<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 26, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
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 WEST MONROE STREET, CHICAGO, ILLINOIS 60661, (312) 441-7000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
DEBRA H. SNIDER, ESQ.
EXECUTIVE VICE PRESIDENT, CHIEF ADMINISTRATIVE OFFICER, GENERAL COUNSEL AND
SECRETARY
HELLER FINANCIAL, INC.
500 WEST MONROE STREET, CHICAGO, ILLINOIS 60661, (312) 441-7000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
LAWRENCE D. LEVIN, ESQ. ANDREW D. SOUSSLOFF, ESQ.
MARK D. WOOD, ESQ. SULLIVAN & CROMWELL
KATTEN MUCHIN & ZAVIS 125 BROAD STREET
525 WEST MONROE STREET, SUITE 1600 NEW YORK, NEW YORK 10004
CHICAGO, ILLINOIS 60661 (212) 558-4000
(312) 902-5200
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
If the Registrant elects to deliver its latest annual report to security
holders or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If delivery of this prospectus is expected to be made pursuant to Rule 434,
check the following box: [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
MAXIMUM
TITLE OF SHARES AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED PRICE(1)(2) REGISTRATION FEE
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<S> <C> <C>
Class A Common Stock, $0.25 par value......................... $500,000,000 $147,500
- --------------------------------------------------------------------------------------------------
</TABLE>
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(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o) of Regulation C under the Securities Act of 1933, as
amended.
(2) The shares of Class A Common Stock are not being registered for the
purposes of sales outside the United States.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 26, 1998
SHARES
LOGO
CLASS A COMMON STOCK
(PAR VALUE $0.25 PER SHARE)
----------
Of the shares of Class A Common Stock offered, shares are being
offered hereby in the United States and shares are being offered in a
concurrent international offering outside the United States. The initial public
offering price and the aggregate underwriting discount per share will be
identical for both Offerings. See "Underwriting".
All of the shares of Class A Common Stock offered hereby are being sold by
the Company. The Company is currently an indirect, wholly-owned subsidiary of
The Fuji Bank, Limited. Upon completion of the Offerings, Fuji Bank will
beneficially own, indirectly, 100% of the outstanding shares of Class B Common
Stock of the Company. The Class B Common Stock, which has three votes per share
(except that the outstanding shares of Class B Common Stock, while held by Fuji
Bank, may never represent more than 79% of the combined voting power of all
outstanding shares of the Company's voting stock), is a class of common stock
separate from the Class A Common Stock, which has one vote per share. Following
the Offerings, the shares of Class A Common Stock offered in the
Offerings will represent % of the combined voting power of all classes of
voting stock of, and % of the economic interest (or rights of holders of
common equity to participate in distributions in respect of the common equity)
in, the Company ( % and %, respectively, if the Underwriters' over-
allotment options are exercised in full). The remainder of the voting power and
economic interest in the Company will be beneficially held by Fuji Bank. See
"Risk Factors--Control by and Relationship with Fuji Bank", "Certain
Relationships and Related Transactions--Relationship with Fuji Bank" and
"Description of Capital Stock".
Prior to this offering, there has been no public market for the Class A
Common Stock. It is currently estimated that the initial public offering price
per share will be between $ and $ . For factors to be considered
in determining the initial public offering price, see "Underwriting".
Shares of Class A Common Stock are being reserved for sale to certain
employees and directors of the Company at the initial public offering price.
See "Underwriting". Such employees and directors will purchase, in the
aggregate, less than 5% of the Class A Common Stock offered in the Offerings.
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE CLASS A COMMON STOCK.
Application will be made to list the Class A Common Stock on the New York
Stock Exchange under the symbol "HF".
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------
<TABLE>
<CAPTION>
PROCEEDS
INITIAL PUBLIC UNDERWRITING TO
OFFERING PRICE DISCOUNT(1) COMPANY(2)
-------------- ------------ ----------
<S> <C> <C> <C>
Per Share............................... $ $ $
Total (3)............................... $ $ $
</TABLE>
- -----
(1) The Company and Fuji Bank have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933.
(2) Before deducting estimated expenses of $ payable by the Company.
(3) The Company has granted to the U.S. Underwriters an option for 30 days to
purchase up to an additional shares at the initial public offering
price per share, less the underwriting discount, solely to cover over-
allotments. Additionally, the Company has granted the International
Underwriters a similar option with respect to an additional shares as
part of the concurrent international offering. If such options are
exercised in full, the total initial public offering price, underwriting
discount and proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting".
----------
The shares offered hereby are offered severally by the U.S. Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that
certificates for the shares will be ready for delivery in New York, New York,
on or about , 1998, against payment therefor in immediately available
funds.
GOLDMAN, SACHS & CO. J.P. MORGAN & CO.
Joint Lead Managers
BT ALEX. BROWN
LEHMAN BROTHERS
MERRILL LYNCH & CO.
----------
The date of this Prospectus is , 1998.
<PAGE>
AVAILABLE INFORMATION
Heller Financial, Inc. (the "Company") is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith files reports and other information with
the Securities and Exchange Commission (the "Commission"). Reports and other
information filed by the Company may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Commission's Regional Offices located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such
materials may also be obtained from the web site the Commission maintains at
http://www.sec.gov. In addition, such materials may be inspected and copied at
the offices of the New York Stock Exchange (the "NYSE"), 20 Broad Street, New
York, New York 10005.
The Company has filed with the Commission a registration statement on Form
S-2 (herein, together with all amendments and exhibits, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"). This Prospectus does not contain all the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information,
reference is hereby made to the Registration Statement.
----------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission (File No. 1-6157) pursuant
to the Exchange Act are incorporated herein by reference:
(1) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997; and
(2) The Company's Current Reports on Form 8-K filed with the Commission
on January 29, 1998, January 30, 1998 and February 20, 1998.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, on the
written or oral request of any such person, a copy of any or all of the
documents incorporated herein by reference, other than exhibits to such
information (unless such exhibits are specifically incorporated by reference
into such documents). Requests should be directed to Heller Financial, Inc.,
500 West Monroe Street, Chicago, Illinois 60661, Attention: Treasurer,
telephone (312) 441-7000.
----------------
Any statement contained in a document all or a portion of which is
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent
that a statement contained herein or in any other subsequently filed document
which also is, or is deemed to be, incorporated by reference herein modifies
or supersedes such statement. Any statement so modified shall not be deemed to
constitute a part of this Prospectus except as so modified, and any statement
so superseded shall not be deemed to constitute a part of this Prospectus.
----------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-SELLING TRANSACTIONS IN
SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERINGS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
2
<PAGE>
[INSIDE FRONT COVER GATEFOLD-LEFT]
On the left side of the page is the following text:
Heller Financial, Inc. has a 79 year history of consistently serving the needs
of mid-sized and small businesses both in the United States and around the
world.
The Company's mission is to provide high quality financial services and capital
that help mid-sized and small enterprises succeed, and to do so by building
strong positions in the markets it serves, and strong relationships with the
clients it serves.
Heller has a variety of commercial finance capabilities including:
. Asset based financing . Sales and vendor financing
. Corporate financing . Small business financing
. Real estate financing . International financing
. Equipment financing and leasing . Factoring and working capital loans
On the right side of the page are bar graphs presenting the following
financial data of the Company for the years 1993-1997:
NET INCOME
Year (in millions)
---- -------------
1993 $117
1994 118
1995 125
1996 133
1997 158
TOTAL ASSETS
Year (in millions)
---- -------------
1993 $ 7.9
1994 8.4
1995 9.6
1996 9.9
1997 12.8
NEW BUSINESS VOLUME
Year (in millions)
---- -------------
1993 $ 2.0
1994 2.9
1995 3.8
1996 4.0
1997 5.9
STOCKHOLDERS' EQUITY
Year (in millions)
---- -------------
1993 $ 1.2
1994 1.3
1995 1.3
1996 1.4
1997 1.6
<PAGE>
[INSIDE FRONT COVER GATEFOLD--RIGHT]
The following text is at the top of the page
The Company has a strong presence in over 40 offices throughout the United
States...
[This text is followed by a map of United States indicating office locations by
city]
In the middle of the page is the following text:
...and in 19 countries around the world.
This text is followed by a map of South America, Europe, Asia and Australia
indicating office locations by country
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and consolidated financial
statements, including the notes thereto, appearing elsewhere in this Prospectus
or incorporated by reference herein. Unless the context indicates otherwise,
(i) references to the "Company" in this Prospectus are to Heller Financial,
Inc. together with its consolidated subsidiaries, (ii) references to "Fuji
Bank" in this Prospectus are to The Fuji Bank, Limited together with its
consolidated subsidiaries, (iii) references to "FAHI" in this Prospectus are to
Fuji America Holdings, Inc., a wholly-owned subsidiary of Fuji Bank and the
immediate parent of the Company and (iv) information contained in this
Prospectus assumes that the Class A Common Stock will be sold in the Offerings
at a price of $ per share (the midpoint of the range set forth on the cover
page of this Prospectus) and that the Underwriters' over-allotment options will
not be exercised. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE
INFORMATION SET FORTH HEREIN UNDER THE HEADING "RISK FACTORS".
THE COMPANY
The Company is a leading diversified commercial financial services company
which provides a broad array of financial products and services to mid-sized
and small businesses in the United States and selected international markets.
The Company provides its products and services principally in five business
categories: (i) asset based finance ("Asset Based Finance"), which provides
secured loans and factoring through five business groups, (ii) Heller Real
Estate Financial Services ("Real Estate Finance"), which provides secured real
estate financing, (iii) Heller International Group, Inc. ("International
Group"), which provides international asset based financing and factoring, (iv)
Heller Corporate Finance ("Corporate Finance"), which provides collateralized
cash flow lending, and (v) Heller Project Finance ("Project Finance"), which
provides structured financing for domestic energy-related projects. The
Company's primary clients and customers are entities in the manufacturing and
service sectors having annual sales generally in the range of $5 million to
$250 million and in the real estate sector having property values generally in
the range of $1 million to $40 million.
The Company concentrates primarily on senior secured lending, with 89% of
lending assets and investments at December 31, 1997 being made on such basis.
Also, to a more limited extent, the Company makes subordinated loans and
invests in select debt and equity instruments. The Company believes that, as of
December 31, 1997, it was the fourth largest factoring operation in the United
States in terms of factoring volume (and the largest factoring operation
worldwide), the third largest originator of U.S. Small Business Administration
("SBA") 7(a) guaranteed small business loans (including leadership positions in
California and Texas) and among the largest lenders to private equity-sponsored
companies in the U.S. middle market. Additionally, the Company is a recognized
leader in real estate finance, vacation ownership lending and middle-market
equipment finance and leasing in the United States. The Company has built its
portfolio through effective asset origination capabilities, disciplined
underwriting and credit approval processes and effective portfolio management.
Most of the Company's business groups have also developed the ability to manage
asset, client and industry concentrations and enhance profitability by
distributing assets through securitizations, syndications and/or loan sales.
The Company's total lending assets and investments were $11.9 billion and
common stockholders' equity was $1.4 billion at December 31, 1997. For the year
ended December 31, 1997, the Company's net income increased 19% to $158
million, from $133 million for the prior year, while new business volume
increased 47% over the prior year, from $4.1 billion to $6.0 billion. Net
income applicable to common stock was $144 million for the year ended December
31, 1997, which represented an increase of 17% from $123 million for the prior
year. The credit quality of the Company's portfolio is reflected in nonearning
assets of $155 million, or 1.4% of total lending assets, at December 31, 1997.
3
<PAGE>
The Company was incorporated in 1919 under the laws of the State of Delaware.
The Company employs approximately 2,350 people worldwide. Its executive offices
are located at 500 West Monroe Street, Chicago, Illinois 60661 (telephone:
(312) 441-7000). The Company's web site address is http://www.hellerfin.com.
STRATEGY
The Company is dedicated to delivering consistent growth in earnings and
assets, while maintaining the credit quality of its asset portfolio. Over the
past five years, the Company has achieved growth in earnings and assets through
its strong client orientation, productive origination network, disciplined
adherence to prudent credit principles and its long-standing leadership
positions in many of its target markets.
Management believes that the following operating principles have been key to
the Company's success and will continue to guide its business strategy in the
future:
. Maintain "superior client focus" in targeted mid-sized and small
business markets throughout all economic cycles
. Build and maintain a strong financial profile through a sound capital
structure, a diversified and high-quality asset portfolio and
conservative reserve levels
. Adhere to prudent credit standards and actively manage the Company's
portfolio
. Enhance productivity by leveraging existing operating platforms,
selectively investing in technology and people and practicing
disciplined expense management
. Develop, attract and retain experienced professionals by maintaining a
vibrant culture that promotes delegation, accountability, creativity and
teamwork
Adhering to these operating principles, the Company intends to continue its
earnings and asset growth by employing the following strategies:
MAINTAIN AND BUILD LEADERSHIP POSITIONS IN SELECTED MID-SIZED AND SMALL
BUSINESS MARKETS. The Company's proven ability to develop client relationships
and originate transactions with mid-sized and small businesses throughout
economic cycles has resulted in leadership positions in several of its
businesses. In addition, since 1992, the Company has entered several markets in
which the Company believes it has developed an effective infrastructure to
enable it to establish leadership positions. This strategy has resulted in
compound annual growth in new business volume of 25% over the past five years.
The Company seeks further growth by (i) continuing to develop the well-
established market positions of its domestic and international factoring,
Corporate Finance and Heller Small Business Lending ("Small Business Lending")
businesses, by offering a broad array of innovative financing products and
services, (ii) continuing to expand the capabilities of Real Estate Finance,
including origination of fixed rate commercial mortgages held for ultimate
securitization ("CMBS"), and (iii) further developing the market positions of
certain other asset based lending businesses, such as Heller Equipment Finance
and Leasing ("Equipment Finance and Leasing"), Heller Business Credit
("Business Credit") and Heller Sales Finance ("Sales Finance"), by building
upon its proven competencies and technical expertise. The Company believes that
the businesses which comprise its Asset Based Finance portfolio represent an
attractive combination of growth potential, earnings consistency and credit
quality.
CONTINUE TO GROW THE COMPANY'S INTERNATIONAL BUSINESSES. The Company has a
significant international presence in factoring and asset based financing, and
has had subsidiaries and joint ventures in many international markets for more
than 25 years. These enterprises provide a solid base for consistent growth in
international earnings and also provide the Company with the opportunity to
meet the international financing needs of its domestic client base.
4
<PAGE>
MAINTAIN PRUDENT CREDIT STANDARDS AND ACTIVE PORTFOLIO MANAGEMENT. The
Company has built a disciplined "credit culture" supported by portfolio and
risk management processes. The Company establishes clearly defined credit
strategies for each of its businesses, permitting them to make quick credit
decisions under disciplined guidelines. Additionally, the Company believes that
it has developed an expertise in structuring sophisticated transactions that
enables it to accommodate unique client needs without compromising credit
quality. The Company has centralized the administration of credit policy and
portfolio management to ensure consistency in credit strategy, efficiency in
credit analysis and processing and the ability to monitor credit quality and
portfolio composition closely. The Company believes that its risk management
systems, portfolio management and servicing capabilities, and client-oriented
structuring capabilities will continue to support long-term profitability.
ENHANCE CAPITAL MARKETS AND DISTRIBUTION EXPERTISE. As a complement to their
strong origination capabilities, most of the Company's business groups have
developed competencies in the syndication and/or securitization of lending
assets, and the Company plans to prudently expand these capabilities. The
Company believes that these skills will be increasingly important to the
Company's ability to (i) maximize its origination strength by providing broader
market access to higher quality credits, (ii) manage customer and asset
concentrations, (iii) generate income growth in competitive markets through
syndication fees and securitization gains and (iv) meet a broader array of the
financial needs of its current clients.
INCREASE OPERATING EFFICIENCIES WITHIN THE COMPANY. The Company has
established a framework for its business categories that it believes can
support the profitable addition of a significant level of assets. The Company
believes it is recognizing significant economies of scale in certain of its
established businesses (domestic and international factoring and Corporate
Finance), and expects to improve economies of scale in its other businesses as
they grow and achieve critical mass. The Company believes that its recent and
ongoing investments in building its Asset Based Finance businesses and its Real
Estate Finance CMBS capability provide effective operating platforms for these
businesses, and that continued strong growth in new business using these
existing platforms will generate productivity improvements in the future. The
Company has also invested in technology and support systems, significantly
upgrading its technology infrastructure in 1997 to streamline the management of
portfolio accounts, increase its efficiency in processing high transaction
volumes and enable Intranet and Internet communications and commerce. In
addition, the Company will selectively pursue strategic acquisition
opportunities of businesses and portfolios of assets that it believes will
generate additional economies of scale and productivity improvements.
RELATIONSHIP WITH FUJI BANK
Presently, all of the outstanding common stock of the Company is indirectly
owned by Fuji Bank, headquartered in Tokyo, Japan, through the Company's
immediate parent, FAHI. Fuji Bank also directly owns 21% of the outstanding
shares of International Group, a consolidated subsidiary of the Company engaged
in international factoring and asset based financing activities. Fuji Bank's
interest will be sold to the Company upon consummation of the Offerings. Fuji
Bank is one of the largest banks in the world, with total deposits of $301
billion at September 30, 1997. See "Risk Factors--Control by and Relationship
with Fuji Bank", "Management's Discussion and Analysis of Financial Condition
and Results of Operations--General" and "Certain Relationships and Related
Transactions".
Upon consummation of the Offerings, Fuji Bank will beneficially own all
51,050,000 of the outstanding shares of the Company's Class B Common Stock,
$0.25 par value per share (the "Class
5
<PAGE>
B Common Stock"), which has three votes per share (except that the outstanding
shares of Class B Common Stock, while held by Fuji Bank, may never represent
more than 79% of the combined voting power of all outstanding shares of the
Company's voting stock) but is otherwise identical in all material respects to
the Company's Class A Common Stock, $0.25 par value per share (the "Class A
Common Stock"), which has one vote per share. Upon consummation of the
Offerings, the Class B Common Stock beneficially owned by Fuji Bank will
represent in the aggregate % of the combined voting power of all of the
outstanding shares of Class A Common Stock and Class B Common Stock
(collectively, the "Common Stock") and % of the economic interest (or
rights of holders of common equity to participate in distributions in respect
of the common equity) in the Company ( % and %, respectively, if the
Underwriters' over-allotment options are exercised in full). For as long as
Fuji Bank continues to beneficially own shares of Common Stock representing
more than 50% of the combined voting power of the Class A Common Stock and
Class B Common Stock, Fuji Bank will be able to direct the election of all of
the members of the Board of Directors of the Company (the "Board of Directors")
and exercise a controlling influence over the business and affairs of the
Company. Fuji Bank has advised the Company that its current intent is to
continue to hold all of the Common Stock beneficially owned by it following the
Offerings. Fuji Bank and the Company have agreed not to sell or otherwise
dispose of any shares of Common Stock for a period of 180 days after the date
of this Prospectus, without the prior written consent of Goldman, Sachs & Co.
From time to time, the Company and Fuji Bank have entered into, and can be
expected to continue to enter into, agreements and business transactions, and
the Company's Amended and Restated Certificate of Incorporation will include
certain provisions relating to the Company's relationship with Fuji Bank. See
"Risk Factors--Control by and Relationship with Fuji Bank", "Risk Factors--
Shares Eligible for Future Sale; Possible Future Sales by Fuji Bank", "Certain
Relationships and Related Transactions--Relationship with Fuji Bank",
"Ownership of Common Stock", "Shares Available for Future Sale", "Description
of Capital Stock" and "Underwriting".
THE OFFERINGS
The offering hereby of shares of Class A Common Stock initially
being offered in the United States (the "U.S. Offering") and the offering of
shares of Class A Common Stock initially being offered in a
concurrent international offering outside of the United States (the
"International Offering") are collectively referred to as the "Offerings". The
closing of each Offering is conditioned upon the closing of the other Offering.
CLASS A COMMON STOCK OFFERED:
U.S. Offering..................... shares
International Offering............ shares
Total.......................... shares
COMMON STOCK OUTSTANDING AFTER THE
OFFERINGS*:
Class A Common Stock.............. shares
Class B Common Stock.............. 51,050,000 shares
Total.......................... shares
- --------
* Excludes (i) 505,912 shares of restricted Class A Common Stock and 1,242,250
shares of Class A Common Stock issuable upon the exercise of options, which
shares of restricted Class A Common Stock and options are to be granted to
certain officers and employees of the Company upon consummation of the
Offerings, and (ii) shares of Class A Common Stock reserved for
issuance with respect to awards that may be granted in the future under the
Heller Financial, Inc. 1998 Stock Incentive Plan. See "Management--Executive
Compensation--The 1998 Stock Incentive Plan".
6
<PAGE>
USE OF PROCEEDS....................... The net proceeds to the Company
from the Offerings are estimated to
be $ ($ if the
Underwriters' over-allotment
options are exercised in full), (i)
$ of which will be used
to repay indebtedness of the
Company, consisting of a
subordinated note in the principal
amount of $450 million issued on
February 24, 1998 as a dividend to
FAHI, and (ii) the remaining
$ of which is expected to
be paid as a cash dividend to FAHI,
as the sole holder of the Class B
Common Stock, following the
consummation of the Offerings. See
"Use of Proceeds".
PROPOSED NYSE SYMBOL FOR CLASS A
COMMON STOCK.......................... HF
DIVIDENDS; VOTING RIGHTS; CONVERSION.. The holders of Class A Common Stock
and Class B Common Stock share
ratably on a per share basis in all
dividends and other distributions
on the Common Stock declared by the
Board of Directors, except that
holders of Class A Common Stock
will not be entitled to receive the
cash dividend which the Company
expects to pay to FAHI, as the sole
holder of the Class B Common Stock,
with a portion of the net proceeds
of the Offerings. See "Dividend
Policy", "Use of Proceeds," and
"Description of Capital Stock--
Common Stock--Dividends". With
certain exceptions, the Class A
Common Stock and Class B Common
Stock vote together as a single
class. However, the holders of
Class A Common Stock are entitled
to one vote per share and the
holders of Class B Common Stock are
entitled to three votes per share
(except that the outstanding shares
of Class B Common Stock, while held
by Fuji Bank, may never represent
more than 79% of the combined
voting power of all outstanding
shares of the Company's voting
stock). See "Description of Capital
Stock--Common Stock--Voting
Rights". Under certain
circumstances, shares of Class B
Common Stock convert or are
convertible into an equivalent
number of shares of Class A Common
Stock. See "Description of Capital
Stock--Common Stock--Conversion".
CONTROLLING STOCKHOLDER............... For information regarding the
Company's controlling stockholder,
see "Risk Factors--Control by and
Relationship with Fuji Bank" and
"Certain Relationships and Related
Transactions--Relationship with
Fuji Bank".
RISK FACTORS.......................... For a discussion of certain
considerations relevant to an
investment in the Class A Common
Stock, see "Risk Factors".
7
<PAGE>
SUMMARY FINANCIAL DATA
The results of operations and balance sheet data of the Company for each of
the years in the three-year period ended December 31, 1997 and as of December
31, 1997 and 1996, respectively, were derived from the audited consolidated
financial statements of the Company, including the notes thereto, appearing
elsewhere in this Prospectus. The results of operations and balance sheet data
for each of the years in the two-year period ended December 31, 1994 and as of
December 31, 1995, 1994 and 1993, respectively, except 1994 and 1993 net income
applicable to common stock and pro forma amounts for all years, were derived
from audited consolidated financial statements of the Company, including the
notes thereto, which are not presented herein. The data presented below should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements,
including the notes thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997(1) 1996 1995 1994 1993
------- ------ ------ ------ ------
(IN MILLIONS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Net interest income.................. $ 408 $ 355 $ 387 $ 366 $ 356
Operating revenues................... 754 533 620 557 517
Operating expenses................... 357 247 216 195 174
Provision for losses................. 164 103 223 188 210
Income before income taxes and
minority interest................... 233 183 181 174 133
Net income........................... 158 133 125 118 117
Net income applicable to common
stock............................... 144 123 115 108 107
Pro forma net income(2).............. 168 143 132 123 122
Pro forma net income applicable to
common stock(2)..................... 154 133 122 113 112
Pro forma net income applicable to
common stock per share(2)(3)........
<CAPTION>
DECEMBER 31,
---------------------------------------
1997(1) 1996 1995 1994 1993
------- ------ ------ ------ ------
(IN MILLIONS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Receivables.......................... $10,722 $8,529 $8,085 $7,616 $7,062
Allowance for losses of receivables.. (261) (225) (229) (231) (221)
Total assets......................... 12,861 9,926 9,638 8,476 7,913
Commercial paper and short-term
borrowings.......................... 3,432 2,745 2,223 2,451 1,981
Long-term debt....................... 6,004 4,761 5,145 3,930 3,968
Total debt.......................... 9,436 7,506 7,368 6,381 5,949
Total liabilities.................... 11,096 8,402 8,208 7,107 6,625
Preferred stock...................... 275 125 125 125 125
Common equity........................ 1,403 1,342 1,259 1,205 1,128
Total stockholders' equity.......... 1,678 1,467 1,384 1,330 1,253
Pro forma book value per common
share(3)(4).........................
</TABLE>
- -------
(1) The financial data presented for 1997 reflect the Company's purchase
(through its subsidiary, International Group) of its joint venture
partner's interest in Factofrance Heller, S.A. ("Factofrance") in April
1997, which resulted in Factofrance being reported on a consolidated basis
with the Company as of the date of acquisition. The consolidation of
Factofrance resulted in increases of $2.0 billion, $94 million, $59 million
and 570 in total assets, operating revenues, operating expenses and number
of employees, respectively, during 1997 as compared to 1996.
(2) Reflects the Company's acquisition of Fuji Bank's 21% interest in
International Group to be effected upon consummation of the Offerings,
which will be accounted for in a manner similar to a pooling of interests.
Does not reflect the ongoing costs associated with this acquisition,
including interest expense related to the purchase price and certain income
tax expenses that will be incurred due to the inclusion of International
Group in the Company's consolidated U.S. federal income tax return.
Management estimates that these costs and expenses will be approximately $5
million per year.
(3) Based upon shares of Common Stock to be outstanding upon
consummation of the Offerings. Excludes (i) 505,912 shares of restricted
Class A Common Stock and 1,242,250 shares of Class A Common Stock issuable
upon the exercise of options, which shares of restricted Class A Common
Stock and options are to be granted to certain officers and employees of
the Company upon consummation of the Offerings, and (ii) shares
of Class A Common Stock reserved for issuance with respect to awards that
may be granted in the future under the Heller Financial, Inc. 1998 Stock
Incentive Plan. See "Management--Executive Compensation--The 1998 Stock
Incentive Plan".
(4)Book value represents total stockholders' equity, net of preferred stock.
8
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997(1) 1996 1995 1994 1993
------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PROFITABILITY
Net interest income as a percentage of AFE(2).. 4.0% 4.1% 4.6% 4.7% 4.7%
Non-interest operating revenues as a percentage
of AFE(2)..................................... 3.5 2.0 2.7 2.5 2.2
Operating revenues as a percentage of AFE(2)... 7.5 6.1 7.3 7.2 6.9
Return on average common stockholders'
equity(3)..................................... 10.5 9.4 9.3 9.2 10.0
Return on AFE(2)............................... 1.6 1.5 1.5 1.5 1.6
Ratio of earnings to combined fixed charges and
preferred stock dividends(4).................. 1.39x 1.36x 1.34x 1.45x 1.44x
Salaries and general operating expenses as a
percentage of AFE(2).......................... 3.5% 2.8% 2.6% 2.5% 2.3%
Ratio of operating expenses to operating
revenues...................................... 47.3 46.3 34.8 35.0 33.7
Common dividend payout ratio(5)................ 47.7 47.2 47.0 20.4 1.9
</TABLE>
<TABLE>
<CAPTION>
AS OF, OR FOR THE YEAR ENDED, DECEMBER 31,
-------------------------------------------------
1997(1) 1996 1995 1994 1993
---------- -------- -------- -------- --------
(IN MILLIONS, EXCEPT NUMBER OF EMPLOYEES
AND OFFICE LOCATIONS)
<S> <C> <C> <C> <C> <C>
CREDIT QUALITY
Ratio of earning loans
delinquent 60 days or more
to receivables............ 1.4% 1.7% 1.4% 1.4% 2.1%
Ratio of net writedowns to
average lending assets.... 1.5 1.3 2.9 2.4 2.8
Ratio of total nonearning
assets to total lending
assets.................... 1.4 3.3 3.6 4.0 5.9
Ratio of allowance for
losses of receivables to
receivables............... 2.4 2.6 2.8 3.0 3.1
Ratio of allowance for
losses of receivables to
net writedowns............ 1.8x 2.1x 1.0x 1.3x 1.1x
Ratio of allowance for
losses of receivables to
nonearning impaired
receivables............... 185.1% 85.2% 87.7% 81.3% 83.7%
LEVERAGE
Ratio of debt (net of
short-term investments) to
total stockholders'
equity.................... 5.2x 5.0x 5.0x 4.7x 4.7x
Ratio of commercial paper
and short-term borrowings
to total debt............. 36.4% 36.6% 30.2% 38.4% 33.3%
OTHER
Total lending assets and
investments (6)........... $ 11,928 $ 9,620 $ 9,039 $ 8,443 $ 7,742
Funds employed(2).......... 10,673 9,030 8,542 7,991 7,309
Total managed assets(7).... 11,800 9,574 9,137 8,414 7,422
Number of employees........ 2,339 1,527 1,487 1,404 1,307
Number of office locations. 63 52 36 33 24
</TABLE>
- -------
(1) The financial data presented for 1997 reflect the Company's purchase
(through its subsidiary, International Group) of its joint venture
partner's interest in Factofrance in April 1997, which resulted in
Factofrance being reported on a consolidated basis with the Company as of
the date of acquisition. The consolidation of Factofrance resulted in
increases of $2.0 billion, $94 million, $59 million and 570 in total
assets, operating revenues, operating expenses and number of employees,
respectively, during 1997 as compared to 1996.
(2) Funds employed include lending assets and investments, less credit
balances of factoring clients. The Company believes funds employed are
indicative of the dollar amount which it has loaned to borrowers. Average
funds employed ("AFE") reflect the average of lending assets and
investments, less credit balances of factoring clients.
(3) Return on average common stockholders' equity is computed as net income
less preferred stock dividends paid, divided by average total stockholders'
equity net of preferred stock.
(4) The ratio of earnings to combined fixed charges and preferred stock
dividends is calculated by dividing (i) income before income taxes,
minority interest and fixed charges by (ii) fixed charges plus preferred
stock dividends.
(5) Common dividend payout ratio is computed as common dividends paid, divided
by net income applicable to common stock.
(6) Total lending assets and investments consist of receivables, repossessed
assets, equity and real estate investments, operating leases, debt
securities and investments in international joint ventures.
(7) Total managed assets include funds employed, plus receivables previously
securitized or sold and currently managed by the Company.
9
<PAGE>
RISK FACTORS
Prospective investors should carefully consider, in addition to the other
information contained or incorporated by reference in this Prospectus, the
following factors before purchasing the Class A Common Stock offered hereby.
ECONOMIC FACTORS
RISK OF ECONOMIC RECESSION OR DOWNTURN
The Company's business, financial condition and results of operations may be
affected by various economic factors, including the level of economic activity
in the markets in which the Company operates. Unfavorable economic conditions
may make it more difficult for the Company to maintain both its new business
origination volume and the credit quality thereof at levels previously
attained. The Company's growth is dependent to a significant degree upon its
ability to generate new finance receivables, and in an economic recession or
other adverse economic environment, growth in finance receivables may not be
attainable.
Certain of the Company's business categories are subject to industry-
specific economic factors. Demand for the Company's products with respect to
targeted industries is affected by demand for such industries' services and
products, and an economic downturn or slowdown in certain of these industries
could adversely affect the demand for the Company's products. For example, the
Company's U.S. factoring business could be adversely affected by a downturn in
the textile, apparel or home furnishings market, which are key markets served
by such business. Also, a significant portion of the Company's portfolio of
lending assets and investments consists of commercial real estate finance
assets. The Company's real estate finance activities could be adversely
affected by a downturn in the commercial real estate markets, which markets
have been characterized by cyclicality and may be significantly affected by
certain factors, such as changes in tax regulations or interest rates. In
addition, the Company has realized a portion of its revenues from gains on
equity investments, the continuation of which is dependent upon the
performance of the equity markets, which have historically been volatile.
Volatility in the capital markets could also adversely affect the timing and
profitability of certain securitization transactions. Consequently, adverse
economic conditions in the commercial real estate markets, the capital markets
or certain other markets or industries served by the Company could have a
material adverse effect on the Company's business, financial position or
results of operations.
In an economic recession or under other adverse economic conditions,
nonearning assets and writedowns are likely to increase as debtors are more
likely to be unable to meet contractual terms and their payment obligations.
Although the Company maintains an allowance for losses of receivables in an
amount which it believes is sufficient to provide adequate protection against
potential writedowns in its entire portfolio, this allowance could prove to be
insufficient. Adverse economic conditions may cause declines in the Company's
ability to realize the value of collateral securing certain of the Company's
finance receivables or in the value of equipment subject to lease agreements.
See "--Allowance for Losses of Receivables".
An economic recession or downturn could contribute to a downgrading of the
Company's credit ratings, which likely would increase the Company's funding
costs, and could decrease its net interest income, limit its access to the
capital markets or result in a decision by the lenders under the Company's
existing bank credit facilities not to extend such credit facilities after
their expiration. There can be no assurance that a decline in economic
conditions will not have a material adverse effect on the Company's business,
financial position or results of operations. See "--Limitations Upon Liquidity
and Capital Raising".
10
<PAGE>
INTEREST RATE RISK
The Company's operating results and cash flow depend to a great extent upon
its level of net interest income (or "spread"), which is the difference
between total interest income earned on earning assets, such as loans and
investments, and total interest expense paid on interest-bearing liabilities,
such as borrowings. The amount of net interest income is affected by changes
in the volume and mix of earning assets, the level of rates earned on those
assets, the volume of interest-bearing liabilities and the level of rates paid
on those interest-bearing liabilities.
Although the Company has an active and comprehensive approach to managing
its interest rate risk, including matching the anticipated maturities of its
interest rate sensitive assets and interest rate sensitive liabilities and
closely monitoring product pricing to remain responsive to changing market
interest rates, significant increases in market interest rates, or (in the
case of floating rate borrowers) the perception that an increase may occur,
could adversely affect both the Company's ability to originate new finance
receivables and its ability to grow. Conversely, a decrease in interest rates
could result in an acceleration in the prepayment of owned and managed finance
receivables. In addition, changes in market interest rates or in the
relationships between short-term and long-term market interest rates or
between different interest rate indices (i.e., basis risk) could affect the
interest rates earned on interest-earning assets differently than the interest
rates paid on interest-bearing liabilities, which could result in an increase
in interest expense relative to interest income. An increase in market
interest rates also could adversely impact the ability of the Company's
floating-rate borrowers to meet their higher payment obligations, which could
result in an increase in nonearning assets and writedowns.
EXCHANGE RATE FLUCTUATIONS AND OTHER INTERNATIONAL FACTORS
At December 31, 1997, international revenues constituted 14.7% of the
Company's total revenues. Such international revenues were generated from
activities of the Company's subsidiaries and international joint ventures in
Europe (12.0%), Asia/Pacific (2.1%) and Latin America (0.6%). The Company
expects that in future years it will continue to generate a meaningful portion
of its revenues from international operations. Foreign currency exchange rate
fluctuations can have a material adverse effect on the total level of
international revenues generated by the Company from international asset based
financing and factoring. Over time, reported results from the Company's
consolidated operations and joint ventures in foreign countries may fluctuate
in response to exchange rate movements in relation to the U.S. dollar. Because
Western European operations and joint ventures are the largest areas of the
Company's international activities, reported results will be most affected by
the exchange rate movements in the currencies of Western European countries.
Reported results will be influenced to a lesser extent by the exchange rate
movements in the currencies of other countries in which the Company's
subsidiaries and joint ventures are located. In addition, an economic
recession or downturn or increased competition in the international markets in
which the Company operates could adversely affect the Company. Other risks
inherent in conducting international business operations generally include
political and macro-economic instability, changes in regulatory requirements
and taxes, unreliability of judicial processes, and financial market
instability and illiquidity. There can be no assurance that one or more of
such factors will not have a material adverse effect on the Company's
business, financial condition and results of operations. In addition,
instability or adverse economic conditions in international markets may
adversely affect the businesses of the Company's domestic customers, which
could adversely affect such customers' demand for the Company's products. See
"Use of Proceeds" and "Certain Relationships and Related Transactions--
Purchase of Interest in International Group from Fuji Bank".
LIMITATIONS UPON LIQUIDITY AND CAPITAL RAISING
The Company's primary sources of funds are cash flow from operations,
commercial paper borrowings, issuances of medium-term notes and other term
debt securities, and, to a lesser extent, securitizations, syndications and
other loan sales. At December 31, 1997, commercial paper borrowings were $2.6
billion, and amounts due on term debt within one year were $2.0 billion. In
the past, a downgrade in the Company's credit ratings has resulted in an
increase in the Company's
11
<PAGE>
interest expense. There can be no assurance there will not be a downgrade in
the Company's credit ratings in the future or, if such downgrading does occur,
that it will not result in an increase in the Company's interest expense or
have an adverse impact on the Company's ability to access the commercial paper
market or the public and private debt markets. These events could in turn have
a material adverse effect on the Company's business, financial position or
results of operations. If the Company is unable to access such markets on
acceptable terms, it could utilize its bank credit and receivable sale
facilities, cash flow from operations and portfolio liquidations to satisfy
its liquidity needs. At December 31, 1997, the Company had committed bank
credit facilities totalling $4.0 billion, including $1.5 billion under a 364-
day facility expiring April 7, 1998 (which the Company intends to renew),
representing 122% of outstanding commercial paper and short-term borrowings
from unaffiliated entities. Although the Company believes that such bank
credit and receivable sale facilities should provide sufficient additional
liquidity to the Company under foreseeable conditions, there can be no
assurance that such facilities would provide adequate liquidity to the Company
following a downgrade in its credit ratings or other adverse conditions or
that such facilities will be renewed.
The Company funds its operations independently of Fuji Bank and believes
that the business of, and the outlook for, Fuji Bank is not necessarily
closely related to the business of, and the outlook for, the Company. However,
in the past when Fuji Bank's credit ratings have been downgraded, the
Company's credit ratings have also been downgraded, and there can be no
assurance that a future downgrading of Fuji Bank's credit ratings would not
have a material adverse impact on the Company's credit ratings. Therefore, a
deterioration in the financial condition of Fuji Bank could result in
increased borrowing costs to the Company and could impair the Company's access
to the public and private capital markets, which could have a material adverse
effect on the Company's business, financial position or results of operations.
For as long as Fuji Bank elects to maintain its beneficial ownership
percentage of the Company, the Company may be constrained in its ability to
raise common or preferred equity capital. Except as provided under the
Company's Keep Well Agreement with Fuji Bank, dated as of April 23, 1983 and
as subsequently amended (the "Keep Well Agreement"), Fuji Bank is not under
any obligation to make future capital contributions. See "Certain
Relationships and Related Transactions--Relationship with Fuji Bank--Keep Well
Agreement".
CONTROL BY AND RELATIONSHIP WITH FUJI BANK
Fuji Bank is currently the beneficial owner of all of the common stock of
the Company. Upon consummation of the Offerings, Fuji Bank will beneficially
own 100% of the outstanding Class B Common Stock, which will, in the
aggregate, represent % of the combined voting power of all of the
outstanding Common Stock and % of the economic interest (or rights of
holders of common equity to participate in distributions in respect of the
common equity) in the Company ( % and %, respectively, if the
Underwriters' over-allotment options are exercised in full). For as long as
Fuji Bank continues to beneficially own shares of Common Stock representing
more than 50% of the combined voting power of the Class A Common Stock and
Class B Common Stock, Fuji Bank will be able to direct the election of all of
the members of the Board of Directors and exercise a controlling influence
over the business and affairs of the Company, including any determinations
with respect to (i) mergers or other business combinations involving the
Company, (ii) the acquisition or disposition of assets by the Company, (iii)
the incurrence of indebtedness by the Company, (iv) the issuance of any
additional Common Stock or other equity securities and (v) the payment of
dividends with respect to the Common Stock. See "--Limitations upon Liquidity
and Capital Raising". Similarly, Fuji Bank will have the power to (i)
determine matters submitted to a vote of the Company's stockholders without
the consent of the Company's other stockholders, (ii) prevent or cause a
change in control of the Company or (iii) take other actions that might be
favorable to Fuji Bank and disadvantageous to the Company or holders of the
Class A Common Stock. In the foregoing situations or otherwise, various
conflicts of interest between the Company or the holders of the Class A Common
Stock and Fuji Bank could arise. Ownership interests of the Company's
directors or officers in Fuji Bank's common stock or
12
<PAGE>
service as a director, officer or other employee of both the Company and Fuji
Bank could create, or appear to create, potential conflicts of interest when
those directors, officers and employees are faced with decisions that could
have different implications for the Company or the holders of Class A Common
Stock, on the one hand, and Fuji Bank, on the other hand. The Company's
Amended and Restated Certificate of Incorporation will include certain
provisions relating to the allocation of business opportunities that may be
suitable for both the Company and Fuji Bank. See "--Shares Eligible for Future
Sale; Possible Future Sales by Fuji Bank", "Shares Available for Future Sale",
"Certain Relationships and Related Transactions--Relationship with Fuji Bank"
and "Description of Capital Stock--Certain Certificate of Incorporation and
By-Law Provisions--Corporate Opportunities".
ALLOWANCE FOR LOSSES OF RECEIVABLES
The Company maintains an allowance for losses of receivables at an amount
which it believes is sufficient to provide adequate protection against
potential losses in its entire receivables portfolio. The level of the
allowance for losses of receivables is determined principally on the basis of
(i) the current credit quality of the portfolio and trends in such quality,
(ii) the current mix of finance receivables, (iii) the size and historical
loss experience of the portfolio and (iv) current and anticipated future
economic conditions. The allowance for losses reflects management's judgment
of the loss potential, after considering factors such as the nature and
characteristics of obligors, the collectibility and workout potential of loans
identified as potential problems, economic conditions and trends, charge-off
experience, delinquencies and the value of underlying collateral and
guarantees, including recourse to dealers and manufacturers. Although the
allowance for losses of receivables in the Company's balance sheet as of
December 31, 1997 is considered adequate by the Company's management, there
can be no assurance that this allowance will prove to be adequate over time to
cover losses in the Company's receivables portfolio. This allowance for losses
may prove to be inadequate due to unanticipated adverse changes in the economy
generally or discrete events that adversely affect specific customers,
industries or markets. The Company's business, financial position or results
of operations could be materially adversely affected to the extent that the
Company's allowance for losses of receivables is insufficient to cover such
unanticipated changes or events. See "--Economic Factors--Risk of Economic
Recession or Downturn", "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Risk Management--Portfolio Quality--
Allowance for Losses".
VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company's results of operations may vary significantly from quarter to
quarter based upon the timing of certain events, such as securitizations and
net investment gains, and upon other factors, including these "Risk Factors".
For example, the Company expects to securitize approximately $1 billion of its
CMBS receivables in the first or second quarter of 1998. The Company
anticipates that this securitization will generate a gain that may cause
operating revenues and net income in the quarter in which such securitization
occurs to be higher than those in other quarters of 1998. See "Business--Real
Estate Finance" and Note 18 of the notes to the consolidated financial
statements appearing elsewhere in this Prospectus.
ATTRACTION AND RETENTION OF QUALIFIED PERSONNEL
The Company's success depends to a significant degree upon the contributions
of management, sales and credit personnel. Competition for qualified personnel
in the commercial finance industry is intense, and there can be no assurance
that the Company will be able to attract and retain qualified and experienced
employees. The strength of the U.S. economy generally and the commercial
finance markets specifically, as well as enhanced competition within the
commercial finance markets, has intensified demand for qualified personnel
with significant industry experience, making hiring and retaining such
individuals by the Company increasingly difficult. Any difficulty in
attracting and retaining qualified employees on acceptable terms could have a
material adverse effect on the Company's business, financial position or
results of operations.
13
<PAGE>
COMPETITION
The Company's markets are highly fragmented and extremely competitive and
are characterized by competitive factors that vary by product and geographic
region. The Company's competitors include other commercial finance companies,
national and regional banks and thrift institutions, investment banks, leasing
companies, investment companies, manufacturers and vendors. Competition from
both traditional competitors and new market entrants has been intensified in
recent years by an improving economy, growing marketplace liquidity and
increasing recognition of the attractiveness of the commercial finance
markets. In addition, the rapid expansion of the securitization markets is
dramatically reducing the difficulty in obtaining access to capital, which is
the principal barrier to entry into these markets. This is further
intensifying competition in certain market segments, including increasing
competition from specialized securitization lenders which offer aggressive
pricing terms.
The Company competes primarily on the basis of pricing, terms, structure and
service in many of its markets. Competitors of the Company seek to compete
aggressively on the basis of these factors and the Company may lose market
share to the extent it is unwilling to match its competitors' pricing, terms
and structure in order to maintain its spreads or to maintain its credit
discipline. To the extent that the Company matches competitors' pricing, terms
or structure, it may experience decreased spreads and/or increased risk of
credit losses. Many of the Company's competitors are large companies that have
substantial capital, technological and marketing resources, and some of these
competitors are larger than the Company and may have access to capital at a
lower cost than the Company. Further, the size and access to capital of
certain of the Company's competitors are being enhanced by the recent surge in
consolidation activity in the commercial and investment banking industries.
Also, the Company's competitors include businesses that are not affiliated
with bank holding companies and therefore are not subject to the same
extensive federal regulations that govern bank holding companies. As a result,
such non-banking competitors may engage in certain activities which currently
are prohibited to the Company. See "--Regulation", "Business--Competition" and
"Business--Regulation".
REGULATION
The Company is subject to federal and state regulation and supervision in
the jurisdictions in which it operates. Such regulation and supervision are
primarily for the benefit and protection of the Company's customers, and not
for the benefit of investors, and could limit the Company's discretion in
operating its businesses and its opportunity to derive a profit from its
business. For example, state laws often establish maximum allowable finance
charges for certain commercial loans. Noncompliance with applicable statutes
or regulations could result in the suspension or revocation of any license or
registration at issue, as well as the imposition of civil fines and criminal
penalties. No assurance can be given that applicable laws or regulations will
not be amended or construed differently, that new laws and regulations will
not be adopted or that the Company will not be prohibited by state laws from
raising interest rates above certain desired levels, any of which could
adversely affect the business, financial condition or results of operations of
the Company. See "Business--Regulation".
Because the Company is an indirect subsidiary of Fuji Bank, the Company and
its activities are examined by the Board of Governors of the Federal Reserve
System (the "Federal Reserve") and are subject to limitations imposed by the
Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"),
and related regulations of the Federal Reserve. The ability of the Company to
engage in new activities or to acquire securities or assets of another company
is regulated by the Bank Holding Company Act. In general, the new activity or
the activity of the other company must be one that the Federal Reserve has
determined to be closely related to banking, and the Company must have
obtained the approval of the Federal Reserve to engage in such activity. To
obtain the Federal Reserve's approval, Fuji Bank must submit a notice that
provides information both about the proposed activity or acquisition and about
the financial condition and operations of Fuji Bank and the Company. The Bank
Holding Company Act will continue to apply to the Company for as long as Fuji
Bank holds more than 25% of any class of the Company's voting stock or
otherwise is deemed to control the management or operations of the Company
under the Bank Holding Company Act and the Federal Reserve's regulations and
interpretations thereunder.
14
<PAGE>
In addition, certain of the Company's equity investments and small business
lending activities are subject to the supervision and regulation of the SBA.
There can be no assurance that these regulations will not have a material
adverse effect on the Company's business, financial condition or results of
operations in the future. See "Business--Regulation".
LIMITATIONS UPON PAYMENT OF DIVIDENDS
The Company is prohibited from paying cash dividends on the Common Stock
unless all declared dividends on all outstanding shares of the Company's Fixed
Rate Noncumulative Perpetual Senior Preferred Stock, Series C (the "Series C
Preferred Stock") and full cumulative dividends on all outstanding shares of
the Company's Cumulative Perpetual Preferred Stock, Series A (the "Series A
Preferred Stock") have been paid. Though such dividends on the Company's
Series C Preferred Stock and Series A Preferred Stock have been paid in full
to date, there can be no assurance that the Company will continue to pay such
dividends on a timely basis.
Certain covenants in the Company's credit agreements have the indirect
effect of limiting the amount of dividends that the Company may pay. The most
restrictive of these covenants require that the Company not permit (i)
consolidated stockholders' equity (as defined in the credit agreements) at the
end of any fiscal quarter of the Company to be less than $1 billion ($900
million through March 31, 1998) or (ii) consolidated debt (as defined in the
credit agreements) to exceed ten times consolidated stockholders' equity (as
defined in the credit agreements) at the end of any fiscal quarter of the
Company. The Company may agree to further restrictions in other agreements
relating to loans, debt securities or other arrangements.
The declaration and payment of dividends by the Company are subject to the
discretion of the Board of Directors, and no assurance can be given that the
Company will pay dividends. The Company may cease to pay dividends at any
time. The Board of Directors' determination as to the payment of dividends
will depend upon, among other things, general business conditions, the
Company's financial results, contractual, legal and regulatory restrictions
regarding the payment of dividends by the Company (including those described
above), the credit ratings of the Company and such other factors as the Board
of Directors may consider to be relevant. For a discussion of the Company's
dividend policy and certain related matters, see "Dividend Policy".
The Company believes that maintaining its ratio of debt (net of short-term
investments) to total stockholders' equity within certain parameters is an
important factor in maintaining its existing credit ratings. Accordingly,
under certain circumstances, the Company's ability to pay dividends may be
restricted while the Company maintains levels of debt which management
believes are appropriate.
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE FUTURE SALES BY FUJI BANK
Fuji Bank has advised the Company that its current intent is to continue to
hold all of the Common Stock beneficially owned by it following the Offerings.
Fuji Bank and the Company have agreed not to sell or otherwise dispose of any
shares of Common Stock for a period of 180 days after the date of this
Prospectus, without the prior written consent of Goldman, Sachs & Co. See
"Underwriting". Under the Keep Well Agreement, as currently in effect, neither
Fuji Bank nor any of its subsidiaries may sell, pledge or otherwise dispose of
shares of the Company's common stock, or permit the Company to issue shares of
its common stock, except to Fuji Bank or a Fuji Bank affiliate. However, prior
to the consummation of the Offerings, the Keep Well Agreement will be amended
to allow the Company or Fuji Bank or any of its affiliates to sell or dispose
of Common Stock to any person or entity, provided that after any such sale or
disposition, Fuji Bank (directly, or indirectly through one or more
subsidiaries) continues to hold greater than 50% of the combined voting power
of the outstanding Common Stock. This provision may be subject to further
amendment by the Company and Fuji Bank
15
<PAGE>
without the approval of any of the Company's securityholders. As a result,
there can be no assurance as to the period of time during which Fuji Bank will
continue to maintain the same beneficial ownership of Common Stock to be
beneficially owned by it immediately following the Offerings. Subject to
applicable federal securities laws and the restrictions described above, after
completion of the Offerings, Fuji Bank may sell any and all of the shares of
Common Stock owned by it.
Prior to consummation of the Offerings, the Company will grant certain
registration rights to Fuji Bank, its subsidiaries and any Qualified
Transferee (as defined below). Sales or distribution by any such person of
substantial amounts of Common Stock in the public market, or the perception
that such sales could occur, could adversely affect prevailing market prices
for shares of Class A Common Stock. See "Shares Available for Future Sale" and
"Certain Relationships and Related Transactions--Relationship with Fuji Bank--
Registration Rights Agreement".
NO PRIOR MARKET FOR CLASS A COMMON STOCK
Prior to the Offerings, there has been no public market for the Class A
Common Stock. The initial public offering price of the Class A Common Stock
will be determined by negotiations between the Company and the Underwriters.
There can be no assurance that the initial public offering price will
correspond to the price at which the Class A Common Stock will trade in the
public market subsequent to the Offerings or that an active public market for
the Class A Common Stock will develop and continue after the Offerings. See
"Underwriting".
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation and the Company's Amended and Restated By-Laws may render more
difficult or have the effect of discouraging unsolicited takeover bids from
third parties or the removal of incumbent management of the Company. See
"Description of Capital Stock--Certain Certificate of Incorporation and By-Law
Provisions". Although such provisions do not have a substantial practical
significance to investors while Fuji Bank controls the Company, such
provisions could have the effect of depriving stockholders of an opportunity
to sell their shares at a premium over prevailing market prices should Fuji
Bank's voting power decrease to less than 50%.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains, and the documents incorporated by reference herein
contain, certain "forward-looking statements" (as defined in Section 27A of
the Securities Act) that are based on the beliefs of the Company's management,
as well as assumptions made by, and information currently available to, the
Company's management. The words "anticipates", "believes", "estimates",
"expects", "plans", "intends" and similar expressions are intended to identify
these forward-looking statements, but are not the exclusive means of
identifying them. These forward-looking statements reflect the current views
of the Company or its management and are subject to certain risks,
uncertainties and contingencies which could cause the Company's actual
results, performance or achievements to differ materially from those expressed
in, or implied by, these statements. These risks, uncertainties and
contingencies include, but are not limited to, the following: (i) the success
or failure of the Company's efforts to implement its business strategy; (ii)
the effect of economic conditions and the performance of borrowers; (iii)
actions of the Company's competitors and the Company's ability to respond to
such actions; (iv) the cost of the Company's capital, which depends in part on
the Company's portfolio quality, ratings, prospects and outlook and general
market conditions; (v) changes in governmental regulations, tax rates and
similar matters; and (vi) the other factors discussed under the heading "Risk
Factors" and elsewhere in this Prospectus. The Company assumes no obligation
to update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
16
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offerings, after the deduction of
estimated underwriting discounts and expenses payable by the Company, are
estimated to be approximately $ ($ if the Underwriters'
over-allotment options are exercised in full). The Company currently intends
to use $ of such net proceeds to repay indebtedness of the Company,
consisting of a $450 million promissory note issued on February 24, 1998 (the
"FAHI Note") as a dividend from the Company to FAHI. The FAHI Note, which is
subordinated to all senior indebtedness of the Company, bears interest at a
rate of LIBOR plus 0.50% per annum and matures on February 24, 2004. The FAHI
Note may be prepaid at any time without premium or penalty. The Company
currently expects to use the remaining $ of the net proceeds to pay
a cash dividend to FAHI, as the sole holder of the Class B Common Stock,
following the consummation of the Offerings. See "Dividend Policy".
DIVIDEND POLICY
The holders of the Class A Common Stock and Class B Common Stock share
ratably on a per share basis in all dividends and other distributions on the
Common Stock declared by the Board of Directors, except that holders of Class
A Common Stock will not be entitled to receive the cash dividend which the
Company expects to pay to FAHI, as the sole holder of the Class B Common
Stock, with a portion of the net proceeds of the Offerings. The Company is
prohibited from paying cash dividends on the Common Stock unless all declared
dividends on all outstanding shares of Series C Preferred Stock and full
cumulative dividends on all outstanding shares of Series A Preferred Stock
have been paid. The Board of Directors currently intends to declare and pay
quarterly dividends on both its Class A Common Stock and Class B Common Stock.
It is expected that the first quarterly dividend (excluding the dividend
expected to be paid to FAHI following the consummation of the Offerings) will
be $ per share (a rate of $ annually) and will be declared
and paid in the quarter of 1998. The declaration and payment of
dividends by the Company are subject to the discretion of the Board of
Directors, and no assurance can be given that the Company will pay such
dividend or any further dividends. The determination as to the payment of
dividends will depend upon, among other things, general business conditions,
the Company's financial results, contractual, legal and regulatory
restrictions regarding the payment of dividends by the Company, the credit
ratings of the Company, planned investments by the Company and such other
factors as the Board of Directors deems relevant. See "Risk Factors--
Limitations Upon Payment of Dividends" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources".
The Company paid cash dividends to its former immediate parent, Heller
International Corporation ("HIC"), of $43 million (plus $26 million in the
form of International Group preferred stock), $58 million and $54 million
during the years ended December 31, 1997, 1996 and 1995, respectively. The
dividends historically paid to HIC by the Company are not indicative of its
future dividend policy.
17
<PAGE>
CAPITALIZATION
The following table sets forth, as of December 31, 1997, (i) the
capitalization of the Company and (ii) such capitalization as adjusted to give
effect to (a) the reclassification of the Company's common stock into shares
of Class A Common Stock and Class B Common Stock, (b) the registered issuance
of the Series C Preferred Stock in exchange for the Company's privately issued
Fixed Rate Noncumulative Perpetual Senior Preferred Stock, Series B (the
"Series B Preferred Stock") pursuant to registration rights of the holders of
Series B Preferred Stock, (c) the payment of a $450 million dividend to FAHI
in the form of the FAHI Note, (d) the sale by the Company of the
shares of Class A Common Stock offered in the Offerings and the application of
the estimated net proceeds therefrom, after deducting estimated underwriting
discounts and expenses of the Offerings, to repay indebtedness of the Company,
consisting of the FAHI Note, and to pay the cash dividend expected to be paid
to FAHI, as the sole holder of the Class B Common Stock, following the
consummation of the Offerings and (e) the Company's purchase of Fuji Bank's
21% interest in International Group for approximately $85 million, to be
effected upon consummation of the Offerings. See "Use of Proceeds". This table
is qualified by, and should be read in conjunction with, the consolidated
financial statements of the Company, including the notes thereto, appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------
ACTUAL AS ADJUSTED
------- -----------
(IN MILLIONS)
<S> <C> <C>
LONG-TERM DEBT:
Commercial paper and short-term borrowings............... $ 3,432 $3,432
Long-term debt........................................... 6,004 6,004
------- ------
Total debt............................................. 9,436 9,436
MINORITY INTEREST.......................................... 87
STOCKHOLDERS' EQUITY:
Cumulative Perpetual Senior Preferred Stock, Series A,
$0.01 par value, 5,000,000 shares authorized, issued and
outstanding, actual and as adjusted..................... 125 125
Fixed Rate Noncumulative Perpetual Senior Preferred
Stock, Series B, $0.01 par value, 1,500,000 shares
authorized, issued and outstanding, actual; no shares
authorized, issued and outstanding, as adjusted......... 150 --
Fixed Rate Noncumulative Perpetual Senior Preferred
Stock, Series C, $0.01 par value, no shares authorized,
issued and outstanding, actual; 1,500,000 shares
authorized, issued and outstanding, as adjusted......... -- 150
Class B Common Stock, $0.25 par value, 300,000,000 shares
authorized and 51,050,000 shares issued and outstanding,
actual and as adjusted(1)............................... 13 13
Class A Common Stock, $0.25 par value, no shares
authorized, issued and outstanding, actual; 500,000,000
shares authorized and shares issued and
outstanding, as adjusted(2)............................. --
Paid-in capital.......................................... 672
Retained earnings........................................ 718
------- ------
Total stockholders' equity............................. $ 1,678 $
------- ------
Total capitalization................................. $11,201 $
======= ======
</TABLE>
- --------
(1) In February 1998, the Company reclassified the 105 shares of the Company's
common stock held by FAHI into Class B Common Stock and declared and paid
a dividend of 51,049,895 shares of Class B Common Stock to FAHI. Such
reclassification and dividend have been retroactively reflected in the
December 31, 1997 totals.
(2) Excludes (i) 505,912 shares of restricted Class A Common Stock and
1,242,250 shares of Class A Common Stock issuable upon the exercise of
options, which shares of restricted Class A Common Stock and options are
to be granted to certain officers and employees of the Company upon
consummation of the Offerings, and (ii) shares of Class A
Common Stock reserved for issuance with respect to awards that may be
granted in the future under the Heller Financial, Inc. 1998 Stock
Incentive Plan. See "Management--Executive Compensation--The 1998 Stock
Incentive Plan".
18
<PAGE>
SELECTED FINANCIAL DATA
The results of operations and balance sheet data of the Company for each of
the years in the three-year period ended December 31, 1997 and as of December
31, 1997 and 1996, respectively, were derived from the audited consolidated
financial statements of the Company, and the notes thereto, appearing
elsewhere in this Prospectus. The results of operations and balance sheet data
for each of the years in the two-year period ended December 31, 1994 and as of
December 31, 1995, 1994 and 1993, respectively, except 1994 and 1993 net
income applicable to common stock and basic and diluted net income applicable
to common stock per share, and pro forma amounts for all years, were derived
from audited consolidated financial statements of the Company, and the notes
thereto, which are not presented herein. The data presented below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial
statements, and the notes thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997(1) 1996 1995 1994 1993
------- ------ ------ ------ ------
(IN MILLIONS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Interest income....................... $ 924 $ 807 $ 851 $ 702 $ 620
Interest expense...................... 516 452 464 336 264
------- ------ ------ ------ ------
Net interest income................. 408 355 387 366 356
Fees and other income................. 206 79 148 117 88
Factoring commissions................. 104 55 50 53 50
Income of international joint
ventures............................. 36 44 35 21 23
------- ------ ------ ------ ------
Operating revenues.................. 754 533 620 557 517
Operating expenses.................... 357 247 216 195 174
Provision for losses.................. 164 103 223 188 210
------- ------ ------ ------ ------
Income before income taxes and
minority interest.................. 233 183 181 174 133
Income tax provision.................. 66 43 49 51 11
Minority interest..................... 9 7 7 5 5
------- ------ ------ ------ ------
Net income.......................... $ 158 $ 133 $ 125 $ 118 $ 117
======= ====== ====== ====== ======
Net income applicable to common
stock.............................. $ 144 $ 123 $ 115 $ 108 $ 107
Basic and diluted net income
applicable to common stock per
share(2)............................. 2.82 2.41 2.25 2.12 2.10
Pro forma net income(3)............... 168 143 132 123 122
Pro forma net income applicable to
common stock(3)...................... 154 133 122 113 112
Pro forma net income applicable to
common stock per share(3)(4).........
<CAPTION>
DECEMBER 31,
---------------------------------------
1997(1) 1996 1995 1994 1993
------- ------ ------ ------ ------
(IN MILLIONS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Receivables........................... $10,722 $8,529 $8,085 $7,616 $7,062
Allowance for losses of receivables... (261) (225) (229) (231) (221)
Equity and real estate investments.... 488 419 428 399 167
Debt securities....................... 311 251 152 69 55
Operating leases...................... 195 135 113 166 148
Investment in international joint
ventures............................. 198 272 233 174 144
Total assets.......................... 12,861 9,926 9,638 8,476 7,913
======= ====== ====== ====== ======
Commercial paper and short-term
borrowings........................... 3,432 2,745 2,223 2,451 1,981
Long-term debt........................ 6,004 4,761 5,145 3,930 3,968
------- ------ ------ ------ ------
Total debt............................ $ 9,436 $7,506 $7,368 $6,381 $5,949
======= ====== ====== ====== ======
Total liabilities..................... $11,096 $8,402 $8,208 $7,107 $6,625
Preferred stock....................... 275 125 125 125 125
Common equity......................... 1,403 1,342 1,259 1,205 1,128
------- ------ ------ ------ ------
Total stockholders' equity........ $ 1,678 $1,467 $1,384 $1,330 $1,253
======= ====== ====== ====== ======
Pro forma book value per common
share(4)(5).......................... $
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
AS OF, OR FOR THE YEAR ENDED,
DECEMBER 31,
---------------------------------------
1997(1) 1996 1995 1994 1993
------- ------ ------ ------ ------
(IN MILLIONS, EXCEPT NUMBER OF
EMPLOYEES AND OFFICE LOCATIONS)
<S> <C> <C> <C> <C> <C>
SELECTED DATA AND RATIOS:
PROFITABILITY
Net interest income as a percentage
of AFE(6).......................... 4.0% 4.1% 4.6% 4.7% 4.7%
Non-interest operating revenues as a
percentage of AFE(6)............... 3.5 2.0 2.7 2.5 2.2
Operating revenues as a percentage
of AFE(6).......................... 7.5 6.1 7.3 7.2 6.9
Return on average common
stockholders' equity(7)............ 10.5 9.4 9.3 9.2 10.0
Return on AFE(6).................... 1.6 1.5 1.5 1.5 1.6
Ratio of earnings to combined fixed
charges and preferred stock
dividends(8)....................... 1.39x 1.36x 1.34x 1.45x 1.44x
Salaries and general operating
expenses as a percentage of AFE(6). 3.5% 2.8% 2.6% 2.5% 2.3%
Ratio of operating expenses to
operating revenues................. 47.3 46.3 34.8 35.0 33.7
Common dividend payout ratio(9)..... 47.7 47.2 47.0 20.4 1.9
Cash dividends paid on common stock
per share(10)...................... $ 0.84 $ 1.14 $ 1.06 $ 0.43 $ 0.04
CREDIT QUALITY
Ratio of earning loans delinquent 60
days or more to receivables........ 1.4% 1.7% 1.4% 1.4% 2.1%
Ratio of net writedowns to average
lending assets..................... 1.5 1.3 2.9 2.4 2.8
Ratio of total nonearning assets to
total lending assets............... 1.4 3.3 3.6 4.0 5.9
Ratio of allowance for losses of
receivables to receivables......... 2.4 2.6 2.8 3.0 3.1
Ratio of allowance for losses of
receivables to net writedowns...... 1.8x 2.1x 1.0x 1.3x 1.1x
Ratio of allowance for losses of
receivables to nonearning impaired
receivables........................ 185.1% 85.2% 87.7% 81.3% 83.7%
LEVERAGE
Ratio of debt (net of short-term
investments) to total stockholders'
equity............................. 5.2x 5.0x 5.0x 4.7x 4.7x
Ratio of commercial paper and short-
term borrowings to total debt...... 36.4% 36.6% 30.2% 38.4% 33.3%
OTHER
Total lending assets and
investments(11).................... $11,928 $9,620 $9,039 $8,443 $7,742
Funds employed(6)................... 10,673 9,030 8,542 7,991 7,309
Total managed assets(12)............ 11,800 9,574 9,137 8,414 7,422
Number of employees................. 2,339 1,527 1,487 1,404 1,307
Number of office locations.......... 63 52 36 33 24
</TABLE>
- --------
(1) The financial data presented for 1997 reflect the Company's purchase
(through its subsidiary, International Group) of its joint venture
partner's interest in Factofrance in April 1997, which resulted in
Factofrance being reported on a consolidated basis with the Company as of
the date of acquisition. The consolidation of Factofrance resulted in
increases of $2.0 billion, $94 million, $59 million and 570 in total
assets, operating revenues, operating expenses and number of employees,
respectively, during 1997 as compared to 1996.
20
<PAGE>
(2) Reflects historical net income applicable to common stock divided by
weighted average common shares outstanding of 51,050,000 in each year. The
historical net income applicable to common stock per share is not
indicative of future net income applicable to common stock per share. In
February 1998, the Company reclassified the 105 shares of the Company's
common stock held by FAHI into Class B Common Stock and declared and paid
a dividend of 51,049,895 shares of Class B Common Stock to FAHI. Such
reclassification and dividend have been retroactively reflected in the
Company's consolidated financial statements.
(3) Reflects the Company's acquisition of Fuji Bank's 21% interest in
International Group accounted for in a manner similar to a pooling of
interests. Does not reflect the ongoing costs associated with this
acquisition, including interest expense related to the purchase price and
certain income tax expenses that will be incurred due to the inclusion of
International Group in the Company's consolidated U.S. federal income tax
return. Management estimates that these costs and expenses will be
approximately $5 million per year.
(4) Based upon shares of Common Stock to be outstanding upon
consummation of the Offerings. Excludes (i) 505,912 shares of restricted
Class A Common Stock and 1,242,250 shares of Class A Common Stock issuable
upon the exercise of options, which shares of restricted Class A Common
Stock and options are to be granted to certain officers and employees of
the Company upon consummation of the Offerings, and (ii) shares
of Class A Common Stock reserved for issuance with respect to awards that
may be granted in the future under the Heller Financial, Inc. 1998 Stock
Incentive Plan. See "Management--Executive Compensation--The 1998 Stock
Incentive Plan".
(5) Book value represents total stockholders' equity, net of preferred stock.
(6) Funds employed include lending assets and investments, less credit
balances of factoring clients. The Company believes funds employed are
indicative of the dollar amount which it has loaned to borrowers. Average
funds employed ("AFE") reflect the average of lending assets and
investments, less credit balances of factoring clients.
(7) Return on average common stockholders' equity is computed as net income
less preferred stock dividends paid divided by average total stockholders'
equity net of preferred stock.
(8) The ratio of earnings to combined fixed charges and preferred stock
dividends is calculated by dividing (i) income before income taxes,
minority interest and fixed charges by (ii) fixed charges plus preferred
stock dividends.
(9) Common dividend payout ratio is computed as common dividends paid, divided
by net income applicable to common stock.
(10) Reflects cash dividends paid on common stock, divided by the weighted
average common shares outstanding of 51,050,000. The historical cash
dividends paid on common stock per share are not indicative of the future
cash dividends to be paid on common stock per share.
(11) Total lending assets and investments consist of receivables, repossessed
assets, equity and real estate investments, operating leases, debt
securities and investments in international joint ventures.
(12) Total managed assets include funds employed, plus receivables previously
securitized or sold and currently managed by the Company.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Selected Financial Data and consolidated financial statements, including the
notes thereto, appearing elsewhere in this Prospectus. The following
discussion and analysis contains certain "forward-looking statements" (as
defined in Section 27A of the Securities Act), which are generally identified
by the words "anticipates", "believes", "estimates", "expects", "plans",
"intends" and similar expressions. Such statements are subject to certain
risks, uncertainties and contingencies, including, but not limited to, those
set forth under the heading "Risk Factors", which could cause the Company's
actual results, performance or achievements to differ materially from those
expressed in, or implied by, such statements. See "Special Note Regarding
Forward-Looking Statements".
GENERAL
The Company is in the commercial finance business, providing primarily
collateralized financing and leasing products and related services to mid-
sized and small businesses in the United States and selected international
markets. The Company's operating revenues can be classified in two broad
categories: (i) net interest income and (ii) non-interest income. Net interest
income represents the total interest income earned by the Company, principally
through its financing and leasing activities, less the total interest expense
paid by the Company on its interest bearing liabilities, which largely relate
to the funding of these financing and leasing activities. Non-interest income
consists of factoring commissions, income from investments in international
joint ventures, and fees and other income. Fees include loan servicing income,
late fees, structuring fees, syndication fees and prepayment fees. Other
income includes real estate participation income, gains from investments and
from sales and securitizations of lending assets, and equipment residual
gains. The Company's primary expenses, other than interest expense, are
operating expenses, including employee compensation and general and
administrative expenses, and provisions for credit losses.
Prior to 1990, the Company's portfolio was not well-diversified with regard
to client concentration and consisted primarily of highly leveraged Corporate
Finance and Real Estate Finance assets. The pre-1990 portfolio contained
assets with a substantial amount of risk, which resulted in a significant
amount of net writedowns. The aggregate net writedowns on the lending assets
in the pre-1990 portfolio were $1.1 billion between 1991 and 1997. Since 1990,
the Company has changed its strategy and focused its efforts on decreasing the
risk of its Corporate Finance and Real Estate Finance businesses through
higher cash flow and collateral coverages, smaller retained positions and
greater liquidity, while building its Asset Based Finance businesses which
rely on more liquid collateral with more predictable value. As a result, the
Company has built a lower risk, though lower yielding, well-diversified
portfolio, with stronger collateralization. For these reasons, the Company
categorizes its pre-1990 Corporate Finance and Real Estate Finance portfolio
(its "pre-1990 portfolio") and the portfolio of its ongoing business
categories (its "current portfolio") separately. While building its current
portfolio, the Company has substantially reduced its pre-1990 portfolio by
over $5 billion since December 31, 1990 to $492 million at December 31, 1997
and expects such portfolio's impact to be insignificant beginning in 1998. In
this Prospectus, the pre-1990 portfolio is excluded from discussions of the
Company's ongoing business categories and business groups and from
presentations (both textual and tabular) of the financial condition and
results of these business categories and groups. This Prospectus includes
certain separate discussions and presentations regarding the composition and
performance of the pre-1990 portfolio.
In April 1997, the Company's subsidiary, International Group, completed its
acquisition of Factofrance, the leading factoring company in France, from the
Company's joint venture partner. Through this acquisition, International Group
increased its ownership interest in Factofrance from 48.8% to 97.6%, which
resulted in Factofrance being reported on a consolidated basis with the
Company as of the date of purchase. Operating revenues, operating expenses,
factoring commissions and fees and other income increased by $94 million, $59
million, $51 million and $20 million,
22
<PAGE>
respectively, for the year ended December 31, 1997 as a result of the
Company's accounting for Factofrance's results on a consolidated basis. In
addition, income of international joint ventures declined by $8 million,
primarily due to this consolidation of Factofrance. This acquisition had a
modest favorable impact on the Company's 1997 net income.
Upon consummation of the Offerings, the Company plans to purchase the 21%
interest of Fuji Bank in International Group for total cash consideration of
approximately $85 million. This acquisition is expected to be accounted for in
a manner similar to a pooling of interests, and the Company's net income will
no longer be reduced by a minority interest in International Group. Beginning
in the first quarter of 1998, the Company will incur ongoing costs associated
with this acquisition, including interest expense related to the purchase
price and certain income tax expenses that will be incurred due to the
inclusion of International Group in the Company's consolidated U.S. federal
income tax return. The Company currently estimates that the effect on net
income of these costs and expenses will be approximately $5 million per year.
See "Selected Financial Data" and "Certain Relationships and Related
Transactions--Purchase of Interest in International Group from Fuji Bank".
The Company's results of operations may vary significantly from quarter to
quarter based upon the timing of certain events, such as securitizations and
net investment gains, and upon other factors, including those discussed under
the heading "Risk Factors". For example, the Company expects to securitize
approximately $1 billion of CMBS receivables in the first or second quarter of
1998. The Company anticipates that this securitization may generate a gain
that will cause operating revenues and net income in the quarter in which such
securitization occurs to be higher than those in other quarters of 1998. See
"Business--Real Estate Finance" and Note 18 of the notes to the consolidated
financial statements appearing elsewhere in this Prospectus.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
RESULTS OF OPERATIONS
OVERVIEW. For the year ended December 31, 1997, the Company's net income
totalled $158 million compared with $133 million for the prior year, an
increase of 19%, representing the Company's fifth consecutive year of record
net income. Net income applicable to common stock was $144 million for the
year ended December 31, 1997, which represented an increase of 17%, from $123
million for the prior year. This reflected an increase of $221 million, or
41%, in operating revenues, due to growth in both net interest income and non-
interest income. Of the increase in operating revenues, $94 million, or 43%,
related to the consolidation of Factofrance. Operating revenues as a
percentage of AFE rose to 7.5% in 1997 from 6.1% in 1996. See "--Operating
Revenues--Non-Interest Income". For the year ended December 31, 1997, new
business volume, which does not include factoring volume, totalled a record
$6.0 billion, an increase of 47% over the prior year. This increase was the
result of the Company's significant investment in building leadership
positions in its businesses and in expanding market coverage. The Company's
factoring volume totalled $15.5 billion in 1997, an $8.5 billion increase from
the prior year, primarily due to the consolidation of Factofrance. The credit
quality of the Company's portfolio was demonstrated by the low level of
nonearning assets, which totalled $155 million, or 1.4% of lending assets, at
December 31, 1997. In addition, the Company's allowance for losses of
receivables at year end was significantly in excess of 100% of nonearning
impaired receivables. The Company's pre-1990 portfolio was substantially
reduced during 1997 and, as of December 31, 1997, represented 4% of total
lending assets and investments. See "Risk Management--Portfolio Quality--Pre-
1990 Portfolio".
23
<PAGE>
OPERATING REVENUES. The following table summarizes the Company's operating
revenues for the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER
31,
-----------------------------
1997 1996
-------------- --------------
PERCENT PERCENT
AMOUNT OF AFE AMOUNT OF AFE
------ ------- ------ -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net interest income........................ $408 4.0% $355 4.1%
Non-interest income:
Fees and other income.................... 206 2.1 79 0.9
Factoring commissions.................... 104 1.0 55 0.6
Income of international joint ventures 36 0.4 44 0.5
---- --- ---- ---
Total operating revenues............... $754 7.5% $533 6.1%
==== === ==== ===
</TABLE>
Excluding the impact of the consolidation of Factofrance, operating revenues
increased by 24% in 1997 from the prior year.
Net Interest Income. The following table summarizes the Company's net
interest income for the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
FOR THE
YEAR
ENDED
DECEMBER
31, INCREASE/(DECREASE)
---------- ---------------------
1997 1996 AMOUNT PERCENT
---- ---- --------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Interest income....................... $924 $807 $ 117 14.5%
Interest expense...................... 516 452 64 14.2
---- ---- ---------
Net interest income................. $408 $355 $ 53 14.9
==== ==== =========
Net interest income as a percentage
of AFE............................. 4.0% 4.1%
</TABLE>
Net interest income totalled $408 million for the year ended December 31,
1997, an increase of $53 million, or 15%, from the comparable prior year
period. This increase reflected growth in lending assets and investments and
the consolidation of Factofrance, which contributed $28 million to this
increase. Net interest margin as a percentage of AFE decreased to 4.0% at
December 31, 1997 from 4.1% at December 31, 1996. This decline reflected the
continued growth of the Company's lower risk, but lower yielding, Asset Based
Finance products, competitive pricing pressures in certain product groups and
higher originations of CMBS, which carry a lower yield than other products of
the Company.
Interest rates charged by the Company vary depending on risks and maturities
of loans, competition, current costs of borrowing to the Company, state usury
laws and other governmental regulations. The Company's portfolio of
receivables earns interest at both variable and fixed rates. The variable
rates float in accordance with various agreed upon reference rates, including
LIBOR, the Prime Rate, the Treasury Bill Rate and corporate based lending
rates.
The Company uses interest rate swaps as an important tool for financial risk
management, which enables it to match more closely the interest rate and
maturity characteristics of its assets and liabilities. As such, interest rate
swaps are used to change the characteristics of fixed rate debt to that of
variable rate liabilities, to alter the characteristics of specific fixed rate
asset pools to more closely match the interest terms of the underlying
financing and to modify the variable rate basis of a liability to more closely
match the variable rate basis used for variable rate receivables. A
comparative analysis of the year-end principal outstanding and average
interest rates paid by the Company on its
24
<PAGE>
debt as of December 31, 1997 and 1996, before and after giving effect to
interest rate swaps, is shown in the following table:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1997 1996
--------------------- ---------------------
YEAR-END BEFORE AFTER YEAR-END BEFORE AFTER
BALANCE SWAPS SWAPS BALANCE SWAPS SWAPS
-------- ------ ----- -------- ------ -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Commercial paper--domestic
and foreign............... $2,560 5.71% N/A $2,576 5.63% N/A
Fixed rate debt............ 3,951 6.90 6.67% 2,905 7.02 6.62%
Variable rate debt......... 2,051 5.44 6.01 1,859 4.85 5.78
------ ------
Total.................... $8,562 6.19 6.44 $7,340 5.98 6.29
====== ======
</TABLE>
Non-Interest Income. The following table summarizes the Company's non-
interest income for the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER
31, INCREASE/(DECREASE)
------------ ----------------------
1997 1996 AMOUNT PERCENT
----- ----- --------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Factoring commissions............. $ 104 $ 55 $ 49 89.1%
Income of international joint
ventures......................... 36 44 (8) (18.2)
Fees and other income:
Fee income and other (1)........ 84 52 32 61.5
Net investment gains............ 69 3 66 N/M
Real estate participation
income......................... 27 24 3 12.5%
Securitization gains............ 26 0 26 --
----- ----- ---------
Total fees and other income... $ 206 $ 79 $ 127 160.8
----- ----- ---------
Total non-interest income... $ 346 $ 178 $ 168 94.4
===== ===== =========
Non-interest income as a
percentage of AFE................ 3.5% 2.0%
</TABLE>
--------
(1) Fee income and other consists primarily of loan servicing income,
late fees, prepayment fees, other miscellaneous fees and equipment
residual gains.
The Company's non-interest income is composed of factoring commissions,
income of international joint ventures and fees and other income. Factoring
commissions increased $49 million, or 89%, from 1996 to 1997 due primarily to
the consolidation of Factofrance in 1997, as a result of which the Company
believes it became the largest factor in the world.
Income of international joint ventures represents the Company's share of the
annual earnings or losses of joint ventures. The Company includes this income
as part of operating revenues because these joint ventures have been, and will
continue to be, an integral part of the Company's strategy, as evidenced by
investments in joint ventures with operations in 15 countries, many of which
have been operating for over 25 years. The $8 million decrease in income from
international joint ventures from 1996 to 1997 was due primarily to the
consolidation of Factofrance.
Fees and other income totalled $206 million for 1997, an increase of $127
million from the prior year, due to increases in net investment gains,
securitization gains and fee income and other. Fee income and other increased
due to $20 million from the consolidation of Factofrance, and a $10 million
gain resulting from the termination of the Company's agreement with Belgravia
Financial Services ("Belgravia"). See "Business--Real Estate Finance".
25
<PAGE>
Net investment gains increased $66 million during 1997 due to a lower level
of losses and writedowns in 1997, as compared to 1996. Gross investment gains
were $119 million and $106 million, while losses and writedowns on investments
were $50 million and $103 million, in 1997 and 1996, respectively. Losses and
writedowns on equity investments were higher in 1996 primarily due to
writedowns during the year totalling $53 million on one pre-1990 Corporate
Finance investment. Net investment gains are generated primarily from
investment activity by Corporate Finance and junior participating lending
activity by Real Estate Finance. The Company also has certain investments from
its pre-1990 portfolio and from direct equity investment activities, an area
in which the Company is no longer pursuing new transactions, which
historically have added significant volatility to the level of net investment
gains. As a result of the pursuit of smaller individual transaction sizes by
Corporate Finance and Real Estate Finance and the significant liquidation of
the pre-1990 and direct equity portfolios, the Company expects that, while net
investment gains will vary from year to year, the level of this volatility
will be reduced. The Company also recognized a $7 million gain in 1997 as a
result of changing to the equity method of accounting for limited partnerships
and fund investments.
During 1997, the Company generated $26 million of securitization gains,
primarily through a CMBS securitization in the second quarter. The Company did
not retain any residual risk in this securitization transaction, as all of the
securities were sold to third parties on a non-recourse basis. The Company
expects to periodically securitize CMBS and other receivables in the future.
See "Business--Real Estate Finance".
OPERATING EXPENSES. The following table summarizes the Company's operating
expenses for the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER
31, INCREASE/(DECREASE)
------------ ---------------------
1997 1996 AMOUNT PERCENT
----- ----- --------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Salaries and other compensation..... $ 214 $ 154 $ 60 39.0%
General and administrative expenses. 143 93 50 53.8
----- ----- ---------
Total............................. $357 $247 $ 110 44.5
===== ===== =========
Operating expenses as a percentage
of AFE............................. 3.5% 2.8%
</TABLE>
Operating expenses, excluding the impact of the Factofrance consolidation,
increased by $51 million, or 21%, in 1997, as compared to 1996. This increase
was primarily due to the Company's continued investment in developing
leadership positions for its Asset Based Finance businesses and expansion of
loan origination and portfolio management resources in the Company's CMBS loan
area, the opening of 11 new offices, increased investment in technology and
higher costs associated with record new business originations.
ALLOWANCE FOR LOSSES. The following table summarizes the changes in the
Company's allowance for losses of receivables, including the Company's
provision for losses of receivables and repossessed assets, for the years
ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER
31, INCREASE/(DECREASE)
------------ ----------------------
1997 1996 AMOUNT PERCENT
----- ----- --------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Balance at the beginning of the
year........................... $ 225 $ 231 $ (6) (2.6)%
Provision for losses.......... 164 103 61 59.2
Writedowns.................... (169) (163) (6) (3.7)
Recoveries.................... 23 55 (32) (58.2)
Factofrance consolidation..... 18 -- 18 N/M
Transfers and other........... -- (1) 1 N/M
----- ----- ---------
Balance at the end of the year.. $ 261 $ 225 $ 36 16.0%
===== ===== =========
</TABLE>
26
<PAGE>
The provision for losses increased to $164 million in 1997 from $103 million
in 1996. This increase primarily resulted from provisions due to growth in
lending assets, combined with lower levels of recoveries in 1997. Gross
writedowns were slightly higher than the prior year at $169 million for 1997
versus $163 million for 1996, while recoveries totalled $23 million in 1997
versus $55 million for 1996. Net writedowns on the current portfolio totalled
$62 million, or 0.6% of total average lending assets, in 1997 versus $41
million, or 0.5% of total average lending assets, in 1996. The Company expects
lower levels of writedowns in future periods due to significantly lower
writedowns on the pre-1990 portfolio.
INCOME TAXES. The Company's effective income tax rate was 28% for 1997 and
23% for 1996, in each case below the statutory rate due to the use of foreign
tax credits, the effect of earnings from international joint ventures and
certain favorable tax issue resolutions. The effective tax rates for 1997 and
1996 were reduced by the effects of nonrecurring items, including $15 million
of net foreign tax credit carryover utilization in 1997. In future periods,
the Company expects its effective tax rate to more closely approximate the
statutory rate.
LENDING ASSETS AND INVESTMENTS
Total lending assets and investments increased $2.3 billion, or 24%, during
1997 reflecting record new business originations of $6.0 billion, a $1.5
billion increase from the consolidation of Factofrance and $5.3 billion of
paydowns, loan sales, syndications and securitizations. During 1997, new
business volume represented a 47% increase over 1996, as the Company realized
the benefit of the market positions held by Asset Based Finance, Corporate
Finance and Real Estate Finance. In addition, the Company liquidated 50% of
the remaining portion of its pre-1990 portfolio, which as of December 31, 1997
represented 4% of total lending assets and investments. The following table
presents the Company's lending assets (which consist of receivables and
repossessed assets) and investments by business line and asset type as of
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1997 1996
------------------ --------------
AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------ -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
BY BUSINESS CATEGORY:
Asset Based Finance....... $ 4,726 40% $4,258 44%
International Group (1)... 2,361(2) 20(2) 609 6
Real Estate Finance....... 2,093 18 1,514 16
Corporate Finance......... 2,010 17 2,016 21
Project Finance........... 144 1 160 2
Pre-1990 portfolio........ 492 4 979 10
Other..................... 102 -- 84 1
------- --- ------ ---
Total lending assets and
investments............ $11,928 100% $9,620 100%
======= === ====== ===
BY ASSET TYPE:
Receivables............... $10,722 90% $8,529 89%
Repossessed assets........ 14 -- 14 --
------- --- ------ ---
Total lending assets.... 10,736(2) 90(2) 8,543 89
Equity and real estate
investments.............. 488 4 419 4
Debt securities........... 311 3 251 3
Operating leases.......... 195 1 135 1
International joint
ventures................. 198 2 272 3
------- --- ------ ---
Total lending assets and
investments............ $11,928 100% $9,620 100%
======= === ====== ===
Total managed assets.... $11,800 $9,574
Funds employed.......... $10,673 $9,030
</TABLE>
- --------
(1) Includes $198 million in investments in international joint ventures,
representing 2% of total lending assets and investments, in 1997, and
$272 million in investments in international joint ventures,
representing 3% of total lending assets and investments, in 1996.
(2) Reflects the consolidation of Factofrance in April 1997.
27
<PAGE>
The Company's portfolio is concentrated in secured asset based lending, as
the combined domestic and consolidated international asset based finance
portfolios totalled nearly $7 billion in lending assets and investments, or
58% of total lending assets and investments, at December 31, 1997. During
1997, the Asset Based Finance portfolio, substantially all of which is
domestic, grew to $4.7 billion in lending assets and investments, or 40% of
total lending assets and investments, at December 31, 1997, due to a 32%
increase in new business originations. Real Estate Finance grew to $2.1
billion in lending assets and investments at December 31, 1997, as
originations of CMBS receivables totalled $1.1 billion in 1997 versus $500
million in 1996. The Company anticipates securitizing approximately $1 billion
of CMBS receivables in the first or second quarter of 1998, and Real Estate
Finance assets are expected to decline in the quarter in which such
securitization occurs. Corporate Finance generated new business volume of over
$1.3 billion, but its lending assets and investments remained unchanged, due
primarily to syndications and runoff in the portfolio.
Concentrations of lending assets of 5% or more at December 31, 1997 and
1996, based on the standard industrial classifications of the borrowers, were
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1996
-------------- --------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
General industrial machines................ $637 6% $500 6%
Food, grocery and miscellaneous retail..... 603 6 669 8
Business services.......................... 556 5 435 5
Department and general merchandise retail
stores.................................... 511 5 987 12
</TABLE>
The general industrial machines classification is distributed among
machinery used for many different industrial applications. The majority of
lending assets in the food, grocery and miscellaneous retail category are
revolving and term facilities with borrowers that are primarily in the
business of manufacturing and retailing of food products. The business
services category is primarily comprised of computer and data processing
services, credit reporting and collection and miscellaneous business services.
The department and general merchandise retail stores category is primarily
comprised of factored accounts receivable, which represent short-term trade
receivables from numerous customers. The reduction in department and general
merchandise retail stores lending assets in 1997 reflected the sale of $500
million of factored accounts receivable under a $550 million factored accounts
receivable facility. See "--Liquidity and Capital Resources".
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
RESULTS OF OPERATIONS
OVERVIEW. During 1996, the Company made significant progress in developing
the market positions and operating platforms of its Asset Based Finance
businesses and strengthening asset quality through the addition of lower risk
assets and the significant reduction of pre-1990 Corporate Finance and Real
Estate Finance assets. Despite the costs of these efforts, the Company was
able to increase net income to $133 million for the year ended December 31,
1996, representing a 6% increase over the prior year. This increase was due to
a significantly lower provision for losses, which more than offset the
reduction in operating revenues and the increase in spending for developing
businesses. The decline in the provision for losses was a result of the
continued strong credit quality of the newer Asset Based Finance businesses
and the current Corporate Finance and Real Estate Finance portfolios,
significant decrease in gross writedowns on the pre-1990 portfolio and the
recognition of several large recoveries on the pre-1990 portfolio. The
reduction in operating revenues reflected the shift in the Company's portfolio
to lower risk, but also lower yielding, assets, coupled with lower net
investment gains and a decline in the level of fee accelerations.
28
<PAGE>
OPERATING REVENUES. The following table summarizes the Company's operating
revenues for the years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------
1996 1995
-------------- --------------
PERCENT PERCENT
AMOUNT OF AFE AMOUNT OF AFE
------ ------- ------ -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net interest income......................... $355 4.1% $387 4.6%
Non-interest income:
Fees and other income..................... 79 0.9 148 1.7
Factoring commissions..................... 55 0.6 50 0.6
Income of international joint ventures.... 44 0.5 35 0.4
---- --- ---- ---
Total operating revenues................ $533 6.1% $620 7.3%
==== === ==== ===
</TABLE>
Net Interest Income. The following table summarizes the Company's net
interest income for the years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, INCREASE/(DECREASE)
-------------------- ----------------------
1996 1995 AMOUNT PERCENT
--------- --------- --------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Interest income........... $ 807 $ 851 $ (44) (5.2)%
Interest expense.......... 452 464 (12) (2.6)
--------- --------- ---------
Net interest income..... $ 355 $ 387 $ (32) (8.3)
========= ========= =========
Net interest income as a
percentage of AFE...... 4.1% 4.6%
</TABLE>
Net interest income decreased by 8.3% in 1996 as compared to 1995,
reflecting the continued shift of the portfolio to lower risk, but also lower
yielding, Asset Based Finance products, competitive pricing pressures and
lower levels of fee accelerations. Interest income yields decreased to 10.8%
during 1996 from 11.7% in 1995. Interest expense decreased to 6.5% in 1996
from 6.9% in 1995 due to the decline in the average borrowing rate.
A comparative analysis of the year-end principal outstanding and average
interest rates paid by the Company on its debt as of December 31, 1996 and
1995, before and after giving effect to interest rate swaps, is shown in the
following table:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1996 1995
--------------------- ---------------------
YEAR-END BEFORE AFTER YEAR-END BEFORE AFTER
BALANCE SWAPS SWAPS BALANCE SWAPS SWAPS
-------- ------ ----- -------- ------ -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Commercial paper-- domestic
and foreign............... $2,576 5.63% N/A $2,067 5.96% N/A
Fixed rate debt............ 2,905 7.02 6.62% 2,699 7.26 6.91%
Variable rate debt......... 1,859 4.85 5.78 2,449 5.59 6.36
------ ------
Total.................... $7,340 5.98 6.29 $7,215 6.32 6.65
====== ======
</TABLE>
29
<PAGE>
Non-Interest Income. The following table summarizes the Company's non-
interest income for the years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER
31, INCREASE/(DECREASE)
------------ ----------------------
1996 1995 AMOUNT PERCENT
----- ----- --------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Factoring commissions............ $ 55 $ 50 $ 5 10.0%
Income of international joint
ventures........................ 44 35 9 25.7
----- ----- ---------
Fees and other income:
Fee income and other(1)........ 52 49 3 6.1
Net investment gains........... 3 74 (71) N/M
Real estate participation
income........................ 24 24 -- --
Securitization gains........... -- 1 (1) N/M
----- ----- ---------
Total fees and other income.. $ 79 $ 148 $ (69) (46.6)%
===== ===== =========
Total non-interest income.. $ 178 $ 233 $ (55) (23.6)
===== ===== =========
Non-interest income as a
percentage of AFE............... 2.0% 2.7%
</TABLE>
--------
(1) Fee income and other consists primarily of loan servicing income, late
fees, prepayment fees, other miscellaneous income and equipment
residual gains.
Factoring commissions during 1996 totalled $55 million, increasing 10% from
1995 due to an increase in factoring volume. Income of international joint
ventures increased by 26% during 1996, primarily due to earnings growth from
European joint ventures in the Netherlands and France. Net investment gains
were $3 million for 1996, as compared to $74 million in 1995. Gross investment
gains were $106 million and $133 million, while losses and writedowns were $103
million and $59 million, in 1996 and 1995, respectively. Losses and writedowns
on equity investments were higher in 1996 primarily due to writedowns during
the year totalling $53 million on one pre-1990 Corporate Finance investment.
OPERATING EXPENSES. The following table summarizes the Company's operating
expenses for the years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER
31, INCREASE/(DECREASE)
------------ ----------------------
1996 1995 AMOUNT PERCENT
----- ----- --------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Salaries and other
compensation.................. $ 154 $ 135 $ 19 14.1%
General and administrative
expenses...................... 93 81 12 14.8
----- ----- ---------
Total........................ $ 247 $ 216 $ 31 14.4
===== ===== =========
Operating expenses as a
percentage of AFE............. 2.8% 2.6%
</TABLE>
During 1996, operating expenses grew 14% versus 1995 primarily due to the
Company's continued investments in developing the products and services of its
Asset Based Finance businesses.
30
<PAGE>
ALLOWANCE FOR LOSSES. The following table summarizes the changes in the
Company's allowance for losses of receivables, including the Company's
provision for losses of receivables and repossessed assets, for the years
ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER
31, INCREASE/(DECREASE)
------------ ----------------------
1996 1995 AMOUNT PERCENT
----- ----- --------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Balance at the beginning of the
year............................ $ 231 $ 237 $ (6) (2.5)%
Provision for losses........... 103 223 (120) (53.8)
Writedowns..................... (163) (259) (96) N/M
Recoveries..................... 55 28 27 96.4%
Transfers and other............ (1) 2 (3) N/M
----- ----- ---------
Balance at end of the year....... $ 225 $ 231 $ (6) (2.6)%
===== ===== =========
</TABLE>
The provision for losses decreased dramatically from 1995 to 1996 as a
result of the lower writedowns and increased recoveries, primarily from the
pre-1990 portfolio. Gross writedowns were $163 million and $259 million, while
recoveries totalled $55 million and $28 million, for 1996 and 1995,
respectively. The credit quality of the current portfolio was demonstrated by
net writedowns on the current portfolio totalling $41 million, or 0.50% of
total average lending assets, in 1996 versus $45 million, or 0.60% of total
average lending assets, in 1995.
INCOME TAXES. The Company's effective income tax rate was 23% for 1996 and
27% for 1995, in each case below the statutory rate due to the effect of
earnings from international joint ventures, the use of foreign tax credits and
favorable tax issue resolutions.
LENDING ASSETS AND INVESTMENTS
Total lending assets and investments increased $581 million, or 6%, during
1996, as the Company continued to grow its lower risk Asset Based Finance
businesses and reduce its pre-1990 portfolio. As of December 31, 1996, the
domestic Asset Based Finance portfolio continued to be the largest business
category, representing 44% of lending assets and investments. The following
tables present lending assets and investments by business category and asset
type as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1995
-------------- --------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
BY BUSINESS CATEGORY:
Asset Based Finance.......................... $4,258 44% $3,147 35%
Corporate Finance............................ 2,016 21 2,328 26
Real Estate Finance.......................... 1,514 16 1,234 14
International Group(1)....................... 609 6 506 5
Project Finance.............................. 160 2 186 2
Pre-1990 portfolio........................... 979 10 1,526 17
Other........................................ 84 1 112 1
------ --- ------ ---
Total lending assets and investments....... $9,620 100% $9,039 100%
====== === ====== ===
</TABLE>
--------
(1) Includes $272 million in investments in international joint ventures,
representing 3% of total lending assets and investments, in 1996, and
$233 million in investments in international joint ventures,
representing 2% of total lending assets and investments, in 1995.
31
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1995
-------------- --------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
BY ASSET TYPE:
Receivables.................................. $8,529 89% $8,085 89%
Repossessed assets........................... 14 -- 28 1
------ --- ------ ---
Total lending assets....................... 8,543 89 8,113 90
Equity and real estate investments........... 419 4 428 5
Debt securities.............................. 251 3 152 2
Operating leases............................. 135 1 113 1
International joint ventures................. 272 3 233 2
------ --- ------ ---
Total lending assets and investments....... $9,620 100% $9,039 100%
====== === ====== ===
Total managed assets....................... $9,574 $9,137
Funds employed............................. $9,030 $8,542
</TABLE>
The Company continued to develop a more balanced, lower risk asset based
portfolio in 1996 while maintaining the strong market positions of Corporate
Finance and Real Estate Finance. Asset diversification was improved with asset
growth of over $1 billion in the Asset Based Finance businesses in 1996, with
all five Asset Based Finance business groups contributing to this growth. None
of the Company's business groups represented more than 21% of the Company's
total portfolio at December 31, 1996. Corporate Finance had fundings of
approximately $900 million in 1996, but its assets and investments decreased
by $312 million in 1996, due primarily to syndications and runoff in the
portfolio.
The Company's investment in international joint ventures increased due to
the impact of undistributed income and an investment made in a factoring
company in Chile.
Concentrations of lending assets of 5% or more at December 31, 1996 and
1995, based on the standard industrial classifications of the borrowers, were
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1995
-------------- --------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Department and general merchandise retail
stores................................... $987 12% $774 10%
Food, grocery and miscellaneous retail.... 669 8 568 7
General industrial machines............... 500 6 392 5
Business services......................... 435 5 387 5
Textile and apparel manufacturing......... 403 5 529 7
</TABLE>
The department and general merchandise retail stores and the textiles and
apparel manufacturing categories were primarily comprised of factored accounts
receivable which represent short-term trade receivables from numerous
customers. The majority of lending assets in the food, grocery and
miscellaneous retail category were revolving and term facilities with
borrowers primarily in the business of manufacturing and retailing of food
products. The general industrial machines classification is distributed among
machinery used for many different industrial applications. The business
services category was primarily comprised of computer and data processing
services, credit reporting and collection, and miscellaneous business
services.
32
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company manages liquidity primarily by monitoring the relative
maturities of assets and liabilities and by borrowing funds through the U.S.
and international money and capital markets and bank credit markets to fund
asset growth and to meet debt obligations. The Company's primary sources of
funds are commercial paper borrowings, issuances of medium-term notes and
other debt securities and the securitizations, syndications and sales of
lending assets. During 1997, the Company's major funding requirements included
$6.0 billion of longer-term loans, leases and investments funded, $526 million
of short-term loans funded, the retirement of $1.4 billion of senior notes,
the acquisition of its joint venture partner's interest in Factofrance for
$174 million and common and preferred dividends of $57 million. The Company's
major sources of funding these requirements, other than $406 million of cash
flows from operations, included loan repayments and investment proceeds of
$3.1 billion, the sale, securitization or syndication of $1.7 billion of loans
and investments, and the issuance of $2.6 billion of senior notes and $150
million of Series B Preferred Stock. These sales reflected the Company's
strategy to limit the size of retained positions and to securitize, retaining
minimal to no residual risk, certain asset types, such as commercial mortgages
and equipment leases. These financing activities also enabled the Company to
reduce short-term debt by $279 million, excluding the effect of consolidating
Factofrance, and left the Company with $821 million in cash and short-term
investments at the end of 1997.
While the portfolio demonstrated increasing liquidity in both its longer
term loans and in the increased proportion of factored receivables and
revolving loans, the Company continued to maintain a conservative funding
posture, with commercial paper and short-term borrowings amounting to 36% of
total debt at December 31, 1997 compared to 37% at the end of 1996.
As of December 31, 1997, committed bank credit and asset sale facilities of
the Company totalled $4.0 billion and represented 122% of the Company's
outstanding commercial paper and short-term borrowings. Committed bank credit
and asset sale facilities in the United States also were well in excess of
100% of U.S. commercial paper borrowings at December 31, 1997. In April 1997,
the Company extended and increased its primary committed bank credit facility,
which provides $3.0 billion of liquidity support under two equal credit
agreements, a 364-day facility expiring April 7, 1998 (which the Company
intends to renew) and a 5-year facility expiring April 8, 2002. In addition,
the consolidated international subsidiaries are funded primarily through
short-term money market and bank borrowings, which are supported by $625
million of committed foreign bank credit facilities in local currencies.
The Company's factored accounts receivable 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. As part of its
array of financing options, the Company utilized this facility during the
fourth quarter so that, as of December 31, 1997, the Company had sold
approximately $500 million of factored accounts receivable.
During the fourth quarter of 1997, the Company established a $400 million
committed warehouse line, which expires in June 1998, to finance CMBS. As of
December 31, 1997, the Company had borrowed $200 million under this facility,
which borrowings were paid off in January 1998.
In an effort to maintain a sound capital structure, in June 1997 the Company
privately issued $150 million of its Series B Preferred Stock at a purchase
price of $100 per share. Pursuant to registration rights of the holders of
Series B Preferred Stock, as of January 1998, all of the shares of the Series
B Preferred Stock had been exchanged for an equal number of shares of Series C
Preferred Stock, and the Series B Preferred Stock was subsequently retired as
a class. The Series C Preferred Stock is substantially identical to the Series
B Preferred Stock, except that the issuance of the Series C Preferred Stock
was registered under the Securities Act and therefore the certificates for the
shares of Series C Preferred Stock do not bear restrictive legends.
33
<PAGE>
In addition to these alternate sources of liquidity, the Company has access
to $500 million of additional liquidity support under the Keep Well Agreement
between the Company and Fuji Bank. This agreement, which cannot be terminated
by either party prior to December 31, 2002, also provides that Fuji Bank will
maintain the net worth of the Company at an amount equal to $500 million. Fuji
Bank has never been required to make any capital contribution or advance any
funds to the Company under the Keep Well Agreement. See "Certain Relationships
and Related Transactions--Relationship with Fuji Bank--Keep Well Agreement".
The Company's ratio of debt (net of short-term investments) to total
stockholders' equity remained conservative relative to commercial finance
industry peers at 5.2 times at December 31, 1997 compared to 5.0 times at
December 31, 1996. Leverage and the level of commercial paper and short-term
borrowings continued to remain within ranges targeted by the Company to
maintain a strong financial position.
ACCOUNTING DEVELOPMENTS
The Company adopted Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 125"), as amended by Statement of
Financial Accounting Standards No. 127, "Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125" ("SFAS 127") on January 1, 1997.
SFAS 125 uses a "financial components" approach that focuses on control to
determine the proper accounting for financial asset transfers and addresses
the accounting for servicing rights on financial assets in addition to
mortgage loans. Securitizations of finance receivables are accounted for as
sales when legal and effective control over the related receivables is
surrendered. Servicing assets or liabilities are recognized when the servicing
rights are retained by the seller, provided that a market rate servicing fee
is received which is above or below the costs of servicing.
In June 1997, the Financial Accounting Standards Board released Statement of
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"),
which the Company has adopted effective January 1, 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" ("SFAS 131") was also released in June
1997 and has also been adopted effective January 1, 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. SFAS 130
and SFAS 131 address financial statement disclosures and, as a result, will
not have an impact on the financial results of the Company.
YEAR 2000 COMPLIANCE
The Company has made, and will continue to make, certain investments in its
software applications and systems to ensure the Company's systems function
properly through and beyond the year 2000. The Company has three loan
processing systems, a lease processing system, a factoring system, and systems
for general ledger processing, payroll, accounts payable, fixed assets,
treasury and other smaller applications. The Company has established plans to
modify, upgrade or replace each of these systems for compliance with year 2000
and has established an overall plan to bring all of these systems into
compliance by the end of 1999. The Company continues to assess the impact of
the year 2000 issue on its consolidated international subsidiaries, which
includes the performance of risk assessments and the evaluation of the extent
of programming changes required to address the issue. The Company currently
estimates that the total costs of year 2000 compliance for the Company will be
below $25 million. Maintenance or modification costs will be expensed as
incurred, while the costs of new software will be capitalized and amortized
over the software's estimated useful life.
34
<PAGE>
The Company is also in the process of performing a risk assessment of its
joint venture companies' plans for year 2000 compliance and of the resulting
potential impact on the Company's investments in international joint ventures.
This assessment is expected to be completed in 1998.
The Company continues to bear some risk related to the year 2000 issue and
could be adversely affected if other entities (e.g., vendors and borrowers)
not affiliated with the Company do not appropriately address their own year
2000 compliance issues. The Company is working with its mainframe provider to
validate its plans for year 2000 compliance. In addition, the Company is
incorporating a year 2000 risk assessment into its underwriting and portfolio
management activities in order to evaluate its exposure due to any lack of
compliance on the part of its clients.
35
<PAGE>
BUSINESS
The following discussion contains certain "forward-looking statements" (as
defined in Section 27A of the Securities Act), which are generally identified
by the words "anticipates", "believes", "estimates", "expects", "plans",
"intends" and similar expressions. Such statements are subject to certain
risks, uncertainties and contingencies, including, but not limited to, those
set forth under the heading "Risk Factors", which could cause the Company's
actual results, performance or achievements to differ materially from those
expressed in, or implied by, such statements. See "Special Note Regarding
Forward-Looking Statements".
GENERAL
The Company is a leading diversified commercial financial services company
which provides a broad array of financial products and services to mid-sized
and small businesses in the United States and selected international markets.
The Company provides its products and services principally in five business
categories: (i) asset based finance ("Asset Based Finance"), which provides
secured loans and factoring through five business groups, (ii) Heller Real
Estate Financial Services ("Real Estate Finance"), which provides secured real
estate financing, (iii) Heller International Group, Inc. ("International
Group"), which provides international asset based financing and factoring,
(iv) Heller Corporate Finance ("Corporate Finance"), which provides
collateralized cash flow lending, and (v) Heller Project Finance ("Project
Finance"), which provides structured financing for domestic energy-related
projects. The Company's primary clients and customers are entities in the
manufacturing and service sectors having annual sales generally in the range
of $5 million to $250 million and in the real estate sector having property
values generally in the range of $1 million to $40 million.
The Company concentrates primarily on senior secured lending, with 89% of
lending assets and investments at December 31, 1997 being made on such basis.
Also, to a more limited extent, the Company makes subordinated loans and
invests in select debt and equity instruments. The Company believes that, as
of December 31, 1997, it was the fourth largest factoring operation in the
United States in terms of factoring volume (and the largest factoring
operation worldwide), the third largest originator of SBA 7(a) guaranteed
small business loans (including leadership positions in California and Texas)
and among the largest lenders to private equity-sponsored companies in the
U.S. middle market. Additionally, the Company is a recognized leader in real
estate finance, vacation ownership lending and middle-market equipment finance
and leasing in the United States. The Company has built its portfolio through
effective asset origination capabilities, disciplined underwriting and credit
approval processes and effective portfolio management. Most of the Company's
business groups have also developed the ability to manage asset, client and
industry concentrations and enhance profitability by distributing assets
through securitizations, syndications and/or loan sales.
The Company was founded in 1919 and from its inception has targeted its
commercial financing activities at mid-sized and small businesses in the
United States. Since 1964, the Company has also competed in selected
international markets through its consolidated subsidiaries and investments in
international joint ventures. The Company was purchased by Fuji Bank in 1984,
and between the time of such acquisition and 1990, the substantial majority of
the Company's portfolio consisted of Corporate Finance and Real Estate Finance
assets (together representing 76% of the Company's lending assets and
investments at December 31, 1990). Since 1990, the Company has diversified its
portfolio, investing major resources in building its Asset Based Finance
businesses, through start-ups of new business groups and business units, as
well as the acquisition of its small business lending operation and the
expansion of smaller existing operations. During these years, the Company has
also introduced a number of Asset Based Finance businesses, including asset
based working capital and term financing, and commercial equipment finance in
1992; public finance and industrial equipment
36
<PAGE>
finance in 1996; and commercial funding in 1997. As a result, the Company's
Asset Based Finance business, which represented only 14% of the portfolio of
lending assets and investments at December 31, 1990, constituted 40% of the
Company's portfolio at December 31, 1997. In the past several years, the
Company has also expanded its overseas operations, most significantly by
completing the acquisition in April 1997 of the interest of its joint venture
partner in Factofrance, the leading factoring company in France. A number of
the Company's new or expanded businesses have only recently begun to contribute
meaningfully to the Company's revenues and portfolio of lending assets and
investments. The following chart shows the breakdown of the Company's portfolio
as of December 31, 1997 and demonstrates the success of the Company's
diversification efforts:
Total Lending Assets and Investments
[PIE CHART APPEARS HERE]
Other 2% $0.2 billion
Asset Based Finance 40% $4.7 billion
40% of Total Lending Assets and Investments
Real Estate Finance 17% $2.1 billion
Corporate Finance 17% $2.0 billion
International Group 20% $2.4 billion
Pre-1990 Portfolio 4% $0.5 billion
Total Lending Assets and Investments: $11.9 billion
Asset Based Finance Breakdown
[PIE CHART APPEARS HERE]
Equipment Finance and Leasing 11% $1.3 billion
Sales Finance 10% $1.2 billion
Business Credit 9% $1.0 billion
Small Business Lending 7% $0.8 billion
Current Asset Management 3% $0.4 billion
Total Asset Based Finance Lending Assets and Investments: $4.7 billion
The Company's total lending assets and investments were $11.9 billion and
common stockholders' equity was $1.4 billion at December 31, 1997. For the year
ended December 31, 1997, the Company's net income increased 19% to $158
million, from $133 million for the prior year, while new business volume
increased 47% over the prior year, from $4.1 billion to $6.0 billion. Net
income applicable to common stock was $144 million for the year ended December
31, 1997, which represented an increase of 17% from $123 million for the prior
year. The credit quality of the Company's portfolio is reflected in nonearning
assets of $155 million, or 1.4% of total lending assets, at December 31, 1997,
the lowest level of nonearning assets in over 10 years.
37
<PAGE>
Information with respect to the Company's business categories, strategic
business groups, principal product offerings, principal industries and markets
served and locations are provided in the following chart:
-----------------------------------------------------
HELLER FINANCIAL, INC.
-----------------------------------------------------
- -------------------------------------------
ASSET BASED FINANCE
- -------------------------------------------
LENDING ASSETS AND INVESTMENTS(1)(2)
$4,726
Strategic Business Groups
<TABLE>
<CAPTION>
Equipment Sales Finance Business Credit Current Asset Small Business
Finance & Management Lending
Leasing
<S> <C> <C> <C> <C>
Lending Assets And Investments (1)(2)
$1,316 $1,228 $1,025 $391(4) $766
Revenues(1)(2)
$ 110 $ 106 $ 114 $122 $ 65
</TABLE>
Principal Product Offerings
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
. Term Debt . Customized . Secured . Factoring . SBA guaranteed
. Finance leases sales finance revolving lines . Import and 7(a) loans
. Operating programs to of credit and export financing . SBA 504 loans
leases manufacturers term loans . Letters of credit (senior to
. Off-balance and distributors . Debtor-in- . Revolving lines associated
sheet loans . Customized possession of credit and government
. True leases financing financing term loans debentures
. Turn-key programs to . Credit protection . Conventional
financing independent . Accounts commercial real
. Lease leasing receivable estate loans
discounting companies and management
. Municipal leases timeshare
. Subordinated developers
debt (aircraft)
</TABLE>
Principal Industries and Markets Served
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
. Manufacturers . Printing . Manufacturers . Appeal . Manufacturers
. Retailers . Machine tools . Retailers . Textiles . Service
. High-tech . Plastics . Wholesalers . Home providers
. Grocery . High tech and and distributors furnishings . Retailers
. Restaurant software . Service firms . Housewares . Wholesalers
franchise . Medical . Agriculture . Golf . Distributors
. Construction . Leasing . Frozen food
. Graphic arts companies . Temporary
. Energy . Resort services
. Municipal, state developments
and federal
governments
. Airline lessors
</TABLE>
<TABLE>
<CAPTION>
- -------- ------------- --------- -------
REAL
ESTATE INTERNATIONAL CORPORATE PROJECT
FINANCE GROUP FINANCE FINANCE
- -------- ------------- --------- -------
<S> <C> <C> <C>
$2,093 $2.361(3) $2,010 $144
</TABLE>
<TABLE>
<CAPTION>
Real Estate International Corporate Project Finance
Finance Group Finance
<S> <C> <C> <C>
$2,093 $2,361(3) $2,010 $144
$ 252 $ 187 $ 245 $ 19
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
. Fixed rate first . Factoring . Senior secured . Pre-construction
mortgages . Import and business value development
. Variable rate export financing lending through loans
participating and . Letters of credit revolving lines . Junior and
non-participating . Revolving lines of credit and senior
first mortgages of credit and term loans construction and
. Letters of credit term loans . Mezzanine term loans
. Junior . Credit protection financing
participating . Accounts . Equity fund
financing receivable investments and
management co-investments
. Leasing
Income- Subsidiaries: Private equity . Energy
generating . Factofrance sponsored . Oil and gas
properties, . Singapore companies in: . Environmental
including: . Mexico . Manufacturing . Coal and
. Multi-family . Australia . Retail minerals mining
housing . Health care . Forest products
. Hotels Joint ventures: . Agriculture
. Industrial . Europe . Food
. Office . Latin America . Service
. Retail . Asia/Pacific . Broadcasting
. Senior housing . Transportation
. Manufactured . Printing
housing . Funeral
communities services
. Self-storage . Electronics
. Tax credit/
affordable
housing
</TABLE>
<TABLE>
<CAPTION>
Locations
<S> <C> <C> <C> <C> <C> <C> <C> <C>
. 18 .9 .9 .5 .24 .10 .19 countries .5 .1
</TABLE>
- --------------
(1) In millions, as of, or for the year ended, December 31, 1997.
(2) Excludes pre-1990 Corporate Finance, Real Estate Finance and other assets
and revenues.
(3) Includes $198 million in investments in international joint ventures.
(4) Reflects the sale of approximately $500 million in factored accounts
receivable. See "--Asset Based Finance--Current Asset Management."
<PAGE>
STRATEGY
The Company is dedicated to delivering consistent growth in earnings and
assets, while maintaining the strong credit quality of its asset portfolio.
Over the past five years, the Company has achieved growth in earnings and
assets through its strong client orientation, productive origination network,
disciplined adherence to prudent credit principles and its long-standing
established positions in many of its target markets.
Management believes that the following operating principles have been key to
the Company's success and will continue to guide its business strategy in the
future:
. Maintain "superior client focus" in targeted mid-sized and small
business markets throughout all economic cycles
. Build and maintain a strong financial profile through a sound capital
structure, a diversified and high-quality asset portfolio and
conservative reserve levels
. Adhere to prudent credit standards and actively manage the lending and
investment asset portfolio
. Enhance productivity by leveraging existing operating platforms,
selectively investing in technology and people and practicing
disciplined expense management
. Develop, attract and retain experienced professionals by maintaining a
vibrant culture that promotes delegation, accountability, creativity and
teamwork
Adhering to these operating principles, the Company intends to continue its
earnings and asset growth by employing the following strategies:
MAINTAIN AND BUILD LEADERSHIP POSITIONS IN SELECTED MID-SIZED AND SMALL
BUSINESS MARKETS. The Company's proven ability to develop client relationships
and originate transactions with mid-sized and small businesses throughout
economic cycles has resulted in leadership positions in several of its
businesses. In addition, since 1992, the Company has entered several markets
in which the Company believes it has developed an effective infrastructure to
enable it to establish leadership positions. This strategy has resulted in
compound annual growth in new business volume of 25% over the past five years.
The Company seeks further growth by (i) continuing to develop the well-
established market position of its domestic and international factoring,
Corporate Finance and Small Business Lending businesses, by offering a broad
array of innovative financing products and services, (ii) continuing to expand
the capabilities of Real Estate Finance, including origination of CMBS
receivables, and (iii) further developing the market positions of certain
other asset based lending businesses, such as Equipment Finance and Leasing,
Business Credit and Sales Finance, by building upon its proven competencies
and technical expertise. The lending assets and investments of Asset Based
Finance have grown at a compound annual rate of 34% since 1992 and, as of
December 31, 1997, accounted for approximately 40% of the Company's total
portfolio. The Company believes that the businesses which comprise its Asset
Based Finance portfolio represent an attractive combination of growth
potential, earnings consistency and credit quality.
CONTINUE TO GROW THE COMPANY'S INTERNATIONAL BUSINESSES. The Company has a
significant international presence in factoring and asset based financing, and
has had subsidiaries and joint ventures in many international markets for more
than 25 years. These enterprises provide a solid base for consistent growth in
international earnings and also provide the Company with the opportunity to
meet the international financing needs of its domestic client base.
MAINTAIN PRUDENT CREDIT STANDARDS AND ACTIVE PORTFOLIO MANAGEMENT. The
Company has built a disciplined "credit culture" supported by portfolio and
risk management processes. The Company establishes clearly defined credit
strategies for each of its businesses, permitting them to make quick
39
<PAGE>
credit decisions under disciplined guidelines. Additionally, the Company
believes that it has developed an expertise in structuring sophisticated
transactions that enables it to accommodate unique client needs without
compromising credit quality. The Company has centralized the administration of
credit policy and portfolio management to ensure consistency in credit
strategy, efficiency in credit analysis and processing, and the ability to
monitor credit quality and portfolio composition closely.
The Company's emphasis on disciplined credit standards has resulted in a
more diverse portfolio, smaller positions retained, net credit losses of 1.5%
of average lending assets (0.7% excluding pre-1990 assets) in 1997 and
nonearning assets representing 1.4% of lending assets (0.8% excluding pre-1990
assets) at December 31, 1997. The Company believes that its risk management
systems, portfolio management and servicing capabilities, and client-oriented
structuring capabilities will continue to support long-term profitability.
ENHANCE CAPITAL MARKETS AND DISTRIBUTION EXPERTISE. As a complement to their
strong origination capabilities, most of the Company's business groups have
developed competencies in the syndication and/or securitization of lending
assets. The Company has successfully syndicated and sold $2.4 billion of
assets and securitized $994 million of assets from 1995 through 1997, and
plans to prudently expand these capabilities. The Company believes that these
skills will be increasingly important to the Company's ability to (i) maximize
its origination strength by providing broader market access to higher quality
credits, (ii) manage customer and asset concentrations, (iii) generate income
growth in competitive markets through syndication fees and securitization
gains and (iv) meet a broader array of the financial needs of its current
clients.
INCREASE OPERATING EFFICIENCIES WITHIN THE COMPANY. The Company has
established a framework for its business categories that it believes can
support the profitable addition of a significant level of assets. The Company
believes it is recognizing significant economies of scale in certain of its
established businesses (domestic factoring and Corporate Finance), and expects
to improve economies of scale in its other businesses as they grow and achieve
critical mass. The Company believes that its recent and ongoing investments in
building its Asset Based Finance businesses and its Real Estate Finance CMBS
capability provide effective operating platforms for these businesses, and
that continued strong growth in new business using these existing platforms
will generate productivity improvements in the future. The Company has also
invested in technology and support systems, significantly upgrading its
technology infrastructure in 1997 to streamline the management of portfolio
accounts, increase its efficiency in processing high transaction volumes and
enable Intranet and Internet communications and commerce. In addition, the
Company will selectively pursue strategic acquisition opportunities of
businesses and portfolios of assets that it believes will generate additional
economies of scale and productivity improvements.
ASSET BASED FINANCE
Asset Based Finance is the Company's largest business category with total
lending assets and investments of $4.7 billion, or 40% of the Company's total
lending assets and investments, at December 31, 1997, and revenues of $517
million, or 41% of the Company's total revenues, for 1997. The Asset Based
Finance portfolio is comprised of factored accounts receivable, secured
working capital loans, equipment loans and leases to end users, vendor finance
program loans and leases, small business loans, and loans to leasing companies
and timeshare developers. Asset Based Finance consists of five distinct
business groups: (i) Equipment Finance and Leasing, (ii) Sales Finance, (iii)
Business Credit, (iv) Heller Current Asset Management (principally domestic
factoring) ("Current Asset Management") and (v) Small Business Lending. The
following tables present certain information regarding Asset Based Finance as
of the end of, and for, each of the years in the three-year period ended
December 31, 1997:
40
<PAGE>
<TABLE>
<CAPTION>
AS OF, OR FOR THE
YEAR ENDED, DECEMBER
31,
------------------------
1997 1996 1995
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Lending Assets and Investments:
Equipment Finance and Leasing................. $1,316 $ 981 $ 697
Sales Finance................................. 1,228 1,090 849
Business Credit............................... 1,025 867 638
Small Business Lending........................ 766 403 208
Current Asset Management...................... 391(1) 917 755
------ ------ ------
Total lending assets and investments........ $4,726 $4,258 $3,147
====== ====== ======
Revenues:
Current Asset Management...................... $ 122 $ 113 $ 98
Business Credit............................... 114 86 64
Equipment Finance and Leasing................. 110 73 53
Sales Finance................................. 106 80 72
Small Business Lending........................ 65 47 18
------ ------ ------
Total revenues.............................. $ 517 $ 399 $ 305
====== ====== ======
Revenues as of percentage of total revenues..... 40.7% 40.5% 28.1%
Ratio of net writedowns to average asset
based lending assets........................... 0.2 0.2 0.4
Ratio of nonearning assets to total asset
based lending assets........................... 0.7 0.4 0.6
</TABLE>
--------
(1) Reflects the sale of $500 million of factored accounts receivable
during 1997.
At December 31, 1997, the Asset Based Finance groups were contractually
committed to finance an additional $1.2 billion to new and existing borrowers,
generally contingent upon the maintenance of specific credit standards. Since
many of the commitments are expected to remain unused, the total commitment
amounts do not necessarily represent future cash requirements. No significant
commitments exist to provide additional financing related to nonearning
assets.
EQUIPMENT FINANCE AND LEASING
Equipment Finance and Leasing is comprised of the following four distinct
business units: Heller Commercial Equipment Finance ("Commercial Equipment
Finance"), which as of December 31, 1997 represented 70% of the Equipment
Finance and Leasing portfolio; Heller Aircraft Finance ("Aircraft Finance"),
which as of December 31, 1997 represented 21% of this portfolio; and two newer
businesses, Heller Public Finance ("Public Finance") and Heller Industrial
Equipment Finance ("Industrial Equipment Finance").
Commercial Equipment Finance, which has generated over $1.8 billion
in new business volume since its inception in 1992, represents the
largest unit in Equipment Finance and Leasing, with $913 million in
lending assets and investments at December 31, 1997. Commercial
Equipment Finance generated new business volume of $542 million in
1997. Commercial Equipment Finance provides general equipment term debt
and lease financing directly to a diverse group of middle market
companies, which use such financing to expand, replace or modernize
their equipment or refinance existing equipment obligations. Typically,
the equipment which serves as collateral for the financing is essential
to the operations of the borrower, and the amount financed is generally
not a substantial part of the borrower's capital structure. In 1997,
the average transaction size was approximately $4 million. A typical
borrower/lessee is a U.S. business with annual revenues of at least $35
million seeking
41
<PAGE>
financing of between $1 million and $40 million. The Commercial
Equipment Finance portfolio consisted of 18 industry classifications at
December 31, 1997, of which transportation represented the largest with
18% of lending assets, followed by food/grocery and computer-related,
each of which represented 14% of lending assets, and restaurants which
represented 10% of lending assets. The portfolio's credit quality is
reflected in cumulative net writedowns of $1 million since the business
unit's inception in 1992.
Aircraft Finance is a niche competitor in the commercial aircraft and
aircraft engine finance industry, with total lending assets and
investments of $280 million at December 31, 1997. Aircraft Finance
provides financing through operating leases and senior and junior
secured loans on both new and used equipment. Clients are typically
mid-tier foreign or domestic airlines. Transaction sizes range from $3
million to $40 million, with an average transaction size in 1997 of
approximately $17 million. Aircraft Finance generated new business
volume of $198 million in 1997. Aircraft Finance has developed a
reputation for responsiveness on single investor transactions, which
generally involve one aircraft with lease terms of three to seven
years. In addition, Aircraft Finance's reliability and industry
knowledge has made it a frequently desired participant in larger
financings by other aircraft lessors. Utilizing its industry and
equipment expertise, Aircraft Finance is able to effectively shift its
product offering mix during various phases of the aircraft finance
equipment cycle and effectively remarket and dispose of equipment.
Public Finance and Industrial Equipment Finance, both of which were
started in 1996, together had total lending assets and investments of
$123 million at December 31, 1997. Public Finance and Industrial
Equipment Finance generated new business volume in the aggregate amount
of $144 million in 1997. Public Finance provides equipment and
project/facility financing to state and local governments, with an
average transaction size in 1997 of approximately $2 million. The
interest income earned by Public Finance is generally exempt from
federal income taxes. Industrial Equipment Finance provides collateral
based equipment financing to companies with annual revenues of less
than $35 million in the machine tool, construction and printing
industries. The average transaction size of Industrial Equipment
Finance in 1997 was approximately $600,000.
Equipment Finance and Leasing represents the largest business group within
Asset Based Finance, with total lending assets and investments of $1.3
billion, or 28% of the lending assets and investments of Asset Based Finance,
as of December 31, 1997. Each business unit of Equipment Finance and Leasing
provides structured equipment finance in select markets through transactions
sourced through multiple channels. Equipment Finance and Leasing serves a
broad range of industries, including transportation, supermarket,
manufacturing, computers, energy, restaurant and food processing. Major
product offerings include finance leases, true leases, term loans, off-balance
sheet loans, operating leases and turn-key financing. Through its broad market
access, the group also generates new business referrals for other business
groups of the Company, particularly Business Credit, Small Business Lending
and Sales Finance.
42
<PAGE>
The following table sets forth certain information regarding Equipment
Finance and Leasing as of the end of, and for, each of the years in the three-
year period ended December 31, 1997:
<TABLE>
<CAPTION>
AS OF, OR FOR
THE YEAR ENDED,
DECEMBER 31,
------------------
1997 1996 1995
------ ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Total lending assets and investments.................. $1,316 $981 $697
New business volume................................... 884 534 386
Revenues.............................................. 110 73 53
Revenues as a percentage of total revenues............ 8.7% 7.4% 4.9%
Ratio of net writedowns (recoveries) to
average lending assets............................... 0.1 (0.4) (0.2)
Ratio of nonearning assets to lending assets.......... 0.1 0.0 0.7
</TABLE>
Equipment Finance and Leasing provides the Company broad, national access to
the equipment finance marketplace through its 18 domestic offices. Unlike many
of its competitors, Equipment Finance and Leasing emphasizes direct
origination of its business, which the Company believes provides it with a
competitive advantage and enables it to generate repeat business. In addition
to direct origination, Equipment Finance and Leasing generates business
through traditional broker and intermediary channels. The servicing of the
Equipment Finance and Leasing portfolio is performed on a centralized basis.
Commercial Equipment Finance's and Industrial Equipment Finance's approach
to lending concentrates on the following three critical factors: (i) the cash
flow of the borrower, (ii) the importance/value of the equipment to the
borrower's overall operations and (iii) the relative strength of the
borrower's balance sheet and capital structure. Aircraft Finance focuses on
the strength of the underlying collateral and the credit worthiness of the
underlying lessee. Public Finance generally lends to investment grade
municipalities secured by essential use equipment.
In addition to maintaining underwriting discipline, Equipment Finance and
Leasing manages credit risk through industry and borrower diversification. The
group's portfolio exhibited strong credit quality as of December 31, 1997,
with nonearning assets of less than $1 million on a $1.3 billion portfolio,
and net writedowns of $1 million (0.1% of lending assets) for the year ended
December 31, 1997. Equipment Finance and Leasing is also able to assess
residual value risk and effectively manage off-lease equipment exposures.
Designated individuals establish all equipment residuals used in pricing lease
transactions and continuously research secondary market values to establish
current values, estimate future values and mark industry trends. As of
December 31, 1997, no equipment was off-lease.
Equipment Finance and Leasing distributes a portion of its assets through
securitizations and syndications. In 1997, Equipment Finance and Leasing
contributed $72 million of assets to an equipment securitization and
syndicated an additional $102 million of assets. Through these capital markets
capabilities, Equipment Finance and Leasing is able to provide broader market
penetration, while managing borrower and industry concentrations.
SALES FINANCE
Sales Finance is comprised of two business units: (i) Heller Vendor Finance
("Vendor Finance"), which provides customized financing programs to
manufacturers and distributors of a wide variety of commercial, industrial and
technology products, and (ii) Heller Lender Finance ("Lender Finance"), which
provides customized financing programs to independent leasing companies and
timeshare developers.
Vendor Finance, which comprised 50% of the Sales Finance portfolio at
year end 1997, provides customized sales financing programs to
manufacturers and distributors of a wide variety of commercial,
industrial and technology products. Vendor Finance offers products
43
<PAGE>
and services to two broad client categories: (i) commercial and
industrial, for which Vendor Finance provides sales financing programs
consisting of true leases, loans, conditional sales contracts and
installment sales contracts secured by equipment; and (ii) healthcare,
information and technology, for which Vendor Finance provides sales
financing programs consisting of true leases, loans and conditional
sales contracts, secured by health care and high-technology products.
These sales financing programs enable the vendor to enhance its
marketing and sales capabilities by offering financing and leasing
options to its customers. Transactions under these programs generally
have partial or, in some cases, full recourse to the vendor. Individual
transactions within these programs range from $50,000 to $5 million,
with an average transaction size in 1997 of approximately $750,000.
Terms generally range from two to six years. In 1997, Vendor Finance
generated approximately $500 million in new business volume.
Lender Finance, which comprised 50% of the Sales Finance portfolio at
year-end 1997, provides (i) financing for the vacation ownership
industry and (ii) lease portfolio financing. Lender Finance is one of
the largest lenders to the U.S vacation ownership industry, providing
timeshare resort developers with full life-cycle financing, primarily
receivables hypothecation and inventory financing. Lender Finance also
provides a wide range of financing to independent leasing companies,
including term financing, residual financing, private securitization
structures and warehouse financing. Lender Finance generated $254
million in new lease financing business volume in 1997. Lender Finance
transactions range from $3 million to $50 million, with an average
transaction size in 1997 of $14 million, secured by individual,
underlying transactions with an average size in 1997 of approximately
$100,000. Lender Finance transactions have terms ranging from 24 to 84
months.
Sales Finance, with $1.2 billion in lending assets and investments
represented 26% of the Asset Based Finance portfolio as of December 31, 1997.
Sales Finance provides financing and related support and servicing
capabilities to assist its clients in selling their products and services by
enabling them to provide financing for the end-customer of these products. The
range of services provided by Sales Finance includes sales financing,
transaction structuring, credit analysis, documentation, billing, collections,
portfolio reporting and marketing support. In 1997, Sales Finance generated
new business volume of $754 million, which represented a 39% increase over
1996.
The following table sets forth certain information regarding Sales Finance
as of the end of, and for, each of the years in the three-year period ended
December 31, 1997:
<TABLE>
<CAPTION>
AS OF, OR FOR THE
YEAR ENDED,
DECEMBER 31,
--------------------
1997 1996 1995
------ ------ ----
(IN MILLIONS)
<S> <C> <C> <C>
Total lending assets and
investments............ $1,228 $1,090 $849
New business volume..... 754 544 589
Revenues................ 106 80 72
Revenues as a percentage
of total revenues...... 8.3% 8.1% 6.6%
Ratio of net writedowns
(recoveries) to
average lending assets. -- (0.1) 0.1
Ratio of total
nonearning assets to
lending assets......... 1.2 0.9 0.4
</TABLE>
The business strategy of Sales Finance is to focus on developing long-term
relationships with clients by understanding its clients' businesses and the
role that financing plays in their sales and marketing processes. The sales
force, which has expertise in originating and structuring customized programs
for companies in its targeted industries, calls directly on prospective
clients, using a database of pre-qualified prospects.
44
<PAGE>
Sales Finance's credit approach focuses on the structure of the underlying
financing program and stresses a balance among three key factors: (i) credit
strength of the underlying lessee or borrower, (ii) value and quality of the
underlying collateral and (iii) financial support from the client, and Sales
Finance's reliance upon that support, as many of its programs have full or
partial recourse to the manufacturer or vendor. The group uses standard
underwriting formats and documents to ensure strict credit controls, while
still providing the quick response times demanded by clients. Credit quality
of Sales Finance's portfolio is evidenced by nonearning assets constituting
1.2% of total lending assets and investments, and no net writedowns during
1997.
Sales Finance is focusing increasingly on the use of syndications and
securitizations to manage client and industry concentrations, and to generate
fee income and increase returns. During 1997, the Company securitized $195
million of Sales Finance receivables in a single transaction. The Company did
not retain any credit risk on this transaction, as all securities were sold to
third parties on a non-recourse basis. The Company continues to generate
servicing fees from these assets.
BUSINESS CREDIT
Business Credit, with $1.0 billion in total lending assets and investments,
represented 22% of the Asset Based Finance portfolio as of December 31, 1997.
Business Credit provides asset based working capital and term financing to
middle-market companies for growth, refinancings, recapitalizations,
acquisitions, seasonal borrowing, and debtor-in-possession ("DIP") and post-
DIP transactions, through senior loans primarily secured by accounts
receivable, inventory and, to a lesser extent, machinery and equipment and
real estate. Middle-market companies served by Business Credit include
manufacturers, retailers, wholesalers, distributors and service firms. The
group's portfolio is well-diversified, consisting of 20 industries, with
food/grocery and retail representing the largest concentrations at 22% and
13%, respectively, of total lending assets, and no other industry constituting
more than 10% of total lending assets, as of December 31, 1997. Terms of
transactions usually range from one to eight years, with an average commitment
size and funds employed of $25 million and $10 million, respectively.
The following table sets forth certain information regarding Business Credit
as of the end of, and for, each of the years in the three-year period ended
December 31, 1997:
<TABLE>
<CAPTION>
AS OF, OR FOR
THE YEAR ENDED,
DECEMBER 31,
------------------
1997 1996 1995
------ ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Total lending assets and investments.................. $1,025 $867 $638
New business volume................................... 695 639 476
Revenues.............................................. 114 86 64
Revenues as a percentage of total revenues............ 9.0% 8.7% 5.9%
Ratio of net writedowns to
average total lending assets......................... -- 0.1 --
Ratio of nonearning assets to lending assets.......... -- -- --
</TABLE>
Through its nine regional sales offices, Business Credit provides the
Company with broad national coverage with a focus on regional market
opportunities. Financing is typically provided as agent (lead lender), but
also may be provided as a co-lender or a participant in senior secured
transactions agented by other traditional asset-based lenders. Business Credit
generates the majority of its new business through intermediaries such as
investment and commercial banks, and private equity investors. The group is
also expanding its direct marketing efforts through its use of proprietary
databases of prospective borrowers. In 1997, Business Credit generated new
business commitments and related fundings of $1.7 billion and $695 million,
respectively, up 26% and 9% over the prior year period.
45
<PAGE>
Business Credit underwrites transactions based on balancing collateral
values, cash flow and capital structure. Business Credit protects its position
against deterioration of a borrower's performance by using established advance
rates against eligible collateral and cross-collateralizing revolving credit
facilities and term loans. Credit risk is also actively managed through
portfolio diversification by industry and individual client exposure. Business
Credit manages its portfolio centrally, ensuring more consistent control over
all of its accounts and efficient documentation and approval of transactions.
The credit quality is reflected in cumulative net writedowns of $2 million
since the group's inception in 1992, and no nonearning assets as of December
31, 1997.
Business Credit has established a syndication capability, enabling it to
commit to larger transactions while still managing the size of ultimate
retained positions and to generate additional income. Although Business Credit
can provide commitments of up to $200 million, the business generally
syndicates its ultimate retained funds employed position to $35 million or
less. Total syndication activity in 1997 amounted to $132 million in fundings.
CURRENT ASSET MANAGEMENT
Current Asset Management has been a leading provider of factoring services
in the United States for over 50 years. For 1997, the Company believes Current
Asset Management was the fourth largest factor in terms of volume in the
United States, with factoring volume of over $7.3 billion, a 6% increase from
the prior year. This group provides factoring, working capital and term loans,
receivables management, import and export financing and credit protection to
middle-market companies which have targeted annual sales in the range of $10
million to $100 million. Working capital and term loans consist of advances
against inventory and equipment on a formula basis, as well as seasonal over-
advances. In addition, during 1997, the group's commercial funding unit began
making asset based loans in the $1 million to $10 million range secured by
receivables and inventory. Current Asset Management serves a wide variety of
markets, with specific expertise in apparel, textiles and home furnishings. As
of December 31, 1997, the majority of Current Asset Management's lending
assets consisted of short-term trade receivables from department and general
merchandise retail stores. The group has also begun to service a broad range
of additional markets such as golf, temporary staffing services, seafood and
housewares. Clients use Current Asset Management's factoring products and
services to address a broad range of needs, including improving cash flow,
mitigating the risk of bad debt charge-offs, increasing sales, improving
management information and converting the high fixed cost of operating a
credit and collection department into a lower, variable expense.
The following table sets forth certain information regarding Current Asset
Management as of the end of, and for, each of the years in the three-year
period ended December 31, 1997:
<TABLE>
<CAPTION>
AS OF, OR FOR THE
YEAR ENDED,
DECEMBER 31,
---------------------
1997 1996 1995
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Total lending assets and investments.............. $ 391(1) $ 917 $ 755
Factoring volume(2)............................... 7,347 6,933 6,084
Revenues.......................................... 122 113 98
Revenues as a percentage of total revenues........ 9.6% 11.5% 9.0%
Ratio of net writedowns to average lending assets. 1.0 1.0 1.3
Ratio of nonearning assets to total lending
assets........................................... 0.5 0.4 1.1
</TABLE>
--------
(1) Reflects the sale of $500 million of factored accounts receivable
during 1997.
(2) Due to the short-term nature of these purchased receivables,
factoring volume is not included in new business volume.
46
<PAGE>
Current Asset Management maintains two full service offices in New York and
Los Angeles and operates sales offices in Atlanta and Dallas. Through its
experienced sales force, Current Asset Management generates business through
direct calling on manufacturers, and develops and maintains relationships with
financial intermediaries that provide financing advice to prospective clients.
In addition to its direct sales efforts, Current Asset Management generates
business through its programmatic use of direct mail and advertising and
through referrals from other business groups of the Company. The Company
believes that its focused sales efforts, market research program, and
advertising and marketing efforts have played a key role in the growth of its
domestic factoring operation. Current Asset Management has developed
sophisticated proprietary information storage and retrieval systems, such as
electronic transmission of invoices and remittances, scanning technology and
electronic linkage with clients, that streamline the management and processing
of accounts receivable and enable the Company to efficiently process the high
transaction volumes related to factoring invoices. Current Asset Management
believes that the investments in technology associated with factoring
represent a significant entry barrier to new competitors.
Current Asset Management generally purchases the accounts receivable owed to
clients by their customers, usually on a nonrecourse basis, and may provide
funding to clients as an advance against those receivables. Customer credit
coverage is extended based on an analysis of operating performance and sources
of short-term liquidity, such as borrowing facilities and trade relationships.
The Company also utilizes technology to electronically perform basic credit
surveillance routines. The Current Asset Management portfolio's strong credit
quality is evidenced by nonearning assets of only 0.5% of lending assets at
December 31, 1997 and net writedowns of 1.0% of lending assets for 1997.
The Company has a factored accounts receivable facility, which allows it to
sell an undivided interest of up to $550 million in a designated pool of its
factored accounts receivable to five bank-supported conduits. The Company
utilized this facility during the fourth quarter of 1997. At December 31,
1997, the Company had sold approximately $500 million of factored accounts
receivables through this facility, resulting in a decrease of Current Asset
Management lending assets from the end of the prior year.
SMALL BUSINESS LENDING
Small Business Lending, with $766 million in lending assets and investments,
represented 16% of the Asset Based Finance portfolio as of December 31, 1997.
Small Business Lending provides long-term financing to the large and growing
small business market, primarily under SBA loan programs. Small Business
Lending's major product offerings are SBA 7(a) loans, which are guaranteed up
to 80% by the SBA, and SBA 504 loans, which are senior to an accompanying SBA
loan and have an average loan to collateral value of 50%. Small Business
Lending is one of only fourteen non-banks licensed by the SBA to make SBA 7(a)
loans and is the third largest originator of such loans. Small Business
Lending provides long-term financing for real estate purchase, construction or
refinance; business or equipment acquisition; working capital; and debt
refinancing, primarily to companies in the manufacturing, retail or service
sectors with annual sales of $500,000 to $3 million. While the portfolio is
somewhat concentrated in California and Texas, it is geographically
diversified within these states. The entire Small Business Lending portfolio
is diversified by industry type, with concentrations of 13% in transportation
services and 10% in miscellaneous consumer services and no other industry
representing more than 10% of the portfolio as of December 31, 1997. The loans
provided by Small Business Lending are generally for amounts up to $3 million,
have an average size of $500,000 and have a contractual maturity ranging from
five to 25 years.
47
<PAGE>
The following table sets forth certain information regarding Small Business
Lending as of the end of, and for, each of the years in the three-year period
ended December 31, 1997:
<TABLE>
<CAPTION>
AS OF, OR FOR
THE YEAR
ENDED,
DECEMBER 31,
----------------
1997 1996 1995
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Total lending assets and investments.................... $766 $403 $208
New business volume..................................... 472 393 165
Revenues................................................ 65 47 18
Revenues as a percentage of total revenues.............. 5.1% 4.8% 1.7%
Ratio of net writedowns to average lending assets....... 0.3 0.3 0.5
Ratio of nonearning assets to lending assets............ 2.0 1.2 0.5
</TABLE>
Small Business Lending operates out of 24 offices in 12 states and the
portfolio is managed on a centralized basis. Small Business Lending focuses
its marketing efforts on developing relationships with third party
intermediaries, such as real estate brokers, mortgage brokers and business
brokers. Additional business originates from referrals from existing
customers, franchisors, targeted direct marketing and cross-referrals from
other of the Company's business groups. Small Business Lending enjoys SBA
Preferred Lender Program "PLP" status, which enables it to approve SBA 7(a)
loans under SBA-delegated approval authority. The Company believes that Small
Business Lending has maintained a position as one of the nation's three
largest originators of SBA 7(a) loans since 1995, and placed first and second
in volume growth in 1996 and 1997, respectively. In California and Texas, the
two largest markets for SBA 7(a) loans, Small Business Lending was the largest
originator of SBA 7(a) loans in 1997. Total new business for all products
exceeded $470 million in 1997.
Small Business Lending's underwriting and procedural guidelines are
standardized to ensure a consistent and efficient process. Credit decisions
are based on analysis of a prospective borrower's cash flow, the use of
independent valuations for collateral and a review of management. Loans are
generally secured by real estate and equipment, with additional collateral in
the form of other business assets, personal residences and, in many instances,
personal guarantees. The portfolio is comprised of approximately 2,800
individual loans, which provides diversified risk. Delinquent accounts are
managed aggressively, beginning at five days past due, through a combination
of collection calls and letters. At 60 days past due, accounts are transferred
to a specialized workout area. Nonearning assets represented 2% of the
portfolio as of December 31, 1997, of which 75% were the guaranteed portions
of net SBA 7(a) loans which are held until a liquidation is complete and the
SBA repurchases the loan. Net writedowns have remained at or below 0.5%
annually for the past three years.
The Company has developed the ability to sell the guaranteed portions of SBA
7(a) loans in the secondary market. The guaranteed portions of SBA 7(a) loans,
which represented 45% of the lending assets of this group at December 31,
1997, can generally be sold and settled, at amounts in excess of book value,
in less than 45 days. Small Business Lending has sold over $150 million in
guaranteed 7(a) loans over the past two years.
REAL ESTATE FINANCE
Real Estate Finance had total lending assets and investments of $2.1
billion, or 17% of the Company's total lending assets and investments, as of
December 31, 1997, and total revenues of $252 million, or 20% of the Company's
total revenues, for 1997. Real Estate Finance provides financing to owners,
investors and developers for the acquisition, refinancing and renovation of
commercial income producing properties in a wide range of property types and
geographic areas. The group serves these markets by offering structured
financings using tailored senior secured debt and junior participating
financings, as well as through its CMBS unit, which originates CMBS loans.
Transactions are secured by a variety of property types including office,
multi-family, retail, industrial, manufactured housing communities, self
storage facilities and hotels. Typical transactions range in size from $1
million to $35 million, with an average transaction size in 1997 of
approximately $4 million.
48
<PAGE>
The following table sets forth certain information regarding Real Estate
Finance as of the end of, and for, each of the years in the three-year period
ended December 31, 1997:
<TABLE>
<CAPTION>
AS OF, OR FOR THE
YEAR ENDED, DECEMBER
31,
----------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Lending assets and investments:
CMBS lending assets and investments............ $1,092 $ 459 $ 99
Other lending assets and investments........... 1,001 1,055 1,135
------ ------ ------
Total lending assets and investments......... $2,093 $1,514 $1,234
====== ====== ======
New business volume:
CMBS new business volume....................... $1,163 $ 549 $ 196
Other new business volume...................... 504 402 550
------ ------ ------
Total new business volume.................... $1,667 $ 951 $ 746
====== ====== ======
Revenues......................................... $ 252 $ 192 $ 185
Revenues as a percentage of total revenues....... 19.8% 19.5% 17.1%
Ratio of net writedowns to average lending
assets.......................................... 0.1 0.1 --
Ratio of nonearning assets to lending assets..... 0.2 0.3 1.0
</TABLE>
Real Estate Finance has ten offices throughout the United States which
generate new business by using a combination of direct calling on prospective
borrowers and calling on intermediaries and brokers who have relationships
with potential clients. Real Estate Finance also markets its products through
the use of trade advertising, direct marketing, newsletters, and trade show
attendance and sponsorship. In 1997, Real Estate Finance generated new
fundings of approximately $1.7 billion, the majority of which were related to
CMBS originations. The Company has made and expects to continue to make
significant investments in CMBS originations and securitization capabilities
to remain a leader in this business. In 1997, the Company terminated its
agreement with Belgravia, whereby Belgravia provided CMBS loans to the Company
for approval and financing and shared in CMBS loan and securitization profits.
In 1997, Belgravia originated approximately 40% of the Company's total CMBS
volume. The Company expects that the termination of this agreement will not
have a material impact on the Company's origination of new CMBS loans, due to
its investment in loan origination capabilities which will be funded by
profits which will no longer be shared with Belgravia.
Real Estate Finance has a credit philosophy that emphasizes selecting
properties that generate stable or increasing income cash flow streams and
that have strong asset quality and proven sponsorship with defined business
plans. Real Estate Finance's lending and investment philosophy emphasizes
portfolio liquidity, relatively small individual transaction sizes, and
maintenance of a diverse portfolio in terms of geographic location and
property type. The CMBS product is underwritten to rating agency guidelines
with the intent to sell through all credit risk at the time of securitization.
This strategy has resulted in low levels of nonearning assets at December 31,
1997 and 1996. There were minimal net writedowns of Real Estate Finance assets
during 1997, 1996 and 1995. The Real Estate Finance portfolio is diversified
across a wide range of property types and geographic areas. At December 31,
1997 and 1996, Real Estate Finance lending assets and investments were
distributed as follows:
<TABLE>
<CAPTION>
PROPERTY TYPES
--------------
1997 1996
---- ----
<S> <C> <C>
Apartments.............. 20% 11%
Manufactured housing.... 16 21
Retail.................. 14 7
Self storage............ 12 13
General purpose office
buildings.............. 8 6
Industrial.............. 8 10
Hotels.................. 6 14
Loan Portfolios......... 4 9
Other................... 12 9
--- ---
100% 100%
=== ===
</TABLE>
<TABLE>
<CAPTION>
GEOGRAPHIC AREAS
----------------
1997 1996
---- ----
<S> <C> <C>
California.............. 29% 28%
Southwest............... 19 13
Midwest................. 12 10
Florida................. 7 12
Mid-Atlantic States..... 6 8
New England............. 5 4
New York................ 4 8
West.................... 4 3
Other................... 14 14
--- ---
100% 100%
=== ===
</TABLE>
49
<PAGE>
During 1997, the Company securitized over $500 million of CMBS loans and did
not retain any residual interest in this transaction, as all of the receivable
backed securities were sold to third parties on a non-recourse basis. Real
Estate Finance also originated approximately $1.1 billion of CMBS loans which
were originated to be held for securitization at December 31, 1997, a 138%
increase over the prior year. The Company plans to securitize approximately $1
billion of these loans in the first quarter of 1998. Real Estate Finance
syndicates 50% to 75% of junior participation originations through a
syndication arrangement with a real estate fund sponsored by a nationally
known investment banking firm. The use of syndications has enabled the Company
to reduce its average individual retained position in this portfolio to
approximately $1 million.
At December 31, 1997, Real Estate Finance was contractually committed to
finance an additional $102 million to new and existing borrowers, generally
contingent upon the maintenance of specific credit standards. Since many of
the commitments are expected to remain unused, the total commitment amounts do
not necessarily represent future cash requirements. No significant commitments
exist to provide additional financing related to nonearning assets.
INTERNATIONAL GROUP
International Group has a significant international presence in factoring
and asset based financing, and has had subsidiaries and joint ventures in many
international markets for more than 25 years. International Group currently
consists of four majority owned subsidiaries and joint ventures with
operations in 15 countries in Europe, Asia/Pacific and Latin America.
International Group had total lending assets and investments of $2.4 billion,
or 20% of the Company's total lending assets and investments, at December 31,
1997, and total revenues (including the Company's share of income from
international joint ventures) of $187 million, or 15% of the Company's total
revenues, for 1997. International Group provides factoring and receivables
management services, asset based financing, acquisition financing, leasing and
vendor finance and/or trade finance programs. The largest of the Company's
consolidated subsidiaries is Factofrance, which is the leading factoring
company in France and the third largest factor in the world, with factoring
volume of approximately $8 billion in 1997. The largest of the Company's joint
ventures is NMB-Heller Holding N.V., which has operations primarily in the
United Kingdom, Holland and Germany and accounted for 54% of the year-end 1997
investments in international joint ventures balance. The Company believes that
International Group's subsidiaries and joint ventures provide a solid base for
consistent growth in international earnings and also provide the Company with
the opportunity to meet the international financing needs of its domestic
client base.
50
<PAGE>
The following is a list of the Company's consolidated subsidiaries and joint
ventures, organized by geographic region, with information regarding country
of existence and the Company's ownership interest as of December 31, 1997:
<TABLE>
<CAPTION>
COMPANY YEAR OF
OWNERSHIP INITIAL
COUNTRY PERCENTAGE INVESTMENT
------- ---------- ----------
<S> <C> <C> <C>
CONSOLIDATED SUBSIDIARIES:
Europe
Factofrance France 98%(1) 1966
Asia/Pacific
Heller Asia Capital Singapore 100% 1974
Heller Financial Services Australia 100 1969
Latin America
Heller Financial Mexico Mexico 92% 1993
JOINT VENTURES:
Europe
Belgo-Factors Belgium 50% 1987
Nordisk Factors Denmark 50 1965
NMB Heller Holland 50(2) 1967
Heller Bank A.G. Germany 50(2) 1964
NMB Heller Limited United Kingdom 50(2) 1964
O.B. Heller a.s. Czech Republic 25(2) 1995
O.B. Heller Factoring a.s. Slovakia 25(2) 1997
Handlowy-Heller S.A. Poland 25(2) 1994
Heller Portuguesa Portugal 40 1972
Heller Espanola Spain 50 1965
Asia/Pacific
East Asia Heller Hong Kong 50% 1972
Heller Factoring (M) Sdn Malaysia 49 1992
Thai Farmers Heller Thailand 49 1990
Latin America
Heller-Sud Servicios Financieros Argentina 50% 1994
HellerNet-Sud Chile 50 1996
</TABLE>
--------
(1) International Group increased its ownership of Factofrance from
48.8% to 97.6% in April 1997 by acquiring the interests of its
joint venture partner of over 30 years.
(2) Represents the Company's effective ownership through its 50%
interest in NMB-Heller Holding N.V.
51
<PAGE>
The following table sets forth certain information regarding International
Group as of the end of, and for, each of the years in the three-year period
ended December 31, 1997:
<TABLE>
<CAPTION>
AS OF, OR FOR THE YEAR ENDED,
DECEMBER 31,
-----------------------------------
1997 1996 1995
----------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Lending assets and investments of
consolidated subsidiaries:
Europe............................ $ 1,860(1) $ -- $ --
Asia/Pacific...................... 223 257 212
Latin America..................... 80 80 61
----------- --------- ---------
2,163 337 273
Investments in international joint
ventures:
Europe............................ 160 238 216
Asia/Pacific...................... 16 14 12
Latin America..................... 22 20 5
----------- --------- ---------
198 272 233
----------- --------- ---------
Total lending assets and
investments.................... $ 2,361 $ 609 $ 506
=========== ========= =========
Revenues of consolidated
subsidiaries:
Europe............................ $ 121(1) $ -- $ --
Asia/Pacific...................... 25 26 23
Latin America..................... 5 12 6
----------- --------- ---------
151 38 29
Income of international joint
ventures:
Europe............................ 32 42 35
Asia/Pacific...................... 1 2 1
Latin America..................... 3 -- (1)
----------- --------- ---------
36 44 35
----------- --------- ---------
Total international revenues.... $ 187 $ 82 $ 64
=========== ========= =========
Total international revenues as a
percentage of total revenues....... 14.7% 8.3% 5.9%
Ratio of net writedowns to average
lending assets..................... 1.8 -- --
Ratio of nonearning assets to
lending assets..................... 0.9 8.2 3.7
</TABLE>
--------
(1) Reflects the consolidation of Factofrance in April 1997.
International Group has broad, worldwide access to mid-sized and small
businesses with operations in 19 countries. Each subsidiary and joint venture
of International Group operates independently, with its own well-developed
methods of originating business, and the majority of the international joint
ventures are self-financed. International Group manages its investments
through offices located in London, Singapore and Chicago. Each subsidiary and
joint venture has its own well-developed credit philosophy, risk management
policies and procedures and portfolio management processes, which are
monitored by the Company through participation on their boards of directors,
credit committees and other executive and administrative bodies. Net
writedowns in consolidated subsidiaries totalled $23 million in 1997 and
related primarily to the Company's Mexican subsidiary and the consolidation of
Factofrance.
CORPORATE FINANCE
Corporate Finance is a leading provider of middle market financing to
private equity-sponsored companies. Corporate Finance had total lending assets
and investments of $2.0 billion, or 17% of the
52
<PAGE>
Company's total lending assets and investments, as of December 31, 1997 and
total revenues of $245 million, or 19% of the Company's total revenues, for
1997. Corporate Finance primarily provides secured financing for leveraged
buyouts, acquisitions, recapitalizations, refinancings, expansion and growth
of publicly and privately held entities in a wide variety of industries. In
almost all cases, these transactions involve professional or private equity
investors ("equity sponsors"), who acquire businesses for financial or
strategic purposes. Corporate Finance provides secured term and revolving
credit facilities, with durations of up to ten years, and to a lesser extent
provides unsecured or subordinated financings and invests in private equity
buy-out funds. Corporate Finance also from time to time makes modest non-
voting equity investments in conjunction with senior debt facilities, receives
warrants or equity interests as a result of providing financing, and makes
stand-alone equity co-investments, primarily with known equity sponsors.
Corporate Finance also serves as co-lender or participant in larger senior
secured cash flow transactions originated by other lenders. The Corporate
Finance portfolio has loans outstanding in a wide range of industries,
including manufacturing, services, metals, plastics, consumer products, health
care and defense. The portfolio is diversified among 26 industries with
concentrations of 12% in both chemicals/plastics and general industrial
machinery at December 31, 1997. No other industry represented more than 10% of
the total portfolio.
The following table sets forth certain information regarding Corporate
Finance as of the end of, and for, each of the years in the three-year period
ended December 31, 1997:
<TABLE>
<CAPTION>
AS OF, OR FOR THE YEAR
ENDED, DECEMBER 31,
---------------------------
1997 1996 1995
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Total lending assets and investments......... $2,010 $2,016 $2,328
New business volume.......................... 1,378 858 1,412
Revenues..................................... 245 257 310
Revenues as a percentage of total revenues... 19.3% 26.1% 28.6%
Ratio of net writedowns to average lending
assets...................................... 1.3 1.0 0.7
Ratio of nonearning assets to lending assets. 0.3 2.1 0.8
</TABLE>
Corporate Finance serves its clients with teams of senior level originators
located in five regional offices. Corporate Finance has developed and
maintains close relationships with approximately 200 equity sponsors, many of
whom have been clients of the Company for ten or more years and who have
financed several transactions with this business group.
The commitment to finance by this business group is predicated on the
Company's assessment of the borrower's ability to generate cash flow to repay
the loan based on the borrower's equity sponsor, market position,
relationships with clients and suppliers and ability to withstand competitive
challenges. Corporate Finance assets are generally cross-collateralized and
secured by liens on the borrower's current and fixed assets and capital stock.
Corporate Finance manages its portfolio centrally to ensure consistent
application of credit policy and efficient documentation and approval of
transaction modifications. Portfolio quality was demonstrated at December 31,
1997 by nonearning assets of $7 million, or 0.3% of lending assets. The
portfolio had net writedowns of $25 million in 1997 versus $21 million in
1996.
In 1997, Corporate Finance functioned as agent for 29 syndicated
transactions. The Company believes its level of agented transactions makes it
the fourth largest syndicator of private equity-sponsored deals in the United
States. Total syndication activity in 1997 amounted to $602 million in funds.
Although Corporate Finance can provide commitments of up to $150 million per
transaction, the group generally syndicates its ultimate retained position to
less than $20 million. As of December 31, 1997, the average retained
transaction size was approximately $14 million in commitments and
approximately $8 million of fundings, which reflects the group's significant
use of the syndication market.
53
<PAGE>
As of December 31, 1997, Corporate Finance was contractually committed to
finance an additional $950 million to new and existing borrowers, generally
contingent upon the maintenance of specific credit standards. Since many of
the commitments are expected to remain unused, the total commitment amounts do
not necessarily represent future cash requirements. No significant commitments
exist to provide additional financing related to nonearning assets.
PROJECT FINANCE
Project Finance is a specialized financing business, which provides
structured financing for individual projects to domestic independent oil and
gas, coal, mining and power companies. Financing is provided in the form of
senior and junior secured loans and equity investments. Project Finance had
total lending assets and investments of $144 million, or 1.2% of the Company's
total lending assets and investments, as of December 31, 1997 and revenues of
$19 million, or 1.5% of the Company's revenues, for 1997. Transaction sizes
generally range from $2 million to $20 million, and terms range from six to 17
years. Project Finance originates its financing opportunities primarily
through intermediaries with which it has established long-standing
relationships in its targeted industries. In 1997, Project Finance generated
$36 million in new business volume, with an average transaction size of $5
million. The credit approval process involves a detailed financial and legal
review of the contract and underlying project economic projections, together
with a review of all industry relevant data. Portfolio management procedures
involve the regular receipt of project status reports together with related
financial and operating information, as well as periodic site visits. The
Company expects Project Finance to remain a small percentage of its assets,
relative to its other business units.
The following table sets forth certain information concerning Project
Finance as of the end of, and for, each of the years in the three-year period
ended December 31, 1997:
<TABLE>
<CAPTION>
AS OF, OR FOR THE
YEAR ENDED,
DECEMBER 31,
----------------------
1997 1996 1995
---- ----- ----
(IN MILLIONS)
<S> <C> <C> <C> <C>
Total lending assets and
investments............ $144 $ 160 $186
New business volume..... 36 23 52
Revenues................ 19 9 27
Revenues as a percentage
of total revenues...... 1.5% 0.9% 2.5%
Ratio of net writedowns
to average lending
assets................. -- 4.8 --
Ratio of nonearning
assets to lending
assets................. 14.2 11.5 4.5
</TABLE>
The nonearning assets in Project Finance at December 31, 1997 and 1996
consisted of one transaction which the Company expects to liquidate in 1998
with little or no net writedown.
At December 31, 1997, Project Finance was contractually committed to finance
an additional $54 million to new and existing borrowers, generally contingent
upon the maintenance of specific credit standards. Since many of the
commitments are expected to remain unused, the total commitment amounts do not
necessarily represent future cash requirements. No significant commitments
exist to provide additional financing related to nonearning assets.
PRE-1990 PORTFOLIO
The lending philosophy of Corporate Finance and Real Estate Finance prior to
1990 emphasized larger, less liquid transactions and transactions with lower
levels of cash flow and collateral coverage. Subsequent to 1990, the Company
has developed a credit strategy which focuses on transactions with lower
lending multiples, smaller retained positions and greater liquidity. As a
result, the Company has separately managed the pre-1990 portfolio over the
last several years in its effort to closely monitor
54
<PAGE>
credit quality and effectively reduce this exposure. During this period, the
Company has substantially reduced its pre-1990 portfolio from $2.5 billion, or
33% of lending assets and investments, at December 31, 1993 to $492 million,
or 4% of lending assets and investments, at December 31, 1997. Approximately
70% of the remaining pre-1990 portfolio consists of real estate assets which
have been independently appraised and written down to the appraised value. The
net writedowns related to working out of the pre-1990 assets have been
significant, with $1.1 billion of writedowns on pre-1990 accounts since 1991.
The Company believes it has dealt with the negative effect of this portfolio
and expects the impact of the pre-1990 portfolio to be insignificant beginning
in 1998. See "Risk Management--Portfolio Quality--Pre-1990 Portfolio".
The following table sets forth certain information concerning the pre-1990
Corporate Finance and Real Estate Finance portfolio as of the end of, and for,
each of the years in the three-year period ended December 31, 1997:
<TABLE>
<CAPTION>
AS OF, OR FOR THE YEAR
ENDED, DECEMBER 31,
-------------------------
1997 1996 1995
----- ----- ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Total lending assets and investments........... $ 492 $ 979 $1,526
Revenues....................................... 40 30 148
Revenues as a percentage of total revenues..... 3.1% 3.0% 13.7%
Ratio of net writedowns to average lending
assets........................................ 11.5 5.9 11.3
Ratio of nonearning assets to lending assets... 15.5 17.8 14.2
</TABLE>
Net writedowns as a percentage of average lending assets were higher in 1997
than 1996 due to a lower level of recoveries in 1997 than the prior year.
SALES AND MARKETING
The Company originates transactions in the United States through a dedicated
sales force of over 260 employees in over 40 locations and through its network
of wholly-owned and joint venture commercial finance companies with operations
in 19 other countries around the world. These sales people have industry-
specific experience that enables them to effectively structure commercial
finance transactions to companies in the industries and market segments served
by the Company.
The Company's sales force originates business through a combination of (i)
direct calling on prospective borrowers, (ii) relationships with
manufacturers, dealers, and distributors, (iii) relationships with a wide
variety of private equity investors, business brokers, investment bankers, and
other intermediaries and referral sources, and (iv) relationships with
financial institutions. The Company has invested in expanding and broadening
its market coverage in several of its businesses, particularly Small Business
Lending and CMBS, and expects these investments to enhance the Company's
ability to generate new transactions and income.
Sales force compensation encourages active, profitable new business
development, client retention, credit quality, pricing margins and cross-
referral of business opportunities to other business groups.
The Company also markets its products and services through the use of
general market advertising, trade advertising, direct mail, a web site, public
relations, newsletters, trade show attendance and sponsorship, educational
seminars, and a variety of other market- and industry-specific events. The
Company maintains several proprietary databases for the purpose of generating
targeted, customized direct marketing campaigns and for the purpose of
tracking relationship history with certain of its clients and prospects. The
Company regularly conducts client satisfaction surveys and other market
research studies designed to assess its competitive position and to identify
unfulfilled needs of its clients and prospects.
55
<PAGE>
SECURITIZATION, SYNDICATION AND LOAN SALE ACTIVITIES
The Company has developed strong capabilities in the areas of
securitization, syndication and loan sales. These capital markets activities
provide the Company with the ability to (i) maximize its origination strength
by providing broader market access to higher quality credits, (ii) manage
customer and asset concentrations, (iii) generate income growth in competitive
markets through syndication fees and securitization gains and (iv) meet a
broader array of the financial needs of its current clients. The Company also
uses securitizations and syndications to provide attractive financial returns
on high-quality, lower yielding assets. The Company believes that additional
benefits are realized by its credit, operations and underwriting processes
being subjected to capital markets disciplines. The following table sets forth
certain information with respect to the Company's capital market activities in
1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
New business volume.............................. $5,970 $4,052 $3,854
Securitizations.................................. 774 -- 220
Syndications and loan sales...................... 964 757 708
</TABLE>
SECURITIZATIONS
The Company securitizes assets to generate fee income and to manage client
and industry concentrations and leverage its origination capabilities. In
1997, the Company securitized $774 million of assets through the completion of
a CMBS and an equipment based securitization. The Company did not retain any
credit risk in either of these transactions, as all of the receivable backed
notes were sold to third parties on a non-recourse basis.
SYNDICATIONS AND LOAN SALES
The Company syndicates assets and sells loans to manage client
concentrations and generate fees, and has established syndication and loan
sale capabilities in nearly all of its business categories. To facilitate its
syndication activity, the Company has established and maintains relationships
with a wide variety of financial institutions throughout the United States. In
1997, the Company completed syndications and sales of $964 million in
receivables, investments and loans.
COMPETITION
The Company's markets are highly fragmented and extremely competitive and
are characterized by competitive factors that vary by product and geographic
region. The Company's competitors include other commercial finance companies,
national and regional banks and thrift institutions, investment banks, leasing
companies, investment companies, manufacturers and vendors. Competition from
both traditional competitors and new market entrants has been intensified in
recent years by an improving economy, growing marketplace liquidity and
increasing recognition of the attractiveness of the commercial finance
markets. In addition, the rapid expansion of the securitization markets is
dramatically reducing the difficulty in obtaining access to capital, which is
the principal barrier to entry into these markets. This is further
intensifying competition in certain market segments, including competition
from specialized securitization lenders that offer aggressive pricing terms.
The Company competes primarily on the basis of pricing, terms, structure and
service in many of its markets. Competitors of the Company often seek to
compete aggressively on the basis of these factors and the Company may lose
market share to the extent it is unwilling to match its competitors' pricing,
terms and structure in order to maintain its spreads or to maintain its credit
discipline. To the extent that the Company matches competitors' pricing, terms
or structure, it may experience decreased spreads and/or increased risk of
credit losses. Many of the Company's competitors are large companies that have
substantial capital, technological and marketing resources, and some of these
56
<PAGE>
competitors are larger than the Company and may have access to capital at a
lower cost than the Company. Further, the size and access to capital of
certain of the Company's competitors are being enhanced by the recent surge in
consolidation activity in the commercial and investment banking industries.
Also, the Company's competitors include businesses that are not affiliated
with bank holding companies and therefore are not subject to the same
extensive federal regulations that govern bank holding companies. As a result,
such non-banking competitors may engage in certain activities which currently
are prohibited to the Company. See "--Regulation".
REGULATION
Fuji Bank is a bank holding company within the meaning of the Bank Holding
Company Act, and is registered as such with the Federal Reserve. As a result,
the Company is subject to the Bank Holding Company Act and is subject to
examination by the Federal Reserve. In general, the Bank Holding Company Act
limits the activities in which the Company may engage to those which the
Federal Reserve has generally determined to be "so closely related to banking
. . . as to be a proper incident thereto" and generally requires the approval
of the Federal Reserve before the Company may engage directly or through a
subsidiary in such activities. To obtain the Federal Reserve's approval, Fuji
Bank must submit a notice that provides information both about the proposed
activity or acquisition and about the financial condition and operations of
Fuji Bank and the Company. The Bank Holding Company Act will continue to apply
to the Company for as long as Fuji Bank holds more than 25% of any class of
the Company's voting stock or otherwise is deemed to control the management or
operations of the Company under the Bank Holding Company Act and the Federal
Reserve's regulations and interpretations thereunder. The Company's current
business activities constitute permitted activities or have been authorized by
the Federal Reserve.
SBA loans made by the Company are governed by the Small Business Act and the
Small Business Investment Act of 1958, as amended, and may be subject to the
same regulations by certain states as are other commercial finance operations.
The federal statutes and regulations specify the types of loans and loan
amounts which are eligible for the SBA's guaranty as well as the servicing
requirements imposed on the lender to maintain SBA guarantees.
The operations of the Company are subject, in certain instances, to
supervision and regulation by state and federal governmental authorities and
may be subject to various laws and judicial and administrative decisions
imposing various requirements and restrictions, which, among other things, (i)
regulate credit granting activities, (ii) establish maximum interest rates,
finance charges and other charges, (iii) regulate customers' insurance
coverages, (iv) require disclosures to customers, (v) govern secured
transactions and (vi) set collection, foreclosure, repossession and claims
handling procedures and other trade practices. Although most states do not
regulate commercial finance, certain states impose limitations on interest
rates and other charges and on certain collection practices and creditor
remedies and require licensing of lenders and financiers and adequate
disclosure of certain contract terms. The Company is also required to comply
with certain provisions of the Equal Credit Opportunity Act that are
applicable to commercial loans. Additionally, the Company is subject to
regulation in those countries in which the Company has operations and in most
cases has been required to obtain central governmental approval before
commencing business.
In the judgment of management, existing statutes and regulations have not
had a material adverse effect on the business conducted by the Company.
However, it is not possible to forecast the nature of future legislation,
regulations, judicial decisions, orders or interpretations, nor their impact
upon the future business, financial condition or results of operations or
prospects of the Company.
EMPLOYEES
As of January 31, 1998, the Company had 2,344 employees. The Company is not
subject to any collective bargaining agreements and believes that its employee
relations are good.
57
<PAGE>
PROPERTIES
The Company leases office space for its corporate headquarters in Chicago,
Illinois and leases other offices throughout the United States, Europe,
Asia/Pacific and Latin America. The Company does not own any material real
property.
LEGAL PROCEEDINGS
The Company is a party to a number of legal proceedings as plaintiff and
defendant, all arising in the ordinary course of its business. The Company
believes that the amounts, if any, which may be ultimately funded or paid with
respect to these matters will not have a material adverse effect on the
Company's business, financial condition or results of operations, but there
can be no assurance that an adverse decision in any such legal proceeding
would not have such a material adverse effect.
RISK MANAGEMENT
The Company's business activities contain elements of risk. The Company
considers the principal types of risk to be credit risk and asset/liability
risk (including interest rate and liquidity risk). The Company considers the
management of risk essential to conducting its businesses and to maintaining
profitability. Accordingly, the Company's risk management systems and
procedures are designed to identify and analyze the Company's risks, to set
appropriate policies and limits and to continually monitor these risks and
limits by means of reliable administrative and information systems and other
policies and programs.
CREDIT RISK MANAGEMENT
The Company manages credit risk through its underwriting procedures,
centralized approval of individual transactions and active portfolio and
account management. Underwriting procedures have been developed for each
business line, enabling the Company to assess a prospective borrower's ability
to perform in accordance with established loan terms. These procedures may
include analyzing business or property cash flows and collateral values,
performing financial sensitivity analyses and assessing potential exit
strategies. For transactions originated with the intent of reducing the
Company's ultimate retained asset size, the Company's syndication units assign
a risk rating prior to approval of the underlying transaction, reflecting its
confidence level, prior to funding, in syndicating the proposed transaction.
Financing and restructuring transactions exceeding designated amounts are
reviewed and approved by an independent corporate credit function, and larger
transactions require approval by a centralized credit committee. During 1997,
the Company further strengthened its credit risk management function through
the appointment of a Chief Credit Officer, who reports to the Company's
Chairman. Each business group is subject to a quarterly portfolio review of
its significant assets with the Chief Credit Officer and, in some cases, the
Chairman.
The Company manages its portfolio by monitoring transaction size and
diversification by industry, geographic area, property type and borrower.
Through these methods, management identifies and limits exposure to
unfavorable risks and seeks favorable financing opportunities. Loan grading
systems are used to monitor the performance of loans by product category, and
an overall risk classification system is used to monitor the risk
characteristics of the total portfolio. These systems generally consider debt
service coverage, the relationship of the loan to underlying business or
collateral value, industry characteristics, principal and interest risk, and
credit enhancements such as guarantees, irrevocable letters of credit and
recourse provisions. When a problem account is identified, professionals that
specialize in the relevant industry are brought in to more closely monitor the
account and formulate strategies to optimize and accelerate the resolution
process. Since 1994, the Internal Audit Department, independent of operations,
has performed an independent review to evaluate the risk identification and
credit management processes, as well as validate the loan grading of assets
58
<PAGE>
in such portfolios and reports its findings to senior management and the Audit
Committee of the Board of Directors.
ASSET/LIABILITY MANAGEMENT
INTEREST RATE AND FOREIGN CURRENCY 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 manage liquidity, diversify sources of funding, alter
interest rate exposure arising from mismatches between assets and liabilities
and manage exposures to foreign exchange fluctuations. 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.
Before entering into a derivative agreement, management determines that an
inverse correlation exists between the value of a hedged item and the value of
the derivative. At the inception of each agreement, management designates the
derivative to specific assets, pools of assets or liabilities. The risk that a
derivative will become an ineffective hedge is generally limited to the
possibility that an asset being hedged will prepay before the related
derivative expires. Accordingly, after inception of a hedge, asset/liability
managers monitor the effectiveness of derivatives through an ongoing review of
the amounts and maturities of assets, liabilities and swap positions. This
information is reported to the Financial Risk Management Committee ("FRMC"),
the members of which include the Company's Chairman, Chief Financial Officer
and Treasurer. The FRMC determines the direction the Company will take with
respect to its financial risk position. This position and the related
activities of the FRMC are reported regularly to the Company's Executive
Committee and Board of Directors.
The Company uses interest rate swaps as an important tool for financial risk
management, which enables it to match more closely the interest rate and
maturity characteristics of its assets and liabilities. As such, interest rate
swaps are used to change the characteristics of fixed rate debt to that of
variable rate liabilities, to alter the characteristics of specific fixed rate
asset pools to more closely match the interest terms of the underlying
financing and to modify the variable rate basis of a liability to more closely
match the variable rate basis used for variable rate receivables. At December
31, 1997, the Company had $6.6 billion in notional amount of swap agreements
with commercial banks and investment banking firms. The average interest rates
paid by the Company on its outstanding indebtedness, before and after the
effect of swap agreements, as of December 31, 1997 and 1996 are summarized
below:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1997 1996
--------------------- ---------------------
YEAR-END BEFORE AFTER YEAR-END BEFORE AFTER
BALANCE SWAPS SWAPS BALANCE SWAPS SWAPS
-------- ------ ----- -------- ------ -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Commercial paper--
domestic and foreign........... $2,560 5.71% N/A $2,576 5.63% N/A
Fixed rate debt................. 3,951 6.90 6.67% 2,905 7.02 6.62%
Variable rate debt.............. 2,051 5.44 6.01 1,859 4.85 5.78
------ ------
Total......................... $8,562 6.19 6.44 $7,340 5.98 6.29
====== ======
</TABLE>
The swap agreements had the effect of increasing interest expense by $8
million during 1997. At December 31, 1997, balance sheet assets that mature or
reprice over the next three months exceeded balance sheet liabilities that
mature or reprice over the same period by $1.1 billion. After the effect of
off-balance sheet instruments, liabilities that mature or reprice over the
next three months exceeded assets that mature or reprice over the same period
by $158 million. The largest such difference at a month end during 1997 was
$695 million.
59
<PAGE>
The Company's sensitivity to changes in interest rates is regularly
monitored and analyzed by measuring the repricing and amortization
characteristics of assets, liabilities and off-balance sheet derivatives. The
Company utilizes various models to assess interest rate risk in terms of the
potential effect on net interest income, the market value of net assets and
the value at risk of the firm in an effort to ensure that the Company is
insulated from any significant adverse effects from changes in interest rates.
The results of these models are reviewed each month with the FRMC. Based on
the model used for the sensitivity of net interest income, if the balance
sheet, when the month-end difference between the repricing of assets and
liabilities was at its greatest during 1997, were to remain constant and no
actions were taken to alter the existing interest rate sensitivity, a
hypothetical immediate 100 basis point change in interest rates would have
affected net interest income and net income by less than 1% over a six month
horizon. Although management believes that this measure is indicative of the
Company's sensitivity to interest rate changes, it does not adjust for
potential changes in credit quality, size and composition of the balance sheet
and other business developments that could affect net income. Accordingly, no
assurance can be given that actual results would not differ materially from
the potential outcome simulated by this model.
In order to minimize the effect of fluctuations in foreign currency exchange
rates on its financial results, the Company periodically enters into forward
contracts or purchases options. These financial instruments serve as hedges of
its foreign investment in international subsidiaries and joint ventures or
effectively hedge the translation of the related foreign currency income. The
Company held $623 million of forward contracts, $74 million of purchased
options and $106 million of cross currency swap agreements at December 31,
1997. Through these contracts, the Company primarily sells the local currency
and buys U.S. dollars. The Company also periodically enters into forward
contracts to hedge receivables denominated in foreign currencies or may
purchase foreign currencies in the spot market to settle a foreign currency
denominated liability. In addition, the Company held $506 million of cross
currency swap agreements used to hedge debt instruments issued in foreign
currencies at December 31, 1997. The Company invests in and operates
commercial finance companies throughout the world. Over the course of time,
reported results from the operations and investments in foreign countries may
fluctuate in response to exchange rate movements in relation to the U.S.
dollar. While the Western European operations and investments are the largest
areas of the Company's activities, reported results will be influenced to a
lesser extent by the exchange rate movements in the currencies of other
countries in which the Company's subsidiaries and investments are located.
LIQUIDITY RISK MANAGEMENT
The Company manages liquidity risk primarily by monitoring the relative
maturities of assets and liabilities and by borrowing funds through the U.S.
and international money and capital markets and bank credit markets. Such cash
is used to fund asset growth and to meet debt obligations and other
commitments on a timely and cost-effective basis. The Company's primary
sources of funds are commercial paper borrowings, issuances of medium-term
notes and other term debt securities and the syndication, securitization or
sale of certain lending assets. At December 31, 1997, commercial paper
borrowings were $2.6 billion and amounts due on term debt within one year were
$2.0 billion. If the Company is unable to access such markets at acceptable
terms, it could utilize its bank credit and asset sale facilities and cash
flow from operations and portfolio liquidations to satisfy its liquidity
needs. At December 31, 1997, the Company had committed liquidity support
through its bank credit and asset sale facilities totalling $4.0 billion,
including a 364-day facility expiring in April 1998 (which the Company intends
to renew), representing, on a consolidated basis, 122% of outstanding
commercial paper and short-term borrowings. The Company believes that such
credit lines should provide sufficient liquidity to the Company under
foreseeable conditions. See also "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources" for further information concerning the liquidity of the Company.
60
<PAGE>
PORTFOLIO QUALITY
The credit quality of the Company's portfolio in 1997 reflected the
effectiveness of the Company's credit strategies, underwriting and portfolio
management and disciplined credit approval process. As of December 31, 1997
nonearning assets were at their lowest level in over 10 years, having been
reduced to $155 million, or 1.4% of lending assets, from $278 million, or 3.3%
of lending assets, at the end of 1996. In addition, the Company's allowance
for losses of receivables represented 185% of nonearning impaired receivables
as of December 31, 1997. The following table presents certain information with
respect to the credit quality of the Company's portfolio:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996 1995
------- ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
LENDING ASSETS AND INVESTMENTS:
Receivables......................................... $10,722 $8,529 $8,085
Repossessed assets.................................. 14 14 28
------- ------ ------
Total lending assets.............................. 10,736 8,543 8,113
Equity and real estate investments.................. 488 419 428
Debt securities..................................... 311 251 152
Operating leases.................................... 195 135 113
Investments in international joint ventures......... 198 272 233
------- ------ ------
Total lending assets and investments.............. $11,928 $9,620 $9,039
======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996 1995
----- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
NONEARNING ASSETS:
Impaired receivables................................... $ 141 $264 $261
Repossessed assets..................................... 14 14 28
----- ---- ----
Total nonearning assets.............................. $155 $278 $289
===== ==== ====
Ratio of nonearning impaired receivables to
receivables........................................... 1.3% 3.1% 3.2%
Ratio of total nonearning assets to total lending
assets................................................ 1.4% 3.3% 3.6%
Nonearning assets in current portfolio................. $ 81 $115 $ 87
Ratio of nonearning assets in current portfolio to
total lending assets.................................. 0.8% 1.3% 1.1%
ALLOWANCES FOR LOSSES:
Allowance for losses of receivables.................... $ 261 $225 $229
Valuation allowance for repossessed assets............. -- -- 2
----- ---- ----
Total allowance for losses........................... $ 261 $225 $231
===== ==== ====
Ratio of allowance for losses of receivables to
receivables........................................... 2.4% 2.6% 2.8%
Ratio of allowances for losses of receivables to net
writedowns............................................ 1.8x 2.1x 1.0x
Ratio of allowance for losses of receivables to
nonearning impaired receivables....................... 185.1% 85.2% 87.7%
DELINQUENCIES:
Earning loans delinquent 60 days or more............... $ 151 $143 $117
Ratio of earning loans delinquent 60 days or more to
receivables........................................... 1.4% 1.7% 1.4%
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------
1997 1996 1995
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
NET WRITEDOWNS OF LENDING ASSETS:
Net writedowns on receivables..................... $ 139 $ 104 $ 215
Net writedowns on repossessed assets.............. 7 4 16
------ ------ ------
Total net writedowns............................ $ 146 $ 108 $ 231
====== ====== ======
Ratio of net writedowns to average lending assets. 1.5% 1.3% 2.9%
Net writedowns on current portfolio lending
assets........................................... $ 62 $ 41 $ 45
Ratio of current portfolio net writedowns to
average total lending assets..................... 0.6% 0.5% 0.6%
</TABLE>
PRE-1990 PORTFOLIO
While building its current portfolio, the Company has substantially
eliminated its Corporate Finance and Real Estate Finance pre-1990 portfolio
and expects such portfolio's impact to be insignificant beginning in 1998. The
pre-1990 portfolio experienced a significant decline of $487 million or 50% in
1997 and now comprises 4% of the Company's total portfolio. Approximately 70%
of the remaining pre-1990 portfolio consists of real estate assets which have
been independently appraised and then written down to the appraised value. The
following table provides a profile of the pre-1990 portfolio in 1997, 1996,
1995, 1994 and 1993:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER
31,
----------------------------------
1997 1996 1995 1994 1993
---- ---- ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Pre-1990 lending assets and investments. $492 $979 $1,526 $2,012 $2,547
Ratio of pre-1990 lending assets and
investments to total lending assets and
investments............................ 4.1% 10.2% 16.9% 23.8% 32.9%
Pre-1990 nonearning assets.............. $ 74 $163 $ 202 $ 274 $ 392
Net writedowns on pre-1990 lending
assets................................. 84 67 186 153 194
Ratio of pre-1990 net writedowns to
average total lending assets........... 0.9% 0.8% 2.3% 2.0% 2.6%
</TABLE>
NONEARNING ASSETS
Receivables are classified as nonearning when there is significant doubt as
to the ability of the debtor to meet current contractual terms, as evidenced
by loan delinquency, reduction of cash flows, deterioration in the loan to
value relationship and other relevant considerations. Nonearning assets
decreased from 3.3% of total lending assets at December 31, 1996 to 1.4% of
total lending assets at December 31, 1997. This decrease reflects the credit
performance of the current portfolio, combined
62
<PAGE>
with the continued resolution of the pre-1990 Corporate Finance and Real
Estate Finance accounts. The table below presents nonearning assets by
business line in 1997, 1996 and 1995:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
-------------- -------------- --------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Asset Based Finance............ $ 32 21% $ 18 7% $ 16 5%
International asset based
finance....................... 19 12 25 9 9 3
Project Finance................ 18 12 18 6 8 3
Corporate Finance.............. 7 4 39 14 19 7
Real Estate Finance............ 3 2 3 1 10 3
Other.......................... 2 1 12 4 25 9
Pre-1990 portfolio............. 74 48 163 59 202 70
---- --- ---- --- ---- ---
Nonearning assets.............. $155 100% $278 100% $289 100%
==== === ==== === ==== ===
</TABLE>
The current portfolio had nonearning assets of $81 million, or 0.8% of total
lending assets, in 1997. The low level of nonearning assets in the current
portfolio is the result of the credit quality of the domestic and
international asset based portfolios and the current Corporate Finance and
Real Estate Finance portfolios.
ALLOWANCE FOR LOSSES
The allowance for losses of receivables is a general reserve available to
absorb losses in the entire portfolio. This allowance is established through
direct charges to income, and losses are charged to the allowance when all or
a portion of a receivable is deemed uncollectible. The allowance is reviewed
periodically and adjusted when appropriate given the size and loss experience
of the overall portfolio, the effect of current economic conditions and the
collectibility and workout potential of identified risk and nonearning
accounts. For repossessed assets, if the fair value declines after the time of
repossession, a writedown is recorded to reflect this reduction in value.
The allowance for losses of receivables totalled $261 million, or 2.4% of
receivables, at December 31, 1997 versus $225 million, or 2.6% of receivables,
at December 31, 1996. The decrease as a percentage of receivables was
consistent with the strong credit profile of the Company's portfolio, as
evidenced by the ratio of allowance for losses of receivables to nonearning
impaired receivables of 185% at December 31, 1997, compared to 85% at December
31, 1996.
DELINQUENT EARNING ACCOUNTS AND LOAN MODIFICATIONS
The level of delinquent earning accounts changes between periods based on
the timing of payments and the effects of changes in general economic
conditions on the Company's borrowers. Troubled debt restructurings were $13
million at December 31, 1997, compared to $14 million at December 31, 1996.
The Company had $13 million of receivables at December 31, 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.
63
<PAGE>
WRITEDOWNS
Net writedowns, as detailed below for the years ended December 31, 1997,
1996 and 1995, increased in 1997 due to a lower level of recoveries compared
to 1996.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
-------------- -------------- --------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
NET WRITEDOWNS OF LENDING
ASSETS:
Asset Based Finance........ $ 11 8% $ 7 7% $ 11 5%
Corporate Finance.......... 25 17 21 19 16 7
International Group........ 23 16 -- -- -- --
Real Estate Finance........ -- -- -- -- -- --
Project Finance............ -- -- 8 7 -- --
Other...................... 3 1 5 5 18 7
Pre-1990 portfolio......... 84 58 67 62 186 81
---- --- ---- --- ---- ---
Total net writedowns..... $146 100% $108 100% $231 100%
==== === ==== === ==== ===
</TABLE>
Gross writedowns were slightly higher than 1996 at $169 million in 1997
compared to $163 million in the prior year, while gross recoveries totalled
only $23 million in 1997 compared to $55 million in 1996. The increase in net
writedowns for Corporate Finance was the result of lower recoveries in 1997
compared to 1996. The increase in net writedowns for the Company's
international asset based finance business in 1997 was the result of
writedowns in Mexico and the impact of the consolidation of Factofrance. Gross
writedowns of pre-1990 lending assets represented 53% and 69% of total gross
writedowns in 1997 and 1996, respectively.
64
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with respect to the
directors and executive officers of the Company. All of the directors and
officers of the Company are elected at the annual meeting for a term of one
year or until their successors are duly elected and qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Richard J. Almeida (1)(2)(4)..... 55 Chairman of the Board and Chief Executive
Officer
Yukihiko Chayama (1)(3).......... 50 Director
Tsutomu Hayano................... 51 Director
Mark Kessel...................... 56 Director
Michael J. Litwin (1)............ 50 Director, Executive Vice President and
Chief Credit Officer
Dennis P. Lockhart (1)........... 51 Director and President of International
Group
Lauralee E. Martin (1)........... 47 Director, Executive Vice President and
Chief Financial Officer
Hideo Nakajima................... 48 Director
Osamu Ogura (1)(3)............... 40 Director
Masahiro Sawada (1).............. 44 Director and Senior Vice President
Takeshi Takahashi................ 49 Director
Atsushi Takano (1)(2)(3)(4)...... 52 Director
Kenichiro Tanaka (1)(2)(4)....... 49 Director and Executive Vice President
Kenichi Tomita................... 48 Director
Mark A. Abbott................... 37 Group President, Corporate Finance
Anthony O'B. Beirne.............. 49 Senior Vice President and Treasurer
Michael P. Goldsmith............. 44 Group President, Real Estate Finance and
Project Finance
John L. Guy, Jr.................. 45 Group President, Small Business Lending
Jay S. Holmes.................... 51 Group President, Equipment Finance and
Leasing
Lawrence G. Hund................. 41 Senior Vice President and Controller
David J. Kantes(5)............... 54 Group President, Business Credit
Scott E. Miller(5)............... 51 Group President, Business Credit
Michael J. Roche................. 46 Group President, Current Asset Management
Charles G. Schultz............... 51 Group President, Sales Finance
Debra H. Snider.................. 43 Executive Vice President, General Counsel,
Chief Administrative Officer and Secretary
Frederick E. Wolfert............. 43 President and Chief Operating Officer
</TABLE>
- --------
(1) Member of Executive Committee
(2) Member of Compensation Committee
(3) Member of Audit Committee
(4) Member of Special Financing Committee
(5) Mr. Kantes has resigned his position with the Company effective April 3,
1998 and has been replaced by Mr. Miller.
65
<PAGE>
Richard J. Almeida has served as the Chairman of the Board and Chief
Executive Officer of the Company, International Group and Heller International
Holdings, Inc. ("Holdings") since November 1995; and as Director of the
Company and International Group since November 1987. He has also served as
Director of FAHI since January 1998. He has served as Director of Holdings
since December 1992. He previously served as the Chairman of the Board and
Chief Executive Officer of HIC from November 1995 to January 1998; Director of
HIC from November 1987 to January 1998; Executive Vice President and Chief
Financial Officer of Holdings from December 1992 to November 1995; and
Executive Vice President and Chief Financial Officer of the Company, HIC and
International Group from November 1987 to November 1995. Prior to joining the
Company in 1987, Mr. Almeida served in a number of operating positions, both
in Corporate Banking and Investment Banking sectors, for Citicorp.
Yukihiko Chayama has served as Director of the Company, International Group
and Holdings since July 1996; Director of FAHI since January 1998; Chief
Representative for the Washington, DC Representative Office of Fuji Bank since
October 1996; and Executive Vice President and General Manager for the
Americas Division of Fuji Bank since July 1996. He previously served as
Director of HIC from July 1996 to January 1998; General Manager at the Oji
Branch of Fuji Bank from May 1994 to 1996; and the Deputy General Manager in
the Head Office Corporate Banking Division of Fuji Bank from April 1991 to
1994.
Tsutomu Hayano has served as Director of the Company since May 1996;
Director of Fuji Bank since June 1997; General Manager at the New York Branch
of Fuji Bank and Chairman of The Fuji Bank and Trust Co. since May 1996. He
previously served as Director of HIC from May 1996 to January 1998; General
Manager at the Hamamatsucho Branch of Fuji Bank from May 1994 to 1996; and
President of Fuji Bank, Nederland N.V. from February 1990 to 1994.
Mark Kessel has served as Director of the Company since July 1992. He
previously served as Director of HIC from July 1992 to January 1998. Mr.
Kessel has been a Partner of Shearman & Sterling since December 1977.
Michael J. Litwin has served as Director of the Company since April 1990;
Executive Vice President and Chief Credit Officer of the Company since January
1997; Executive Vice President of Holdings since December 1992; Director of
International Group and Holdings since January 1997; and Executive Vice
President of International Group since January 1989. He previously served as
Director of HIC from April 1990 to January 1998; Executive Vice President of
HIC from January 1997 to January 1998; and Senior Group President of the
Company from October 1990 to January 1997. Mr. Litwin has served in various
other positions since joining the Company in 1971, including Assistant General
Counsel.
Dennis P. Lockhart has served as Director of the Company and International
Group and President of International Group since January 1988; Director and
President of Holdings since December 1992; and Director of Tri Valley
Corporation since April 1981. He previously served as Director and Executive
Vice President of HIC from January 1988 to January 1998. Prior to joining the
Company in 1988, Mr. Lockhart was employed by Citicorp for 16 years, holding a
number of positions in corporate/institutional banking domestically and
abroad, including assignments in Lebanon, Saudi Arabia, Greece, Iran, New York
and Atlanta, with regional experience encompassing Europe, the Middle East,
Africa and Latin America.
Lauralee E. Martin has served as Executive Vice President and Chief
Financial Officer of the Company, International Group and Holdings since May
1996; Director of the Company since May 1991; Director of International Group
and Holdings since May 1996; and Director of Gables Residential
66
<PAGE>
Trust since January 1994. She previously served as Executive Vice President
and Chief Financial Officer of HIC from May 1996 to January 1998; Director of
HIC from May 1991 to January 1998; and Senior Group President of the Company
from October 1990 to May 1996. Prior to joining the Company in 1986, Ms.
Martin held a variety of senior management positions with General Electric
Credit Corporation.
Hideo Nakajima has served as Director of the Company since May 1996; and
Executive Vice President and General Manager of Fuji Bank, Los Angeles Agency
since May 1996. He previously served as Director of HIC from May 1996 to
January 1998; Managing Director of Fuji Bank, Nederland N.V. from July 1993 to
1996; and Deputy General Manager in the Head Office Corporate Banking Division
I of Fuji Bank from February 1990 to 1993.
Osamu Ogura has served as Director of the Company since November 1994;
Director of FAHI since January 1998; Director of International Group and
Holdings since May 1996; and Senior Vice President and Deputy General Manager
of the Americas Division of Fuji Bank since November 1994. He previously
served as Director of HIC from November 1994 to January 1998 and Senior
Manager of Fuji Bank, Americas Division from 1993 to 1994.
Masahiro Sawada has served as Senior Vice President of the Company since
January 1998 and as Director of the Company, International Group and Holdings
since December 1995. He previously served as Director of HIC from December
1995 to January 1998; Senior Vice President of HIC from May 1995 to January
1998; and Joint General Manager of Fuji Bank, Paris Branch from May 1992 to
1995.
Takeshi Takahashi has served as Director of the Company, and as Executive
Vice President and General Manager of Fuji Bank, Chicago Branch since June
1997. He previously served as Director of HIC from June 1997 to January 1998;
Executive Vice President and General Manager of Fuji Bank, Houston Agency from
May 1995 to June 1997; General Manager of HIC Project Finance II, Fuji Bank,
Tokyo from May 1994 to May 1995; and Joint General Manager of Fuji Bank,
London Branch from February 1990 to May 1994.
Atsushi Takano has served as Director of the Company, International Group
and Holdings since August 1997; Director and Chairman of FAHI since January
1998; Managing Director of Fuji Bank since June 1997; and Director of Fuji
Bank since June 1995. He previously served as Director of HIC from August 1997
to January 1998; General Manager, Corporate Banking Division II, Fuji Bank,
Tokyo from June 1996 to June 1997; General Manager of Fuji Bank, New York
Branch from June 1994 to June 1996; and General Manager of Fuji Bank, Los
Angeles Agency from June 1992 to June 1994.
Kenichiro Tanaka has served as Executive Vice President of the Company since
January 1998; Director of the Company, International Group and Holdings since
February 1997; and Director, President and Chief Executive Officer of FAHI
since January 1998. Mr. Tanaka previously served as Director and Executive
Vice President of HIC from February 1997 to January 1998; President and Chief
Executive Officer of Fuji Bank, Canada from November 1994 to January 1997; and
Deputy General Manager of Fuji Bank, Head Office Credit Division from May 1991
to November 1994.
Kenichi Tomita has served as a Director of the Company since May 1996; and
as Executive Vice President and General Manager in the Credit Division for the
Americas of Fuji Bank since April 1996. He previously served as Director of
HIC from May 1996 to January 1998, and as Deputy General Manager of the Credit
Division for the Americas of Fuji Bank from March 1992 to 1996.
67
<PAGE>
Mark A. Abbott has served as Group President of Corporate Finance since
April 1997. He previously served as Executive Vice President of Corporate
Finance from November 1992 to April 1997. Prior to joining the Company in
1989, Mr. Abbott held various positions with Continental Bank, most recently
as a member of the bank's venture capital unit, which focused on investing in
leveraged transactions.
Anthony O'B. Beirne has served as Senior Vice President and Treasurer of the
Company since May 1995 and as Treasurer of FAHI since January 1998. He
previously served as Senior Vice President and Treasurer of HIC from May 1995
to January 1998; Senior Vice President and Controller of Holdings from
December 1992 to May 1995; and Senior Vice President and Controller of the
Company, HIC and International Group from March 1988 to May 1995. Before
joining the Company in 1988, Mr. Beirne was Vice President and Corporate
Controller of Kenner Parker Toys, Inc. and previously worked for General
Mills, Inc., Arthur Andersen and Co. and Chemical Bank.
Michael P. Goldsmith has served as Group President of Real Estate Finance
and Project Finance since April 1994. He previously served as Executive Vice
President and Division Manager for the Project Management Organization from
May 1990 to April 1994. Prior to joining the Company in 1988, Mr. Goldsmith
was a Vice President and Division Manager at Continental Bank, managing many
of Continental's troubled loans. He has also held a variety of corporate
finance positions involving buyouts and recapitalizations.
John L. Guy, Jr. has served as Group President for Small Business Lending
since April 1997; President of Heller First Capital Corp. since May 1996; and
Director of Monetta Trust since November 1994. He previously served as
Executive Vice President for the Heller First Capital Division of the Company
from May 1996 to April 1997; Senior Vice President for the Heller First
Capital Division of the Company from May 1995 to May 1996; and Senior Vice
President and Treasurer of the Company and HIC from July 1992 to May 1995.
Before joining the Company in 1987, Mr. Guy was Assistant Treasurer for Borg
Warner Financial Services.
Jay S. Holmes has served as Group President of Equipment Finance and Leasing
since December 1995 and as President of Heller Financial Leasing, Inc. since
May 1996. He previously served as Executive Vice President for Commercial
Equipment Finance from September 1992 to December 1995. Mr. Holmes, who joined
the Company in 1992, has 26 years of equipment leasing industry experience and
currently is a member of the Middle Market Business Council of the Equipment
Leasing Association.
Lawrence G. Hund has served as Senior Vice President and Controller of the
Company, International Group and Holdings since May 1995. He previously served
as Senior Vice President and Controller of HIC from May 1995 to January 1998;
Senior Vice President, Liability Management and Assistant Treasurer of the
Company and HIC from January 1995 to May 1995; and Senior Vice President for
Accounting and Operations of the Company and HIC from January 1993 to December
1994. Prior to joining the Company in 1985, Mr. Hund was an Audit Manager with
the accounting firm of Arthur Young & Company.
David J. Kantes has served as Group President of Business Credit since
December 1995. He previously served as Executive Vice President of Business
Credit from June 1993 to December 1995, and as Executive Vice President of
NatWest Credit Corp. from July 1986 to May 1993. Mr. Kantes has resigned his
positions with the Company effective April 3, 1998.
Scott E. Miller has served as Group President of Business Credit since
joining the Company in February 1998. From September 1993 to January 1998, he
served as Senior Vice President and General Manager in Asset Based Lending for
Bank of America NT&SA. Mr. Miller previously spent 17 years with Citicorp,
holding a variety of management and lending roles.
68
<PAGE>
Michael J. Roche has served as Group President of Current Asset Management
since November 1994. He previously served as Senior Vice President and Chief
Information Officer for Information Technology of the Company from October
1990 to November 1994; and as Senior Vice President and Chief Information
Officer for Information Technology of HIC from May 1991 to October 1994. Prior
to joining the Company in 1990, Mr. Roche was employed by Continental Bank for
17 years in a variety of information technology positions, including as Senior
Vice President, Managing Director of Application Services.
Charles G. Schultz has served as Group President of Sales Finance since
April 1997. He previously served as Executive Vice President of Vendor Finance
from September 1995, when he joined the Company, to April 1997; President of
Financial Alliance Corporation from January 1994 to September 1995; and as
Executive Vice President of Sanwa Business Credit Corporation ("Sanwa") from
February 1991 to January 1994. Prior to joining Sanwa, Mr. Schultz spent 10
years in various treasury, marketing and credit positions for Ford Motor
Credit Company.
Debra H. Snider has served as Chief Administrative Officer of the Company
since February 1997; General Counsel of the Company, International Group and
Holdings since October 1995; Executive Vice President and Secretary of the
Company, International Group and Holdings since April 1995; and Secretary of
FAHI since January 1998. She previously served as General Counsel of HIC from
October 1995 to January 1998; Executive Vice President and Secretary of HIC
from April 1995 to January 1998; and Acting General Counsel for the Company,
HIC, International Group and Holdings from April 1995 to October 1995. Ms.
Snider was a Partner at Katten Muchin & Zavis from February 1991 to March 1995
and previously served as First Vice President and Associate General Counsel at
the Balcor Company.
Frederick E. Wolfert has served as President and Chief Operating Officer of
the Company since January 1998. He served as Chairman of Key Global Finance
Ltd. from April 1996 to December 1997; Chairman, President and Chief Executive
Officer of KeyCorp Leasing, Ltd. from June 1993 to December 1997; Chairman,
President and Chief Executive Officer of KeyBank USA N.A. from June 1993 to
December 1996; President and Chief Operating Officer of KeyCorp Leasing, Ltd.
from December 1991 to June 1993; and Executive Vice President of KeyBank USA
N.A. from December 1991 to June 1993. Mr. Wolfert also served for nine years
in management positions with U.S. Leasing Corporation in its San Francisco
headquarters.
BOARD OF DIRECTORS
The Company intends to appoint two persons who are not officers or employees
of the Company, Fuji Bank or FAHI to the Board of Directors. The Company will
be required to have at least two independent directors to maintain the listing
of the Class A Common Stock on the NYSE.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has appointed an Audit Committee, a Compensation
Committee, an Executive Committee and a Special Financing Committee. The
members of the Audit Committee are Messrs. Takano (Chairman), Chayama and
Ogura. Following the consummation of the Offerings, the Audit Committee will
consist solely of independent directors. The Audit Committee makes
recommendations concerning the Company's engagement of independent public
accountants, reviews the Company's annual audit, and reviews with the
Company's independent public accountants the Company's internal controls and
financial management policies. The members of the Compensation Committee are
Messrs. Takano (Chairman), Almeida and Tanaka. The two independent directors
to be appointed to the Board of Directors following the consummation of the
Offerings will be appointed to the Compensation Committee. The Compensation
Committee establishes the Company's general
69
<PAGE>
compensation and benefits policy and recommends to the Board of Directors
compensation for the Company's officers and key employees. The members of the
Executive Committee are Messrs. Takano (Chairman), Almeida, Chayama, Litwin,
Lockhart, Ogura, Sawada and Tanaka and Ms. Martin. With certain limited
exceptions, the Executive Committee has the authority to exercise all powers
of the Board of Directors in managing the business and affairs of the Company,
including the declaration of dividends and issuance of securities. The members
of the Special Financing Committee are Messrs. Takano (Chairman), Almeida and
Tanaka. The Special Financing Committee sets the terms of securities issued by
the Company.
COMPENSATION OF DIRECTORS
The Company anticipates that, following the consummation of the Offerings,
the Company's directors will receive compensation for serving as directors at
levels customary for publicly-held companies similar to the Company, except
that no director of the Company who is also an employee of the Company or Fuji
Bank will receive remuneration for serving as a director. Directors of the
Company who are not employees of the Company or Fuji Bank ("Non-Employee
Directors") will receive an award of non-qualified stock options under the
Heller Financial, Inc. 1998 Stock Incentive Plan (the "Stock Incentive Plan").
See "--Executive Compensation--The 1998 Stock Incentive Plan".
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Richard J. Almeida served as a member of the Compensation Committee
throughout 1997. Atsushi Takano was appointed to the Compensation Committee on
August 21, 1997 and Kenichiro Tanaka was appointed to the Compensation
Committee on February 25, 1997. Messrs. Almeida, Takano and Tanaka also served
concurrently as members of the Compensation Committees of HIC, International
Group and Holdings.
During 1997, Mr. Almeida also served as Chairman and Chief Executive Officer
of the Company, International Group and Holdings. In addition, Mr. Almeida
served as the Chairman of the Board, Chief Executive Officer and President of
HIC and as a member of the compensation committees of HIC, International Group
and Holdings. Mr. Tanaka also served as an executive officer of HIC and FAHI
during his tenure as a member of the compensation committees.
Mr. Lockhart, Mr. Litwin and Ms. Martin also served as executive officers of
HIC, International Group and Holdings, for which companies Mr. Almeida served
as a member of the Compensation Committee of the Board of Directors.
No other relationships exist between the members of the Compensation
Committee of the Company, FAHI, HIC, International Group or Holdings and the
directors and executive officers of those companies.
OWNERSHIP GUIDELINES
The Company has adopted ownership guidelines that specify an expected level
of Class A Common Stock ownership for executive officers and certain other
employees of the Company. With respect to executive officers and such other
employees, the guidelines for ownership are expressed as a multiple of such
person's base salary. The multiple varies according to the officer's or
employee's position, with the Chairman and Chief Executive Officer expected to
acquire ownership of Class A Common Stock having a value equal to three times
his base salary within a specified time period. Shares of restricted stock
count toward the ownership guidelines only to the extent such shares of
restricted stock are fully vested. If an officer or covered employee fails to
meet the ownership guidelines applicable to his or her position, the Company
may, in its sole discretion, limit future awards under the Stock Incentive
Plan.
70
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information with respect to all compensation
received by the Chief Executive Officer of the Company and the four next most
highly compensated executive officers of the Company (as determined at
December 31, 1997 based on combined salary and bonus) (collectively, the
"Named Officers") for services rendered in all capacities to the Company
during the years ended December 31, 1997, 1996 and 1995.
SUMMARY COMPENSATION TABLE (1)(2)
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
LTIP PAYOUTS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(3) COMPENSATION($)(4)
- --------------------------- ---- --------- -------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
Richard J. Almeida 1997 637,500 450,000 548,871 4,000
(Chairman of the 1996 475,000 313,500 -- 4,750
Board and Chief 1995 318,375 225,000 310,905 4,620
Executive Officer)
Michael P. Goldsmith 1997 247,682 450,000 222,742 4,000
(Group President, 1996 191,579 200,000 -- 4,050
Real Estate Finance 1995 184,500 90,732 67,838 4,128
and Project
Finance)
David J. Kantes 1997 245,583 350,000 240,146 4,000
(Group President, 1996 237,128 225,000 -- 4,479
Business Credit) 1995 208,488 175,000 -- 4,620
Mark A. Abbott 1997 207,125 350,000 174,787 114,476(5)
(Group President, 1996 192,833 276,000 -- 4,478
Corporate Finance) 1995 175,334 175,000 88,984 4,321
Lauralee E. Martin 1997 286,354 225,000 313,448 4,000
(Chief Financial 1996 270,000 160,000 -- 4,318
Officer) 1995 254,004 175,000 256,774 4,620
</TABLE>
- --------
(1) The Company has an Executive Deferred Compensation Plan, a non-qualified
deferred compensation plan in which certain employees of the Company may
elect to defer a portion of their annual compensation on a pre-tax basis.
The amount of deferred compensation remains an asset of the Company and
may be invested in any of certain mutual funds at the participant's
discretion. The Company intends to amend the Plan to permit the investment
of deferred compensation in the Class A Common Stock.
(2) Certain executive officers of the Company whose compensation is included
above were employed and paid by HIC during 1997. Pursuant to a management
agreement between the Company and HIC, the Company reimbursed HIC for
their services.
(3) Under the terms of each of the Company's Long Term Incentive Plans
("LTIPs"), payouts of all accruals are made after the termination of the
LTIP to officers who are active employees of the Company and participants
in the LTIP through its termination date (subject to exceptions in the
case of disability, death or retirement). In 1997, cash payouts were made
to the Named Officers under an LTIP for the performance and award period
that began January 1, 1994 and ended December 31, 1996. In March, 1995,
cash payouts were made to the Named Officers under an LTIP for the
performance and award period that began January 1, 1992 and ended December
31, 1994. In prior years, the Company reported annual accruals under its
LTIPs as other annual
71
<PAGE>
compensation. The Company revised the terms of its LTIPs commencing with
the LTIP for the performance and award period beginning January 1, 1996 and
ending December 31, 1998 (the "1996-1998 LTIP"), as discussed below in
greater detail. Perquisites and other personal benefit amounts for each of
the Named Officers fall below the minimum level for disclosure and
therefore have been excluded.
(4) Amounts reported reflect the Company's contribution made in the form of a
match on amounts deferred by the Named Officer in the Company's Savings
and Profit Sharing Plan, which is qualified under Section 401(a) of the
1986 Internal Revenue Code, as amended (the "Code"). This Plan is
available to all employees who work at least 900 hours per year. The
Company makes matching contributions equal to 50% of the employee's
contribution, except that the Company's contribution will not exceed 2.5%
of the employee's base salary or $4,000, whichever is less.
(5) Also includes an aggregate of $110,476 that was paid in respect of
relocation expenses incurred on Mr. Abbott's behalf.
LONG TERM INCENTIVE PLANS
The Company currently maintains two different LTIPs covering the Named
Officers and other employees of the Company. Under each of the LTIPs,
performance shares have been granted for a three year performance and award
period. The performance shares are earned out over the three-year performance
and award period based on a targeted average return on equity goal. The
Company has made grants under the 1996-1998 LTIP and under an LTIP for the
performance and award period beginning January 1, 1997 and ending December 31,
1999 (the "1997-1999 LTIP"). The performance and award periods for the 1996-
1998 LTIP grants and the 1997-1999 LTIP grants will continue after the
consummation of the Offerings, subject to the terms and conditions of the
LTIPs. For each of the 1996-1998 LTIP and the 1997-1999 LTIP, a total of
46,000 units was allocated. If the Company achieves its return on equity
target, this would create a pool of $4,600,000 for each LTIP. In the event an
employee ceases to be an active employee prior to the end of the performance
period, no incentive compensation will be deemed to be earned under the LTIPs.
See "--The 1998 Stock Incentive Plan--Offering Awards". Following the
Offerings, the Compensation Committee will administer the LTIPs.
The following tables set forth certain information with respect to awards
that were granted during 1996 to the Named Officers under the 1996-1998 LTIP
and are currently outstanding:
LONG TERM INCENTIVE PLANS--AWARDS IN 1996
1996-1998 LTIP
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS
PERFORMANCE OR UNDER NON-STOCK PRICE-BASED
NUMBER OF OTHER PERIOD PLANS
SHARES, UNITS UNTIL ---------------------------
OR OTHER MATURATION OR THRESHOLD TARGET MAXIMUM
NAME RIGHTS PAYOUT ($) ($) ($)
---- ------------- -------------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Richard J. Almeida.... 4,060 3 Years $304,500 $406,000 $690,200
Michael P. Goldsmith.. 1,130 3 Years 84,750 113,000 192,100
David J. Kantes....... (1)
Mark A. Abbott........ 800 3 Years 60,000 80,000 136,000
Lauralee E. Martin.... 1,580 3 Years 118,500 158,000 268,600
</TABLE>
- --------
(1) Mr. Kantes has resigned from the Company effective April 3, 1998 and will
therefore be ineligible to receive any payouts under this plan.
72
<PAGE>
The following table sets forth certain information with respect to awards
that were granted during 1997 to the Named Officers under the 1997-1999 LTIP
and are currently outstanding:
LONG TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR
1997-1999 LTIP
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS
PERFORMANCE OR UNDER NON-STOCK PRICE-BASED
NUMBER OF OTHER PERIOD PLANS
SHARES, UNITS UNTIL ---------------------------
OR OTHER MATURATION OR THRESHOLD TARGET MAXIMUM
NAME RIGHTS PAYOUT ($) ($) ($)
- ---- ------------- -------------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Richard J. Almeida.... 4,375 3 Years $328,125 $437,500 $743,750
Michael P. Goldsmith.. 500 3 Years 37,500 50,000 85,000
David J. Kantes....... (1)
Mark A. Abbott........ 1,000 3 Years 75,000 100,000 170,00
Lauralee E. Martin.... 1,500 3 Years 112,500 150,000 255,00
</TABLE>
- --------
(1) Mr. Kantes has resigned from the Company effective April 3, 1998 and will
therefore be ineligible to receive any payouts under this plan.
RETIREMENT AND OTHER DEFINED BENEFIT PLANS
The Company has a defined benefit retirement income plan (the "Retirement
Plan") for the benefit of its employees that is a qualified plan under Section
401 of the Code. Substantially all domestic employees of the Company who have
one year of service, including executive officers and directors of the
Company, certain employees of FAHI, and certain employees of International
Group who are not employees of the Company participate in the Retirement Plan.
Non-Employee Directors are not eligible for retirement benefits. Under a
defined benefit plan, such as the Retirement Plan, contributions are not
specifically allocated to individual participants.
The Company adopted a Supplemental Executive Retirement Plan ("SERP"),
effective October 28, 1987 and amended and restated effective January 1, 1996,
which provides a benefit to all employees whose full benefit under the
Retirement Plan is reduced by participation in the Company's Executive
Deferred Compensation Plan and by limitations imposed by Sections 401(a)(17)
and 415 of the Code.
The following table shows estimated annual retirement benefits for
executives in specified remuneration and service classifications:
ESTIMATED ANNUAL RETIREMENT BENEFITS
<TABLE>
<CAPTION>
YEARS OF CREDITED SERVICE
----------------------------------------------
FINAL AVERAGE PAY 5 10 15 20 25 AND OVER
- ----------------- ------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
$200,000......................... $26,000 $ 52,000 $ 78,000 $104,000 $130,000
225,000......................... 29,250 58,500 87,750 117,000 146,250
250,000......................... 32,500 65,000 97,500 130,000 162,500
275,000......................... 35,750 71,500 107,250 143,000 178,750
300,000......................... 39,000 78,000 117,000 156,000 195,000
400,000......................... 52,000 104,000 156,000 208,000 260,000
450,000......................... 58,500 117,000 175,500 234,000 292,500
500,000......................... 65,000 130,000 195,000 260,000 325,000
600,000......................... 78,000 156,000 234,000 312,000 390,000
</TABLE>
73
<PAGE>
In general, remuneration covered by the Retirement Plan consists of the
annual base salary determined before any salary reduction contributions to the
Company's Savings and Profit Sharing Plan. The figures shown in the table
above include benefits payable under the Retirement Plan and SERP as described
above. However, the figures shown are prior to offsets for Social Security and
Company matching benefits under its Savings and Profit Sharing Plan. The
estimates assume that benefits commence at age 65 under a straight life
annuity form.
As of December 31, 1997, the number of years of credited service for the
Named Officers and the actual average remuneration for their respective years
of credited service with the Company were as follows: Richard J. Almeida, 10
years, 5 months, $400,058; Michael P. Goldsmith, 9 years, 1 month, $165,558;
David J. Kantes, 4 years, 6 months, $196,642; Mark A. Abbott, 8 years, 5
months, $189,741; and Lauralee E. Martin, 11 years, 5 months, $256,308.
THE 1998 STOCK INCENTIVE PLAN
The Company's Board of Directors has adopted a stock-based incentive plan,
the Heller Financial, Inc. 1998 Stock Incentive Plan (the "Stock Incentive
Plan"), covering Non-Employee Directors and employees of the Company and its
subsidiaries (collectively, "Participants"). The Compensation Committee of the
Company's Board of Directors will administer the Stock Incentive Plan.
The Stock Incentive Plan provides for the grant of incentive and non-
qualified stock options, restricted stock, stock appreciation rights,
performance shares and performance units ("Awards"). The terms of the Awards
will be set forth in award agreements ("Award Agreements"). The Compensation
Committee, in its sole discretion, will select the employees to whom Awards
will be granted and will determine the type, size and terms and conditions
applicable to each Award. The Compensation Committee also will have the
authority to interpret, construe and implement the provisions of the Stock
Incentive Plan. Awards to Non-Employee Directors will be made by members of
the Company's Board of Directors who are not otherwise entitled to participate
in the Stock Incentive Plan, or will be based on a formula developed by the
Board of Directors or the Compensation Committee.
The total number of shares of Class A Common Stock that may be subject to
Awards under the Stock Incentive Plan is shares. In connection with
the Offerings, the Company has awarded 505,912 shares of Restricted Stock (as
defined below) and non-qualified Options (as defined below) to purchase
1,242,250 shares of Class A Common Stock under the Stock Incentive Plan. Set
forth below is a brief description of the Awards that may be granted under the
Stock Incentive Plan.
STOCK OPTIONS. The Compensation Committee may grant options (each an
"Option") to purchase shares of Class A Common Stock, which may be incentive
or non-qualified stock options. The Compensation Committee will determine the
exercise price (the "Exercise Price") of the Options in its sole discretion,
provided that the Exercise Price may not be less than the average of the high
and the low trading prices of the Class A Common Stock on the NYSE on the date
of grant. Notwithstanding the foregoing, the initial grants of Offering Awards
(as defined below) will be granted with an Exercise Price equal to the initial
public offering price set forth on the cover page of this Prospectus. Each
Option represents the right to purchase one share of Class A Common Stock at
the specified Exercise Price. Options will expire no later than ten years
after the date on which they were granted and will become vested and
exercisable at such times and in such installments as determined by the
Compensation Committee and specified in the applicable Award Agreement.
RESTRICTED STOCK. The Compensation Committee may award shares of Class A
Common Stock that are subject to such restrictions as it deems appropriate,
including forfeiture conditions and restrictions against transfer for a period
the Compensation Committee specifies ("Restricted Stock"). The Compensation
Committee may award Restricted Stock under the Stock Incentive Plan for
services
74
<PAGE>
and/or payment of cash. Restrictions on Restricted Stock may lapse in
installments based on factors selected by the Compensation Committee. Prior to
the expiration of the restricted period, a Participant who has received a
Restricted Stock Award generally has the rights of a stockholder of the
Company, including the right to vote and to receive cash dividends on the
shares subject to the Award. Stock dividends issued with respect to a
Restricted Stock Award may be treated as additional shares under such Award
with respect to which such dividends are issued.
STOCK APPRECIATION RIGHTS. The Compensation Committee may award a stock
appreciation right ("SAR") under the Stock Incentive Plan with respect to
shares of Class A Common Stock. Generally, one SAR is granted with respect to
one share of Class A Common Stock. A SAR entitles the Participant, upon the
exercise of the SAR, to receive an amount equal to the appreciation in the
underlying share of Class A Common Stock. The appreciation is equal to the
difference between (i) the "base value" of the SAR (which is determined with
reference to the average of the high and the low trading prices of the Class A
Common Stock on the NYSE on the date the SAR is granted) and (ii) the average
of the high and the low trading prices of the Class A Common stock on the NYSE
on the date the SAR is exercised. Upon the exercise of a vested SAR, the
exercising Participant will be entitled to receive the appreciation in the
value of one share of Class A Common Stock as so determined, payable, at the
discretion of the Participant, in cash, shares of Class A Common Stock, or
some combination thereof, subject to availability of shares of Class A Common
Stock to the Company. SARs will expire no later than ten years after the date
on which they are granted. SARs become vested and exercisable at such times
and in such installments as determined by the Compensation Committee and
specified in the applicable Award Agreement.
TANDEM OPTIONS/SARS. The Compensation Committee may grant an Option and a
SAR "in tandem" with each other (a "Tandem Option/SAR"). An Option and a SAR
would be considered in tandem with each other when the exercise of the Option
aspect of the tandem unit automatically cancels the right to exercise the SAR
of the tandem unit, and vice versa. The Option may be an incentive SAR in any
proportionate relationship selected by the Compensation Committee.
PERFORMANCE SHARES AND PERFORMANCE UNITS. The Compensation Committee may
grant a performance share Award ("Performance Share") and/or a performance
unit Award (a "Performance Unit") under the Stock Incentive Plan. Each
Performance Unit will have an initial value that is established by the
Compensation Committee at the time of grant. Each Performance Share will have
an initial value equal to the average of the high and the low trading prices
of one share of Class A Common Stock on the NYSE on the date of grant. Such
Awards may be earned based upon satisfaction of certain performance criteria
within a performance period specified in the applicable Award Agreement, and
subject to such other terms and conditions as the Compensation Committee deems
appropriate. Prior to the end of a performance period, the Compensation
Committee, in its discretion, may adjust the performance conditions for a
significant acquisition or disposition of assets or other property by the
Company. The extent to which a grantee is entitled to payment in settlement of
such an Award at the end of a performance period will be determined by the
Compensation Committee, based on whether the performance criteria have been
met. The Company will make payment in cash or in shares of Class A Common
Stock, or some combination thereof, subject to availability of shares of Class
A Common Stock to the Company, in accordance with the terms of the applicable
Award Agreement.
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<PAGE>
OFFERING AWARDS. Effective upon consummation of the Offerings, the Company
will grant Awards (the "Offering Awards") to the Named Officers and other
selected Participants, as summarized in the following table:
STOCK INCENTIVE PLAN OFFERING AWARDS
<TABLE>
<CAPTION>
SHARES
UNDERLYING
NON-
SHARES OF QUALIFIED
RESTRICTED STOCK
NAME STOCK (1) OPTIONS (2)
- ---- ---------- -----------
<S> <C> <C>
Richard J. Almeida......................................
Michael P. Goldsmith....................................
David J. Kantes.........................................
Mark A. Abbott..........................................
Lauralee E. Martin......................................
All executive officers as a group (including those
listed above).......................................... 344,150 964,000
All other employees as a group.......................... 161,762 278,250
Non-Employee Directors.................................. -- --
</TABLE>
- --------
(1) Upon consummation of the Offerings, the Company will award shares of
Restricted Stock to each of the Named Officers and certain other officers and
employees. The Restricted Stock will vest on January 1, 2001 if the Company
achieves net income goals specified in the Restricted Stock Award Agreements.
If the Company does not achieve such goals by January 1, 2001, the Restricted
Stock will vest on January 1, 2004.
(2) Upon consummation of the Offerings, the Company will award non-qualified
Options to each of the Named Officers and certain other officers and
employees. The Options will vest 100% on January 1, 2001. The Exercise Price
of the Options will be the initial public offering price set forth on the
cover page of this Prospectus.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
Richard J. Almeida, Chairman and Chief Executive Officer of the Company, is
party to an employment contract with the Company, which became effective as of
December 31, 1997 and expires on December 31, 1999. The contract will be
automatically extended to December 31, 2000, unless either Mr. Almeida or the
Company gives the other written notice to the contrary on or before June 30,
1999. The contract provides for the payment to Mr. Almeida of an annual base
salary of not less than the amount Mr. Almeida receives during 1998. Mr.
Almeida's base salary and performance bonus are to be reviewed by the Company
during the term of the contract pursuant to the Company's normal practices.
The contract provides for Mr. Almeida's participation in all executive bonus
and incentive compensation plans of the Company. The contract further provides
that if Mr. Almeida's employment is terminated by the Company without cause
(as defined in the contract), or if he resigns with cause (as defined in the
contract), he will be entitled to receive full salary through the date 24
months from the date of termination. In the event of a termination under
either of the situations described above, Mr. Almeida is also entitled to
receive his incentive plan bonus payment at the applicable target bonus level
for the full year in which such termination occurs, as well as certain minimum
payments under each LTIP in which he was previously granted awards, and he
will continue to be covered under certain benefit plans through the date 24
months from the date of termination.
76
<PAGE>
Frederick E. Wolfert is party to an employment contract with the Company,
which became effective as of December 31, 1997, the date on which he was
elected President and Chief Operating Officer, and expires on December 31,
1999. The contract provides for the payment to Mr. Wolfert of an annual base
salary of not less than the amount Mr. Wolfert receives during 1998. Mr.
Wolfert's base salary and performance bonus are to be reviewed by the Company
during the term of the contract pursuant to the Company's normal practices.
The contract provides for Mr. Wolfert's participation in all executive bonus
and incentive compensation plans of the Company. The contract further provides
that if Mr. Wolfert's employment is terminated by the Company without cause
(as defined in the contract), or if he resigns with cause (as defined in the
contract), he will be entitled to receive full salary through the later of
December 31, 2000 or the date 18 months from the date of termination. In the
event of a termination, Mr. Wolfert is also entitled to receive his incentive
plan bonus payment at the applicable target bonus level for the full year in
which such termination occurs, as well as payments under each LTIP in which he
was previously granted awards through the year in which the termination
occurs, and he will continue to be covered under certain benefit plans through
the later of December 31, 2000 or the date 18 months from the date of
termination.
Seventeen other executive officers of the Company (including the Named
Executive Officers other than Messrs. Almeida and Wolfert) will become,
effective upon consummation of the Offerings, party to termination of
employment and change in control agreements (the "Change in Control
Agreements"). Each such Change in Control Agreement will provide protection to
the executive officer in the event of certain "changes in control" of the
Company (as defined in the Change in Control Agreements) within three years of
consummation of the Offerings. If the executive officer's employment is either
actually or "constructively" terminated on or after such a change in control
other than for "cause" (as defined in the Change in Control Agreements), the
Company will pay to the executive officer the present value of the additional
benefits the executive officer would have accrued under the Company's
qualified and non-qualified retirement plans from the date of termination
through the last day of the 24-month period following such employment
termination and the executive officer will: (i) become fully vested in all
Options and Restricted Stock granted under the Stock Incentive Plan, and any
benefits under the Company's non-qualified retirement plans; (ii) be entitled
to receive all payments under each LTIP in which he or she was previously
granted awards through the year in which the termination occurs; (iii) become
fully vested in the Cash Incentive Program (as hereinafter defined) at not
less than the target bonus level for the year in which the change in control
occurred; (iv) be entitled to continuation of base salary and certain benefits
and perquisites for 24 months; and (v) be credited with 24 months of age and
years of service for purposes of the Company's retiree medical benefit plan.
Messrs. Almeida's and Wolfert's employment agreements will also be amended to
add certain change in control protections.
ANNUAL CASH INCENTIVE PROGRAM
The Company has adopted the Heller Financial, Inc. Annual Cash Incentive
Program (the "Cash Incentive Program") pursuant to which certain executive and
other employees will be eligible to receive annual incentive bonuses based on
individual performance and the Company's results of operations. The Cash
Incentive Program specifies a minimum, maximum and target award level based on
achievement of the Company's financial performance goals. The Cash Incentive
Program will be administered by the Compensation Committee of the Board of
Directors. The Compensation Committee and the President and Chief Executive
Officer will annually approve incentive awards and schedules under the Cash
Incentive Program. Cash bonuses, if any, will be paid annually in the first
quarter of the Company's next fiscal year.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIP WITH FUJI BANK
Fuji Bank, headquartered in Tokyo, Japan, is currently the beneficial owner
of all of the common stock of the Company through its wholly-owned, domestic
subsidiary, FAHI. Fuji Bank is one of the largest banks in the world, with
total deposits of $301 billion at September 30, 1997. See "--Keep Well
Agreement". Upon consummation of the Offerings, Fuji Bank will beneficially
own 100% of the outstanding Class B Common Stock, which will, in the
aggregate, represent % of the combined voting power of all of the
outstanding Common Stock and % of the economic interest (or rights of
holders of common equity to participate in distributions in respect of the
common equity) in the Company ( % and %, respectively, if the
Underwriters' over-allotment options are exercised in full). For as long as
Fuji Bank continues to beneficially own shares of Common Stock representing
more than 50% of the combined voting power of the Class A Common Stock and
Class B Common Stock, Fuji Bank will be able to direct the election of all of
the members of the Board of Directors and thereby exercise a controlling
influence over the business and affairs of the Company, including any
determinations with respect to (i) mergers or other business combinations
involving the Company, (ii) the acquisition or disposition of assets by the
Company, (iii) the incurrence of indebtedness by the Company, (iv) the
issuance of any additional Common Stock or other equity securities and (v) the
payment of dividends with respect to the Common Stock. Similarly, Fuji Bank
will have the power to (i) determine matters submitted to a vote of the
Company's stockholders without the consent of the Company's other
stockholders, (ii) prevent or cause a change in control of the Company or
(iii) take other actions that might be favorable to Fuji Bank. In the
foregoing situations or otherwise, various conflicts of interest between the
Company and Fuji Bank could arise.
Fuji Bank has advised the Company that its current intent is to continue to
hold all of the Common Stock beneficially owned by it following the Offerings.
Fuji Bank and the Company have agreed not to sell or otherwise dispose of any
shares of Common Stock for a period of 180 days after the date of this
Prospectus without the prior written consent of Goldman, Sachs & Co. See
"Underwriting".
From time to time the Company and Fuji Bank have entered into, and can be
expected to continue to enter into, certain agreements and business
transactions in the ordinary course of their respective businesses. See "Risk
Factors--Control by and Relationship with Fuji Bank", "Risk Factors--Shares
Eligible for Future Sale; Possible Future Sales by Fuji Bank" and "Shares
Available for Future Sales".
KEEP WELL AGREEMENT
The Company entered into the Keep Well Agreement with Fuji Bank on April 23,
1983. The Keep Well Agreement was amended and supplemented on January 26,
1984, in connection with the consummation of the purchase of the Company by
Fuji Bank and has been amended since that date from time to time. Under the
Keep Well Agreement, as currently in effect, neither Fuji Bank nor any of its
subsidiaries can sell, pledge or otherwise dispose of shares of the Company's
common stock, or permit the Company to issues shares of its common stock,
except to Fuji Bank or a Fuji Bank affiliate. However, prior to the
consummation of the Offerings, the Keep Well Agreement will be amended to
allow the Company or Fuji Bank or any of its affiliates to sell or dispose of
Common Stock to any person or entity, provided that after any such sale or
disposition, Fuji Bank (directly or indirectly, through one or more
subsidiaries) continues to hold greater than 50% of the combined voting power
of the outstanding Common Stock. This provision may be subject to further
revision by the Company and Fuji Bank without the approval of any of the
Company's securityholders.
The Keep Well Agreement may not be terminated prior to the date (the
"Termination Date") which is the earlier of (i) December 31, 2007 and (ii) the
date on which the Company has received written certifications from Moody's
Investors Service, Inc. ("Moody's") and Standard & Poor's Rating Services
78
<PAGE>
("S&P") that, upon termination of the Keep Well Agreement, the ratings on the
Company's senior unsecured indebtedness without the support provided by the
Keep Well Agreement will be no lower than such ratings with the support of the
Keep Well Agreement, but in no event may the Termination Date occur before
December 31, 2002. In addition, the Keep Well Agreement includes certain
restrictions on termination relating to the Company's Series A Preferred Stock
and Series C Preferred Stock, which restrictions are discussed below.
The Keep Well Agreement provides that Fuji Bank will maintain the Company's
stockholders' equity in an amount equal to $500 million. Accordingly, if the
Company should determine, at the close of any month, that its net worth is
less than $500 million, then Fuji Bank will purchase, or cause one of its
subsidiaries to purchase, shares of the Company's NW Preferred Stock, Class B,
no par value (the "NW Preferred Stock"), in an amount necessary to increase
the Company's stockholders' equity to $500 million. The NW Preferred Stock is
a series of Junior Preferred Stock and, accordingly, if and when issued will
rank junior to the Series A Preferred Stock and the Series C Preferred Stock
and senior to the Common Stock as to payment of dividends, and in all other
respects. If and when the NW Preferred Stock is issued, dividends thereon will
be noncumulative and will be payable (if declared) quarterly at a rate per
annum equal to 1% over the three-month LIBOR. Such dividends will not be paid
during a default in the payment of principal or interest on any of the
outstanding indebtedness for money borrowed by the Company. Subject to certain
conditions, the NW Preferred Stock will be redeemable, at the option of the
holder, within a specified period of time after the end of a calendar quarter
in an aggregate amount not greater than the excess of the stockholders' equity
of the Company as of the end of such calendar quarter over $500 million. See
"Description of Capital--Preferred Stock--NW Preferred Stock".
The Keep Well Agreement further provides that if the Company should lack
sufficient cash, other liquid assets or credit facilities to meet its payment
obligations on its commercial paper, then Fuji Bank will lend the Company up
to $500 million, payable on demand, which the Company may use only for the
purpose of meeting such payment obligations. Any such loan by Fuji Bank to the
Company (a "Liquidity Advance") will bear interest at a fluctuating interest
rate per annum equal to the announced prime commercial lending rate of Morgan
Guaranty Trust Company of New York plus 0.25% per annum. Each Liquidity
Advance will be repayable on demand at any time after the business day
following the 29th day after such Liquidity Advance was made. No repayment of
the Liquidity Advance will be made during a period of default in the payment
of the Company's senior indebtedness for borrowed money.
No Liquidity Advances or purchases of NW Preferred Stock have been made by
Fuji Bank under the Keep Well Agreement; other infusions of capital in the
Company have been made by Fuji Bank, the last one of which occurred in 1992.
Under the Keep Well Agreement, the Company has covenanted to maintain, and
Fuji Bank has undertaken to assure that the Company will maintain, unused
short-term lines of credit, asset sales facilities and committed credit
facilities in an amount approximately equal to 75% of the amount of its
commercial paper obligations from time to time outstanding.
Neither Fuji Bank nor the Company is permitted to terminate the Keep Well
Agreement for any reason prior to the Termination Date. After the Termination
Date, either Fuji Bank or the Company may terminate the Keep Well Agreement
upon 30 business days' prior written notice, except as set forth below. So
long as the Series A Preferred Stock is outstanding and held by third parties
other than Fuji Bank, the Keep Well Agreement may not be terminated by either
party unless the Company has received written certifications from Moody's and
S&P that upon such termination the Series A Preferred Stock will be rated by
them no lower than "a3" and "A-", respectively. Additionally, so long as the
Series C Preferred Stock is outstanding and held by third parties other than
Fuji Bank, the Keep Well Agreement may not be terminated by either party
unless the Company has received written
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certifications from Moody's and S&P that upon such termination the Series C
Preferred Stock will be rated no lower than "baa1" and "BBB" by Moody's and
S&P, respectively. For these purposes, the Series A Preferred Stock and the
Series C Preferred Stock will no longer be deemed outstanding at such time as
an effective notice of redemption of all of the Series A Preferred Stock and
the Series C Preferred Stock shall have been given by the Company and funds
sufficient to effectuate such redemption shall have been deposited with the
party designated for such purpose in the notice. So long as the Series A
Preferred Stock is outstanding, if both Moody's and S&P shall discontinue
rating the Series A Preferred Stock, then Goldman, Sachs & Co., or its
successor, shall, within 30 days, select a nationally recognized substitute
rating agency and identify the comparable ratings from such agency. So long as
the Series A Preferred Stock is no longer outstanding but the Series C
Preferred Stock is outstanding, if both Moody's and S&P shall discontinue
rating the Series C Preferred Stock, then Lehman Brothers Inc., or its
successor, shall, within 30 days, select a nationally recognized substitute
rating agency and identify the comparable ratings from such agency. Any
termination of the Keep Well Agreement by the Company must be consented to by
Fuji Bank. Any such termination will not relieve the Company of its
obligations in respect of any NW Preferred Stock outstanding on the date of
termination or the dividends thereon, any amounts owed in respect of Liquidity
Advances on the date of termination or the unpaid principal or interest on
those Liquidity Advances or Fuji Bank's fee relating to the Liquidity
Commitment. Any such termination will not adversely affect the Company's
commercial paper obligations outstanding on the date of termination. The Keep
Well Agreement can be modified or amended by a written agreement of Fuji Bank
and the Company. However, no such modification or amendment may change the
prohibition against termination before the Termination Date or the other
restrictions on termination or adversely affect the Company's then-outstanding
commercial paper obligations.
Under the Keep Well Agreement, the Company's commercial paper obligations
and any other debt instruments are solely the obligations of the Company. The
Keep Well Agreement is not a guarantee by Fuji Bank of the payment of the
Company's commercial paper obligations, indebtedness, liabilities or
obligations of any kind.
For a description of certain provisions of the Company's Amended and
Restated Certificate of Incorporation concerning the allocation of business
opportunities that may be suitable for both the Company and Fuji Bank, see
"Description of Capital Stock--Certain Certificate of Incorporation and By-Law
Provisions--Corporate Opportunities".
REGISTRATION RIGHTS AGREEMENT
The Registration Rights Agreement will provide that, upon the request of
Fuji Bank, its subsidiaries or certain transferees of Common Stock from Fuji
Bank or its subsidiaries (each, a "Qualified Transferee"), the Company will
use its best efforts to effect the registration under the applicable federal
and state securities laws of any of the shares of Class A Common Stock that it
may hold or that are issued or issuable upon conversion of any other security
that it may hold (including the shares of Class B Common Stock) and of any
other securities issued or issuable in respect of the Class A Common Stock, in
each case for sale in accordance with the intended method of disposition of
the holder or holders making such demand for registration, and will take such
other actions as may be necessary to permit the sale thereof in other
jurisdictions, subject to certain specified limitations. Fuji Bank, its
subsidiaries or any Qualified Transferee will also have the right, which it
may exercise at any time and from time to time, subject to certain
limitations, to include any such shares and other securities in other
registrations of equity securities of the Company initiated by the Company on
its own behalf or on behalf of its other stockholders. The Company will agree
to pay all costs and expenses in connection with each such registration which
Fuji Bank, any subsidiary thereof or any Qualified Transferee initiates or in
which any of them participates. The Registration Rights Agreement will contain
indemnification and contribution provisions (i) by Fuji Bank and its permitted
assigns for the benefit of the Company,
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and (ii) by the Company for the benefit of Fuji Bank and other persons
entitled to effect registrations of Class A Common Stock (and other
securities) pursuant to its terms, and related persons.
PURCHASE OF INTEREST IN INTERNATIONAL GROUP FROM FUJI BANK
The Company and Fuji Bank have agreed that, upon consummation of the
Offerings, the Company will purchase Fuji Bank's interest in International
Group for total cash consideration of approximately $85 million. Fuji Bank
currently owns shares of common and preferred stock of International Group,
together representing 21% of the outstanding shares of capital stock of
International Group.
CERTAIN OTHER TRANSACTIONS WITH FUJI BANK AND ITS SUBSIDIARIES
Several financial, administrative or other service arrangements exist or
have existed between the Company and Fuji Bank, FAHI, HIC or related
affiliates. In management's opinion, the terms of these arrangements are
similar to those the Company would have been able to obtain in like agreements
with unaffiliated entities in arms-length transactions.
TAX ALLOCATION AGREEMENT
Under the terms of the tax allocation agreement between HIC and the Company,
as amended, which was in place in 1997, each company covered by the agreement
calculated its current and deferred income taxes based on its separate company
taxable income or loss, utilizing separate company net operating losses, tax
credits, capital losses and deferred tax assets or liabilities. Under the
terms of other tax allocation agreements with certain of the Company's
subsidiaries, the Company and HIC, in calculating their current income taxes,
utilized the taxable income or loss of the subsidiaries.
SERVICES PROVIDED BY FUJI BANK, HIC AND FAHI FOR THE COMPANY
Certain employees of Fuji Bank and HIC performed managerial, administrative
and other related functions for the Company during 1997. The Company
compensated Fuji Bank and HIC for the use of such individuals' services at a
rate which reflects current costs to Fuji Bank and HIC. The amounts paid to
Fuji Bank and HIC for these services in 1997 were $2 million and $77 million,
respectively. See "Management--Executive Compensation." In conjunction with
the transfer of ownership of the Company to FAHI, the majority of the
employees of HIC who were providing services to the Company were transferred
to the Company. Additionally, certain subsidiaries of Fuji Bank periodically
serve as managers for various offerings of the Company's debt securities and
may act as registrar and paying agent for certain debt issuances by the
Company. These services are provided at market rates. The Company has entered
into similar agreements with FAHI. In the Company's opinion, the amounts to be
paid under such agreements will be significantly less than the amounts paid in
1997.
SERVICES PROVIDED BY THE COMPANY FOR AFFILIATES
The Company performs services for its affiliates, including FAHI, and
charges them for the cost of the work performed. The Company may also
guarantee the obligations of its clients or the clients of certain joint
ventures under letters of credit issued by financial institutions, some of
which are affiliates of the Company. Additionally, the Company guaranteed
payment under a deferred compensation arrangement between HIC and certain of
its employees. The Company had agreements with HIC and certain other
subsidiaries of HIC which provided for the Company to receive an annual
negotiated fee for servicing assets which had been sold by the Company to HIC
and these affiliates. The amount of fees for servicing these assets in 1997
was approximately $200,000.
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Heller Capital Markets Group, Inc. ("CMG"), a wholly-owned subsidiary of the
Company, acted as placement agent for the sale of commercial paper issued by
HIC during 1997. CMG received compensation based upon the face amount of the
commercial paper notes sold. For the year ended December 31, 1997, HIC paid
compensation to CMG pursuant to this arrangement of $61,000. The HIC
commercial paper program was terminated during 1997.
INTERCOMPANY RECEIVABLES, PAYABLES, TRANSACTIONS AND FINANCIAL INSTRUMENTS
At December 31, 1997, the net amount due to affiliates was $29 million. This
amount is comprised principally of interest bearing demand notes representing
amounts due to or from the Company arising from an interest rate swap
agreement with HIC, advances, administrative fees and costs charged to other
subsidiaries of HIC. The notes bear interest at rates which approximate the
average rates on the Company's commercial paper obligations or short-term bank
borrowing rates outstanding during the period. During 1997 the Company paid
interest of $3 million to HIC related to these notes.
Fuji Bank and one of its subsidiaries provided uncommitted lines of credit
to consolidated international subsidiaries totalling approximately $29 million
at December 31, 1997. Borrowings under these facilities totalled $5 million at
December 31, 1997. In addition, Fuji Bank provides lines of credit to certain
international joint ventures.
The Company is a party to a $200 million notional amount interest rate swap
agreement with FAHI, which expires December 15, 2000. The purpose of this
agreement is to manage the Company's exposure to interest rate fluctuations.
Under this agreement, the Company pays interest to FAHI at a variable rate
based on the commercial paper rate published by the Board of Governors of the
Federal Reserve and FAHI pays interest to the Company at a fixed rate of
5.57%. This agreement, which FAHI assumed from HIC effective January 1998,
increased the Company's interest expense by $295,000 in 1997.
During 1997, HIC converted all of its shares of Series D Preferred Stock
into common stock of the Company. Prior to the conversion, the Company paid a
dividend to HIC on the Series D Preferred Stock of approximately $500,000.
Also, during 1997, the Company paid to Fuji Bank a commitment fee of
approximately $317,000, related to the Keep Well Agreement.
The trust department of Fuji Bank may purchase commercial paper of the
Company for its clients. Interest expense paid by the Company related to such
commercial paper borrowings was $235,000 in 1997.
In the ordinary course of its business, the Company participates in joint
financings with Fuji Bank or certain affiliates. During 1997, the Company sold
$10 million of an outstanding $25 million commitment to Fuji Bank at book
value. No gain or loss was recorded on the transaction.
The Company has an accounts receivable sale facility which 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. The
Company sold approximately $500 million of receivables under this facility as
of December 31, 1997. The underlying liquidity support for the conduit is
provided by unaffiliated entities. One of the conduits has an operating
agreement with Fuji Bank. The Company paid fees of $346,000 to Fuji Bank
during 1997 for services provided under this agreement.
In conjunction with the formation of FAHI, the Company purchased, at book
value, less than $10 million of assets from HIC on December 31, 1997. These
assets are primarily recorded as real estate receivables at the purchase
price.
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On February 15, 1985, the Company issued to HIC 1,000 shares of previously
subscribed Cumulative Convertible Preferred Stock, Series D (the "Series D
Preferred Stock"), which had a dividend yield established quarterly at the
rate of 1/2% under the announced prime commercial lending rate of Morgan
Guaranty Trust Company of New York, cumulative from March 30, 1984 and payable
quarterly commencing on March 31, 1989. During 1997, HIC converted all of its
shares of Series D Preferred Stock into common stock of the Company. The
conversion was accounted for as a stock dividend and therefore has been
retroactively restated in the Company's consolidated financial statements. All
dividends paid on the Series D Preferred Stock have been retroactively
reclassified to common dividends.
CERTAIN OTHER RELATIONSHIPS
Mr. Kessel, a director of the Company, is a partner of the law firm of
Shearman & Sterling, which from time to time acts as counsel in certain
matters for Fuji Bank, the Company and FAHI.
OWNERSHIP OF COMMON STOCK
FAHI directly owns 100% of the Common Stock outstanding prior to the
Offerings, and as the sole stockholder of FAHI, Fuji Bank is also deemed to
beneficially own 100% of such Common Stock. Upon consummation of the
Offerings, FAHI will directly own 100% of the outstanding Class B Common Stock
and none of the outstanding Class A Common Stock and, by virtue of its
ownership of FAHI, Fuji Bank will also be deemed to beneficially own 100% of
such Class B Common Stock and none of such Class A Common Stock. Accordingly,
FAHI and Fuji Bank will beneficially own Common Stock representing % of
the economic interest in the Company ( % if the Underwriters' over-
allotment options are exercised in full) and % of the combined voting
power of the outstanding Common Stock upon consummation of the Offerings
( % if the Underwriters' over-allotment options are exercised in full).
See "Certain Relationships and Related Transactions--Relationship with Fuji
Bank".
The principal executive offices of Fuji Bank are located at 1-5-5 Otemachi,
Chiyoda-ku, Tokyo, Japan.
SHARES AVAILABLE FOR FUTURE SALE
Upon consummation of the Offerings, the Company will have shares
of Class A Common Stock and 51,050,000 shares of Class B Common Stock issued
and outstanding. All of the shares of Class A Common Stock to be sold in the
Offerings will be freely tradeable without restriction under the Securities
Act, except for any shares held by an "affiliate" of the Company (as that term
is defined in Rule 144 adopted under the Securities Act ("Rule 144")), which
will be subject to the resale limitations of Rule 144. Immediately following
the consummation of the Offerings, all of the outstanding shares of Class B
Common Stock will be beneficially owned by Fuji Bank and will not have been
registered under the Securities Act. Such shares owned by Fuji Bank may be
sold only pursuant to an effective registration statement under the Securities
Act or in accordance with Rule 144 or another exemption from the registration
requirements of the Securities Act. Fuji Bank has certain rights to require
the Company to effect registration of shares of Class A Common Stock, and
certain other securities issued or issuable in respect thereof, owned by Fuji
Bank. See "Certain Relationships and Related Transactions--Relationship with
Fuji Bank--Registration Rights Agreement".
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated) who has beneficially owned shares
of Common Stock for at least one year, including a person who may be deemed an
"affiliate", is entitled to sell, within any three-month period, a number
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of shares that does not exceed the greater of (i) one percent (1%) of the
total number of outstanding shares of the class of stock being sold or (ii)
the average weekly reported trading volume of the class of stock being sold
during the four calendar weeks preceding such sale. A person who is not deemed
an "affiliate" of the Company at any time during the three months preceding a
sale and who has beneficially owned shares for at least two years is entitled
to sell such shares under Rule 144 without regard to the volume limitations
described above. As defined in Rule 144, an "affiliate" of an issuer is a
person that directly or indirectly through the use of one or more
intermediaries controls, is controlled by, or is under common control with,
such issuer. Rule 144A under the Securities Act ("Rule 144A") provides a non-
exclusive safe harbor exemption from the registration requirements of the
Securities Act for specified resales of restricted securities to certain
institutional investors. In general, Rule 144A allows unregistered resales of
restricted securities to a "qualified institutional buyer", which generally
includes an entity, acting for its own account or for the account of other
qualified institutional buyers, that in the aggregate owns or invests at least
$100 million in securities of unaffiliated issuers. Rule 144A does not extend
an exemption to the offer or sale of securities that, when issued, were of the
same class as securities listed on a national securities exchange or quoted on
an automated quotation system. The shares of Class B Common Stock outstanding
as of the date of this Prospectus would be eligible for resale under Rule 144A
because such shares, when issued, were not of the same class as any listed or
quoted securities. The foregoing summary of Rule 144 and Rule 144A is not
intended to be a complete description thereof.
Prior to the Offerings, there has been no market for the Class A Common
Stock, and no prediction can be made as to the effect, if any, that market
sales of outstanding shares of Common Stock by Fuji Bank, or the availability
of such shares for sale, will have on the market price of the Class A Common
Stock prevailing from time to time. Nevertheless, sales by Fuji Bank of
substantial amounts of Common Stock in the public market, or the perception
that such sales could occur, could adversely affect prevailing market prices
for the Class A Common Stock offered hereby. See "Risk Factors--Shares
Eligible for Future Sale; Possible Future Sales by Fuji Bank".
Fuji Bank has advised the Company that its current intent is to continue to
hold all of the Common Stock beneficially owned by it following the Offerings.
Fuji Bank and the Company have agreed not to sell or otherwise dispose of any
shares of Common Stock for a period of 180 days after the date of this
Prospectus, without the prior written consent of Goldman, Sachs & Co. See
"Underwriting". Prior to the consummation of the Offerings, the Keep Well
Agreement will be amended to allow the Company or Fuji Bank or any of its
affiliates to sell or dispose of Common Stock to any person or entity,
provided that after any such sale or disposition, Fuji Bank (directly or
indirectly, through one or more subsidiaries) continues to hold greater than
50% of the combined voting power of the outstanding Common Stock. This
provision may be subject to further amendment by the Company and Fuji Bank
without the approval of any of the Company's other security holders. As a
result, there can be no assurance as to the period of time during which Fuji
Bank will continue to maintain the same beneficial ownership of Common Stock
to be beneficially owned by it immediately following the Offerings.
DESCRIPTION OF CAPITAL STOCK
The following summary of the capital stock of the Company does not purport
to be complete and is subject to, and qualified in its entirety by reference
to, the Company's Amended and Restated Certificate of Incorporation (the
"Restated Certificate"), the Certificates of Designation, Preferences and
Rights relating to the Series A Preferred Stock and Series C Preferred Stock,
and the Company's Amended and Restated By-Laws (the "Restated By-Laws"),
copies of which have been or will be filed with, and are or will be available
from, the Commission, and to Delaware corporate law.
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GENERAL
The Restated Certificate will authorize the Company to issue 852,000,000
shares of capital stock, of which 500,000,000 shares will be designated Class
A Common Stock, $0.25 par value per share, 300,000,000 shares will be
designated Class B Common Stock, par value $0.25 per share, 2,000,000 shares
will be designated preferred stock, no par value per share ("Junior Preferred
Stock"), and 50,000,000 shares will be designated senior preferred stock,
$0.01 par value per share ("Senior Preferred Stock" and, together with the
Junior Preferred Stock, "Preferred Stock") . As of February 24, 1998, there
were no shares of Class A Common Stock and 51,050,000 shares of Class B Common
Stock issued and outstanding. As of February 24, 1998, there were 6,600,000
shares of Preferred Stock authorized and issued or reserved for issuance as
follows: 5,000,000 shares of Series A Preferred Stock, a series of Senior
Preferred Stock, all of which were issued and outstanding; 1,500,000 shares of
Series C Preferred Stock, a series of Senior Preferred Stock, all of which
were issued and outstanding; and 100,000 shares of NW Preferred Stock, a
series of Junior Preferred Stock, none of which were issued and outstanding.
All outstanding shares of Common Stock and Preferred Stock are fully paid and
nonassessable. Of the 500,000,000 authorized shares of Class A Common Stock,
shares are being offered in the Offerings, shares will
be reserved for issuance upon conversion of shares of Class B Common Stock
into Class A Common Stock, and shares will be reserved for issuance
under the Stock Incentive Plan. There will continue to be 51,050,000 shares of
Class B Common Stock outstanding upon consummation of the Offerings, all of
which will be beneficially owned directly by FAHI and indirectly by Fuji Bank.
Upon consummation of the Offerings, all outstanding shares of Common Stock
will be fully paid and nonassessable.
COMMON STOCK
VOTING RIGHTS
The holders of Class A Common Stock and Class B Common Stock generally have
identical rights except that holders of Class A Common Stock are entitled to
one vote per share and holders of Class B Common Stock are entitled to three
votes per share on all matters to be voted on by stockholders, subject to the
right of Fuji Bank or the Class B Transferee (as defined below), as the case
may be, to reduce from time to time the number of votes per share of Class B
Common Stock by written notice to the Company specifying the reduced number of
votes per share. Notwithstanding the foregoing, in the event that at any time
while held by Fuji Bank the shares of Class B Common Stock would represent
greater than 79% of the combined voting power of all outstanding classes of
voting stock of the Company, then for voting purposes the number of votes per
share of Class B Common Stock shall be automatically reduced so that the
shares of Class B Common Stock held by Fuji Bank represent 79% of such
combined voting power. Holders of shares of Class A Common Stock and Class B
Common Stock are not entitled to cumulate their votes for the election of
directors. Generally, all matters to be voted on by stockholders must be
approved by a majority (or, in the case of the election of directors, by a
plurality) of the votes entitled to be cast by all holders of shares of Class
A Common Stock and Class B Common Stock present in person or represented by
proxy, voting together as a single class, subject to any voting rights granted
to holders of any Preferred Stock. Except as otherwise provided by law or the
Restated Certificate, and subject to any voting rights granted to holders of
any outstanding Preferred Stock, amendments to the Restated Certificate must
be approved by the vote of the holders of Common Stock having a combined
voting power of a majority of all shares of Class A Common Stock and Class B
Common Stock, voting together as a single class. Amendments to the Restated
Certificate that would alter or change the powers, preferences or special
rights of the Class A Common Stock or the Class B Common Stock so as to affect
them adversely also must be approved by a majority of the votes entitled to be
cast by the holders of the shares affected by the amendment, voting as a
separate class.
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DIVIDENDS
Holders of Class A Common Stock and Class B Common Stock will share ratably
on a per share basis in any dividends declared by the Board of Directors,
subject to any preferential rights of any outstanding Preferred Stock; except
that holders of Class A Common Stock shall not be entitled to receive the cash
dividend which the Company expects to pay to FAHI, as the sole holder of the
Class B Common Stock, with a portion of the net proceeds of the Offerings. The
Company is prohibited from paying dividends on the Common Stock unless all
declared dividends on all outstanding shares of Series C Preferred Stock and
full cumulative dividends on all outstanding shares of Series A Preferred
Stock have been paid. In the case of dividends or other distributions payable
in Common Stock, including distributions pursuant to stock splits or divisions
of Common Stock, only shares of Class A Common Stock shall be paid or
distributed to holders of shares of Class A Common Stock, and only shares of
Class B Common Stock shall be paid or distributed to holders of Class B Common
Stock. See "Dividend Policy" and "Use of Proceeds".
The Company may not reclassify, subdivide or combine shares of one class of
Common Stock without at the same time proportionally reclassifying,
subdividing or combining shares of the other class of Common Stock.
CONVERSION
Each share of Class B Common Stock is convertible at any time while held by
Fuji Bank and/or any of its subsidiaries or the Class B Transferee (as defined
below) and/or any of its subsidiaries at the option of the holder thereof into
one share of Class A Common Stock.
Except as provided below, any shares of Class B Common Stock transferred to
a person other than Fuji Bank or any of its subsidiaries or the Class B
Transferee or any of its subsidiaries shall automatically convert into shares
of Class A Common Stock upon such disposition. Shares of Class B Common Stock
representing more than a 50% voting interests in the outstanding shares of
Common Stock transferred by Fuji Bank and/or any of its subsidiaries in a
single transaction or series of related transactions to one unrelated person
(the "Class B Transferee") and/or any of its subsidiaries shall not
automatically convert into shares of Class A Common Stock upon such
disposition. Any shares of Class B Common Stock retained by Fuji Bank or any
of its subsidiaries following any such disposition of more than a 50% voting
interest in the outstanding shares of Common Stock to the Class B Transferee
and/or any of its subsidiaries shall automatically convert into shares of
Class A Common Stock upon such disposition.
All shares of Class B Common Stock will automatically convert into Class A
Common Stock if the number of outstanding shares of Class B Common Stock
beneficially owned by Fuji Bank and its subsidiaries or the Class B Transferee
and its subsidiaries, as the case may be, falls below 30% of the aggregate
number of outstanding shares of Common Stock. This will prevent Fuji Bank and
its subsidiaries or the Class B Transferee and its subsidiaries, as the case
may be, from decreasing their economic interest in the Company to less than
30% while still retaining control of a majority of the Company's voting power.
The foregoing automatic conversion is intended to ensure that Fuji Bank and/or
its subsidiaries or the Class B Transferee and/or its subsidiaries, as the
case may be, retain voting control by virtue of their ownership of Class B
Common Stock only if they continue to have a significant economic interest in
the Company. All conversions will be effected on a share-for-share basis.
OTHER RIGHTS
In the event of any merger, reorganization or consolidation of the Company
with or into another entity in connection with which shares of Common Stock
are converted into or exchangeable for
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shares of stock, other securities or property (including cash), all holders of
Common Stock, regardless of class, will be entitled to receive the same kind
and amount of shares of stock and other securities and property (including
cash), except that shares of stock or other securities receivable upon such
reorganization, consolidation or merger by a holder of a share of Class B
Common Stock may differ from the shares of stock or other securities
receivable upon such reorganization, consolidation or merger by a holder of a
share of Class A Common Stock to the extent that the Class B Common Stock and
Class A Common Stock differ as provided in the Restated Certificate.
On liquidation, dissolution or winding up of the Company, after payment in
full of the amounts required to be paid to holders of Preferred Stock, if any,
all holders of Common Stock, regardless of class, are entitled to share
ratably in any assets available for distribution to holders of shares of
Common Stock.
No shares of either class of Common Stock are subject to redemption. Shares
of Class A Common Stock do not have preemptive rights to purchase additional
shares. Holders of shares of Class B Common Stock have preemptive rights to
subscribe for and receive additional securities of the Company upon all
additional issuances by the Company of shares of Class A Common Stock, or any
other securities convertible into shares of Class A Common Stock (other than
in connection with certain issuances pursuant to employee stock or stock
option benefit plans or in connection with any stock split or stock dividend),
such that such holder of Class B Common Stock may, by purchasing such
additional securities, maintain the percentage beneficial ownership interest
(including voting and for economic interest) it had immediately prior to such
issuance.
PREFERRED STOCK
Under the Restated Certificate, the Board of Directors of the Company may
provide for the issuance of Senior Preferred Stock or Junior Preferred Stock
in one or more series from time to time, and the rights, preferences,
privileges and restrictions, including dividend rights, voting rights,
conversion rights, terms of redemption and liquidation preferences, of the
Senior Preferred Stock or Junior Preferred Stock of each series will be fixed
or designated by the Board of Directors pursuant to a certificate of
designation without any further vote or action by the Company's stockholders,
except as required pursuant to the terms of the Series A Preferred Stock and
Series C Preferred Stock.
SERIES A PREFERRED STOCK
Dividends on the Series A Preferred Stock are payable at an annual rate of
8.125%. Dividends are cumulative and payable quarterly. The Company is
prohibited from declaring or paying cash dividends on Common Stock, Junior
Preferred Stock or other series of Senior Preferred Stock on parity with the
Series A Preferred Stock, unless full cumulative dividends on all outstanding
shares of Series A Preferred Stock for all past dividend periods have been
paid. The Series A Preferred Stock is not redeemable prior to September 22,
2000. On or after that date, the Series A Preferred Stock will be redeemable
at the option of the Company, in whole or in part, at a redemption price of
$25 per share, plus accrued and unpaid dividends. Except as required by law
and as set forth herein, the holders of Series A Preferred Stock have no
voting rights. In case the Company shall be in arrears in the payment of six
consecutive quarterly dividends on the outstanding Series A Preferred Stock,
the holders of Series A Preferred Stock, voting separately as a class and in
addition to any voting rights that holders of the Series A Preferred Stock
shall have as required by law, shall have the exclusive right to elect two
additional directors beyond the number to be elected by the stockholders at
the next annual meeting of the stockholders called for the election of
directors, and at every subsequent such meeting at which the terms of office
of the directors so elected by the Series A Preferred Stock expire, provided
such arrearage exists on the date of such meeting or subsequent meetings, as
the case may be. Any such elected directors shall serve until the dividend
default shall cease to exist. In addition, without the vote of the holders of
at least two-thirds of the outstanding shares of Series A Preferred Stock, the
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Company shall not (i) issue, from any class or series of stock now existing or
to be created in the future, any shares of stock ranking senior to the
outstanding shares of Series A Preferred Stock as to the payment of dividends
and upon liquidation or (ii) amend the Restated Certificate or the Restated
By-laws, as amended, if such amendment would increase or decrease the
aggregate number of authorized shares of Series A Preferred Stock, increase or
decrease the par value of the shares of Series A Preferred Stock or alter or
change the powers, preferences or special rights of the Series A Preferred
Stock so as to affect the holders of the Series A Preferred Stock adversely.
The Series A Preferred Stock carries a liquidation preference of $25 per
share, plus accrued and unpaid dividends. The Series A Preferred Stock ranks
senior with respect to payment of dividends and liquidation preferences to the
Common Stock and Junior Preferred Stock.
SERIES C PREFERRED STOCK
Dividends on the Series C Preferred stock are noncumulative and, if declared
by the Board of Directors or a duly authorized committee thereof, will be
payable quarterly at an annual rate of 6.687%. The amount of dividends payable
will be adjusted in the event of certain amendments to the Internal Revenue
Code of 1986, as amended, in respect of the dividends received reduction. The
Company is prohibited from declaring or paying cash dividends on Common Stock,
Junior Preferred Stock or other series of Senior Preferred Stock on parity
with the Series C Preferred Stock, unless all declared dividends on all
outstanding shares of Series C Preferred Stock for all past dividend periods
have been paid. The Series C Preferred Stock is not redeemable prior to August
15, 2007. On or after that date, the Series C 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 accrued and unpaid dividends (whether or not
declared) for the then-current dividend period and, if declared, accrued and
unpaid dividends for prior dividend periods. Except as required by law and as
set forth herein, the holders of Series C Preferred Stock have no voting
rights. If dividends payable on any share or shares of the Series C Preferred
Stock or on any other class or series of Senior Preferred Stock for which
dividends are noncumulative ("Noncumulative Preferred Stock") ranking on a
parity with the Series C Preferred Stock and upon which like voting rights
have been conferred and are exercisable (excluding any class or series of
Noncumulative Preferred Stock entitled to elect additional directors by a
separate vote, "Voting Preferred Stock") have not been paid or declared and
set aside for payment for the equivalent of six full quarterly dividend
periods (whether or not consecutive), the number of directors of the Company
will be increased by two (without duplication of any increase made pursuant to
the terms of any other class or series of Voting Preferred Stock), and the
holders of the Series C Preferred Stock, voting as a single class with the
holders of the Voting Preferred Stock, will be entitled to elect such two
directors to fill such newly-created directorships. Such right of the holders
of the Series C Preferred Stock and the Voting Preferred Stock shall continue
until dividends on the Series C Preferred Stock and the Voting Preferred Stock
have been paid or declared and set apart for payment regularly for at least
one year (i.e., four consecutive full quarterly dividend periods). Any such
elected directors shall serve until the Company's next annual meeting of
stockholders and until their respective successors are elected and qualified
(notwithstanding that prior to the end of such term the dividend default shall
cease to exist). In addition, the affirmative vote or consent of the holders
of at least two-thirds of the outstanding shares of the Series C Preferred
Stock will be required for any amendment, alteration or repeal of any
provisions of the Restated Certificate or of any other certificate amendatory
of or supplemental to the Restated Certificate which would adversely affect
the powers, preferences, privileges or rights of the Series C Preferred Stock.
The affirmative vote or consent of the holders of at least two-thirds of the
outstanding shares of the Series C Preferred Stock and any other series of
Noncumulative Preferred Stock ranking on a parity with the Series C Preferred
Stock either as to dividends or upon liquidation, voting as a single class
without regard to series, will be required to issue, authorize or increase the
authorized amount of, or issue or authorize any obligation or security
convertible into or evidencing a right to purchase, any additional class or
series of stock ranking prior to the Series C Preferred Stock as to dividends
or upon liquidation, or to reclassify any authorized stock of the Company into
such prior
88
<PAGE>
shares, but such vote will not be required for the Company to take any such
actions with respect to any stock ranking on a parity with or junior to the
Series C Preferred Stock. The Series C Preferred Stock is entitled to a
liquidation preference of $100.00 per share, plus an amount equal to the sum
of all accrued and unpaid dividends (whether or not earned or declared) for
the then-current dividend period to the date of final distribution (without
accumulation of accrued and unpaid dividends for prior dividend periods unless
previously declared), that is senior to payments to holders of the Common
Stock, the Junior Preferred Stock or any other class or series of stock of the
Company ranking junior to the Series C Preferred Stock and pari passu with
payments to holders of each other series of Senior Preferred Stock outstanding
on the date of original issue of the Series C Preferred Stock.
NW PREFERRED STOCK
The Company has authorized the issuance of 100,000 shares of NW Preferred
Stock pursuant to the Keep Well Agreement wherein, among other things, Fuji
Bank has agreed to purchase NW Preferred Stock in an amount required to
maintain the Company's net worth at $500 million. The Company's net worth was
approximately $1.7 billion at December 31, 1997. If and when the NW Preferred
Stock is issued, dividends will be payable thereon at an annual rate equal to
1% per annum above the three-month rate at which deposits in United States
dollars are offered by Fuji Bank in London, England to prime banks in the
London interbank market. Dividends on the NW Preferred Stock will be
noncumulative and payable (if declared) quarterly, and the Company will be
prohibited from paying cash dividends on the Common Stock unless full
dividends for the then-current dividend period (without accumulation of
accrued and unpaid dividends for prior dividend periods unless previously
declared) on all outstanding shares of NW Preferred Stock have been declared
and paid or declared and a sum sufficient set aside for such payment. Subject
to certain conditions, NW Preferred Stock will be redeemable at the option of
the holder, in whole or in part, within a specified period of time after the
end of a calendar quarter in an aggregate amount not greater than the excess
of the net worth of the Company as of the end of such calendar quarter over
$500 million and at a redemption price equal to the price paid to the Company
upon the issuance thereof, plus accrued and unpaid dividends for the then-
current dividend period (without accumulation of accrued and unpaid dividends
for prior dividend periods unless previously declared). Except as required by
law, the holders of NW Preferred Stock will have no voting rights. The NW
Preferred Stock will carry a liquidation preference equal to the price paid
for each share upon issuance thereof, plus accrued and unpaid dividends for
the then-current dividend period (without accumulation of accrued and unpaid
dividends for prior dividend periods unless previously declared). The NW
Preferred Stock will rank senior to the Common Stock and junior to the Senior
Preferred Stock with respect to payment of dividends and liquidation
preference. No purchases of NW Preferred Stock have been made to date by Fuji
Bank under the Keep Well Agreement.
CERTAIN CERTIFICATE OF INCORPORATION AND BY-LAW PROVISIONS
CORPORATE OPPORTUNITIES
The Restated Certificate will provide that Fuji Bank shall have no duty to
refrain from engaging in the same or similar activities or lines of business
as the Company, and neither Fuji Bank nor any director, officer or other
employee thereof (except as provided below) will be liable to the Company or
its stockholders for breach of any fiduciary duty by reason of any such
activities of Fuji Bank. In the event that Fuji Bank acquires knowledge of a
potential transaction or matter which may be a corporate opportunity for both
Fuji Bank and the Company, Fuji Bank shall have no duty to communicate or
offer such corporate opportunity to the Company and shall not be liable to the
Company or its stockholders for breach of any fiduciary duty as a stockholder
of the Company by reason of the fact that Fuji Bank pursues or acquires such
corporate opportunity for itself, directs such corporate opportunity to
another person or does not communicate information regarding such corporate
opportunity to the Company.
89
<PAGE>
In the event that a director, officer or other employee of the Company who
is also a director or officer or other employee of Fuji Bank acquires
knowledge of a potential transaction or matter which may be a corporate
opportunity for both the Company and Fuji Bank, such director, officer or
other employee of the Company shall have fully satisfied and fulfilled the
fiduciary duty of such director, officer or other employee of the Company and
its stockholders with respect to such corporate opportunity if such director,
officer or other employee acts in a manner consistent with the following
policy:
(i) a corporate opportunity offered to any person who is an officer or
other employee of the Company, and who is also a director but not an
officer or other employee of Fuji Bank, shall belong to the Company;
(ii) a corporate opportunity offered to any person who is a director but
not an officer or other employee of the Company, and who is also a director
or officer or other employee of Fuji Bank, shall belong to the Company if
such opportunity is expressly offered to such person in writing solely in
his or her capacity as a director of the Company, and otherwise shall
belong to Fuji Bank, and
(iii) a corporate opportunity offered to any person who is an officer or
other employee of both the Company and Fuji Bank, or an officer of one and
an employee of the other, shall belong to the Company if such opportunity
is expressly offered to such person in writing solely in his or her
capacity as an officer of the Company, and otherwise shall belong to Fuji
Bank.
For purposes of the foregoing:
(i) A director of the Company who is Chairman of the Board of Directors
or of a committee thereof shall not be deemed to be an officer or employee
of the Company by reason of holding such position (without regard to
whether such position is deemed an officer of the Company under the
Restated By-Laws), unless such person is a full-time employee of the
Company; and
(ii)(A) The term "Company" shall mean the Company and all corporations,
partnerships, joint ventures, associations and other entities controlled
directly or indirectly by the Company through the ownership of the
outstanding voting power of such corporation, partnership, joint venture,
association or other entity or otherwise and (B) the term "Fuji Bank" shall
mean Fuji Bank and all corporations, partnerships, joint ventures,
associations and other entities (other than the Company, defined in
accordance with clause (A) of this section (ii)) controlled (directly or
indirectly) by Fuji Bank through the ownership of the outstanding voting
power of such corporation, partnership, joint venture, association or other
entity or otherwise.
The foregoing provisions of the Restated Certificate will expire on the date
that Fuji Bank ceases to own beneficially Common Stock representing at least
30% of the voting power of all classes of outstanding Common Stock and no
person who is a director, officer or employee of the Company is also a
director, officer or employee of Fuji Bank or any of its subsidiaries (other
than the Company).
Any person purchasing or otherwise acquiring Common Stock will be deemed to
have notice of, and to have consented to, the foregoing provisions of the
Restated Certificate.
PROVISIONS THAT MAY HAVE AN ANTI-TAKEOVER EFFECT
Certain provisions to be contained in the Restated Certificate and the
Restated By-Laws summarized below may be deemed to have an anti-takeover
effect and may delay, deter or prevent a tender offer or takeover attempt that
a stockholder might consider to be in its best interest, including an attempt
that might result in a premium being paid over the market price for the shares
held by stockholders.
The Restated Certificate will provide that, subject to any rights of holders
of Preferred Stock to elect additional directors under specified
circumstances, the number of directors of the Company will
90
<PAGE>
not be more than 16 nor less than eight, with the exact number to be fixed
from time to time as specified in the Restated By-Laws. The Restated By-Laws
will provide that subject to any rights of holders of Preferred Stock to elect
additional directors under specified circumstances, the number of directors
will be fixed from time to time exclusively by resolution of the board of
directors adopted by the affirmative vote of directors constituting not less
than a majority of the total number of the directors that the Company would
have if there were no vacancies on the Company's Board of Directors, but shall
consist of not more than 16 nor less than eight directors. In addition, the
Restated Certificate and Restated By-Laws will provide that, subject to any
rights of holders of Preferred Stock, and unless the Company's Board of
Directors otherwise determines, any vacancies may be filled by the affirmative
vote of a majority of the remaining members of the Board of Directors, though
less than a quorum, or by a sole remaining director, and except as otherwise
provided by law, any such vacancy may not be filled by the stockholders.
The Restated By-Laws will provide for an advance notice procedure for the
nomination, other than by or at the direction of the Board of Directors, of
candidates for election as directors as well as for other stockholder
proposals to be considered at annual meetings of stockholders. In general,
notice of intent to nominate a director or raise matters at such meetings will
have to be received in writing by the Company at its principal executive
offices not less than 90 days prior to the first anniversary of the previous
year's annual meeting of stockholders, subject to adjustment in certain
situations, and must contain certain information concerning the person to be
nominated or the matters to be brought before the meeting and concerning the
stockholder submitting the proposal. The Restated Certificate and the Restated
By-Laws will also provide that special meetings of stockholders may be called
only by certain specified officers of the Company or by any such officer at
the request in writing of the Board of Directors; special meetings of
stockholders cannot be called by stockholders. In addition, the Restated
Certificate will provide that any action required or permitted to be taken by
stockholders may be effected by written consent; provided, however, that on
and after the date on which neither Fuji Bank and its subsidiaries nor the
Class B Transferee and its subsidiaries continue to beneficially own more than
50% of the total voting power of the outstanding Common Stock, any action
required or permitted to be taken by stockholders may be effected only at a
duly called annual or special meeting of stockholders and may not be effected
by a written consent by stockholders in lieu of such a meeting.
The Company's Restated Certificate will also provide that the affirmative
vote of the holders of at least 66 2/3% of the total voting power of all
classes of outstanding common stock, voting together as a single class, is
required to amend, repeal or adopt any provision inconsistent with the
foregoing provisions of the Restated Certificate. The Restated Certificate and
the Restated By-Laws will further provide that the Restated By-Laws may be
altered, amended or repealed by the affirmative vote of directors constituting
not less than a majority of the entire Board of Directors (if effected by
action of the Board of Directors) or by the affirmative vote of the holders of
at least 66 2/3% of the total voting power of all outstanding voting stock,
voting together as a single class (if effected by action of the stockholders).
Upon the consummation of the Offering, the Company will be subject to the
provisions of Section 203 of the DGCL. In general, this statute prohibits a
publicly held Delaware corporation from engaging, under certain circumstances,
in a "business combination" with an "interested stockholder" for a period of
three years after the date of the transaction in which the person becomes an
interested stockholder, unless either (i) prior to the date at which the
stockholder becomes an interested stockholder the board of directors approved
either the business combination or the transaction in which the person becomes
an interested stockholder, (ii) the stockholder acquires more than 85% of the
outstanding voting stock of the corporation (excluding shares held by
directors who are officers or held in certain employee stock plans) upon
consummation of the transaction in which the stockholder becomes an interested
stockholder or (iii) the business combination is approved by the board of
directors and by two-thirds of the outstanding voting stock of the corporation
(excluding shares held by the interested stockholder) at a meeting of the
stockholders (and not by written consent) held on or subsequent to the date of
the
91
<PAGE>
business combination. An "interested stockholder" is a person who, together
with affiliates and associates, owns (or at any time within the prior three
years did own) 15% or more of the corporation's voting stock. Section 203
defines a "business combination" to include, without limitation, mergers,
consolidations, stock sales and asset based transactions and other
transactions resulting in a financial benefit to the interested stockholder.
LIMITATIONS ON DIRECTORS' LIABILITY
The Company's Restated Certificate provides that no director of the Company
shall be liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) in respect of certain unlawful
dividend payments or stock redemptions or repurchases or (iv) for any
transaction from which the director derived an improper personal benefit. The
effect of these provisions will be to eliminate the rights of the Company and
its stockholders (through stockholders' derivative suits on behalf of the
Company) to recover monetary damages against a director for breach of
fiduciary duty as a director (including breaches resulting from grossly
negligent behavior), except in the situations described above.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Class A Common Stock will be The
Bank of New York.
VALIDITY OF SHARES OF CLASS A COMMON STOCK
The validity of the shares of Class A Common Stock offered hereby will be
passed upon for the Company by Katten Muchin & Zavis, Chicago, Illinois, and
for the Underwriters by Sullivan & Cromwell, New York, New York.
INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated balance sheets of the Company as of December 31, 1997 and
1996 and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997 included in this Prospectus have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
92
<PAGE>
HELLER FINANCIAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996.............. F-3
Consolidated Statements of Income for the Years Ended December 31, 1997,
1996 and
1995..................................................................... F-4
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995...................................................... F-5
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1997, 1996 and 1995................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Heller Financial, Inc.:
We have audited the accompanying consolidated balance sheets of HELLER
FINANCIAL, INC. (a Delaware corporation) AND SUBSIDIARIES as of December 31,
1997 and 1996, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Heller Financial, Inc. and
Subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Chicago, Illinois
January 23, 1998
(Except with respect to the
matters discussed in Notes 20
and 21, as to which the date
is February 24, 1998)
F-2
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
ASSETS 1997 1996
------ ------- ------
(IN MILLIONS)
<S> <C> <C>
Cash and cash equivalents....................................... $ 821 $ 296
Receivables (Note 3)
Commercial loans
Term loans.................................................. 2,597 2,434
Revolving loans............................................. 1,674 1,493
Real estate loans............................................. 2,238 1,994
Factored accounts receivable.................................. 2,223 994
Equipment loans and leases.................................... 1,990 1,614
------- ------
Total receivables........................................... 10,722 8,529
Less: Allowance for losses of receivables (Note 3)............ 261 225
------- ------
Net receivables............................................. 10,461 8,304
Equity and real estate investments (Note 4)..................... 488 419
Debt securities (Note 4)........................................ 311 251
Operating leases (Note 4)....................................... 195 135
Investments in international joint ventures (Note 4)............ 198 272
Other assets (Note 4)........................................... 387 249
------- ------
Total assets................................................ $12,861 $9,926
======= ======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Senior debt (Note 5)
Commercial paper and short-term borrowings.................... $ 3,432 $2,745
Notes and debentures.......................................... 6,004 4,761
------- ------
Total debt.................................................. 9,436 7,506
Credit balances of factoring clients............................ 1,255 590
Other payables and accruals..................................... 405 306
------- ------
Total liabilities........................................... 11,096 8,402
Minority interest............................................... 87 57
Stockholders' equity (Notes 9 and 10)
Cumulative Perpetual Senior Preferred Stock, Series A......... 125 125
Noncumulative Perpetual Senior Preferred Stock, Series B...... 150 --
Class A Common Stock ($.25 par; 500,000,000 shares authorized;
no shares issued or outstanding) (Note 20)................... -- --
Class B Common Stock ($.25 par; 300,000,000 shares authorized;
51,050,000 shares issued and outstanding) (Notes 9 and 20)... 13 13
Additional paid in capital.................................... 672 675
Retained earnings............................................. 718 654
------- ------
Total stockholders' equity.................................. 1,678 1,467
------- ------
Total liabilities and stockholders' equity.................. $12,861 $9,926
======= ======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-3
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER
31,
-----------------
1997 1996 1995
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Interest income.............................................. $ 924 $ 807 $ 851
Interest expense............................................. 516 452 464
----- ----- -----
Net interest income........................................ 408 355 387
Fees and other income (Note 11).............................. 206 79 148
Factoring commissions........................................ 104 55 50
Income of international joint ventures....................... 36 44 35
----- ----- -----
Operating revenues......................................... 754 533 620
Operating expenses (Note 12)................................. 357 247 216
Provision for losses (Note 3)................................ 164 103 223
----- ----- -----
Income before taxes and minority interest.................. 233 183 181
Income tax provision (Note 14)............................... 66 43 49
Minority interest............................................ 9 7 7
----- ----- -----
Net income................................................. $ 158 $ 133 $ 125
===== ===== =====
Dividends on preferred stock............................... $ 14 $ 10 $ 10
===== ===== =====
Net income applicable to common stock...................... $ 144 $ 123 $ 115
===== ===== =====
Basic and diluted net income applicable to common stock per
share
(Note 21) ................................................ $2.82 $2.41 $2.25
===== ===== =====
Pro forma basic and diluted net income applicable to common
stock (Note 22) (unaudited)............................... $
=====
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-4
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------
1997 1996 1995
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................................ $ 158 $ 133 $ 125
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses............................ 164 103 223
Losses from equity investments.................. 50 103 59
Amortization and depreciation................... 23 14 11
Provision for deferred tax asset (benefit)...... (19) 12 (50)
Increase (decrease) in accounts payable and
accrued liabilities............................ 29 (1) 34
Undistributed income of international joint
ventures....................................... (19) (38) (26)
Increase (decrease) in interest payable......... 11 (11) 12
Other........................................... 9 (36) (4)
------- ------- -------
Net cash provided by operating activities..... 406 279 384
INVESTING ACTIVITIES
Longer-term loans funded.......................... (5,311) (3,372) (3,202)
Collections of principal.......................... 2,904 2,521 2,248
Loan sales, securitizations and syndications...... 2,238 757 708
Net increase in short-term loans and advances to
factoring clients
Due to consolidation of Factofrance............. (1,018) -- --
Other........................................... (526) (427) (510)
Investment in operating leases.................... (119) (33) (14)
Investment in equity interests and other
investments...................................... (369) (272) (172)
Sales of investments and equipment on lease....... 365 168 148
Factofrance goodwill and noncompetition agreement. (96) -- --
Other............................................. 26 3 (17)
------- ------- -------
Net cash used for investing activities........ (1,906) (655) (811)
FINANCING ACTIVITIES
Senior note issues................................ 2,599 976 1,674
Retirement of notes and debentures................ (1,411) (1,358) (459)
Increase (decrease) in commercial paper and other
short-term borrowings
Due to consolidation of Factofrance............. 966 -- --
Other........................................... (279) 522 (228)
Proceeds from preferred stock issuance............ 147 -- --
Net decrease in advances to affiliates............ 49 5 4
Dividends paid on preferred and common stock...... (57) (68) (64)
Other............................................. 11 (4) --
------- ------- -------
Net cash provided by financing activities..... 2,025 73 927
Increase (decrease) in cash and cash equivalents.... 525 (303) 500
Cash and cash equivalents at the beginning of the
year............................................... 296 599 99
------- ------- -------
Cash and cash equivalents at the end of the year.... $ 821 $ 296 $ 599
======= ======= =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-5
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NONCUM.
PERP. CLASS CLASS
SR. A B
PERPETUAL PREF. COMMON COMMON
SR. PREF. STOCK STOCK STOCK ADD'L
STOCK SERIES (NOTE (NOTE PAID IN RETAINED
SERIES A B 20) 20) CAPITAL EARNINGS TOTAL
--------- ------- ------ ------ ------- -------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1994................... $125 -- -- $13 $675 $517 $1,330
Net income.............. -- -- -- -- -- 125 125
Preferred stock
dividends (Notes 9 and
10).................... -- -- -- -- -- (10) (10)
Common stock dividends
(Note 10).............. -- -- -- -- -- (54) (54)
Changes in unrealized
gains and losses on
securities available
for sale, net of tax
(Note 4)............... -- -- -- -- -- (10) (10)
Change in deferred
translation adjustment,
net of tax............. -- -- -- -- -- 3 3
---- ---- ---- --- ---- ---- ------
BALANCE AT DECEMBER 31,
1995................... $125 -- -- $13 $675 $571 $1,384
Net income.............. -- -- -- -- -- 133 133
Preferred stock
dividends (Notes 9 and
10).................... -- -- -- -- -- (10) (10)
Common stock dividends
(Note 10).............. -- -- -- -- -- (58) (58)
Changes in unrealized
gains and losses on
securities available
for sale, net of tax
(Note 4)............... -- -- -- -- -- 18 18
Change in deferred
translation adjustment,
net of tax............. -- -- -- -- -- -- --
---- ---- ---- --- ---- ---- ------
BALANCE AT DECEMBER 31,
1996................... $125 -- -- $13 $675 $654 $1,467
Net income.............. -- -- -- -- -- 158 158
Issuance of
Noncumulative Perpetual
Senior Preferred Stock,
Series B (Note 9)...... -- 150 -- -- (3) -- 147
Preferred stock
dividends (Notes 9 and
10).................... -- -- -- -- -- (14) (14)
Common stock dividends
(Note 10).............. -- -- -- -- -- (69) (69)
Changes in unrealized
gains and losses on
securities available
for sale, net of tax
(Note 4)............... -- -- -- -- -- (5) (5)
Change in deferred
translation adjustment,
net of tax............. -- -- -- -- -- (6) (6)
---- ---- ---- --- ---- ---- ------
BALANCE AT DECEMBER 31,
1997................... $125 $150 $-- $13 $672 $718 $1,678
==== ==== ==== === ==== ==== ======
</TABLE>
The retained earnings balance included $8 of unrealized gains, $13 of
unrealized gains and $5 of unrealized losses on securities available for sale
at December 31, 1997, 1996 and 1995, respectively. Retained earnings also
included deferred foreign currency translation adjustments, net of tax, of
$(20), $(14) and $(14) at December 31, 1997, 1996 and 1995, respectively.
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-6
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of the Reporting Entity--
Heller Financial, Inc. and its subsidiaries (the "Company") are engaged
principally in furnishing commercial finance services to businesses in the
United States and investing in and operating commercial finance companies
throughout the world. The Company operates in the middle and emerging middle
market segments of the commercial finance industry, which generally includes
entities in the manufacturing and service sectors with annual sales in the
range of $5 million to $250 million and in the real estate sector with
property values generally in the range of $1 million to $40 million. The
Company currently provides services in five product categories: 1) asset based
finance, 2) corporate finance, 3) real estate finance, 4) international asset
based finance and factoring and 5) project finance.
During 1997, all of the common stock of the Company was owned by Heller
International Corporation ("HIC"), which is a wholly-owned subsidiary of The
Fuji Bank, Limited ("Fuji Bank"), of Tokyo, Japan. Fuji Bank directly owned
21% of the outstanding shares of Heller International Group, Inc.
("International Group"), a consolidated subsidiary, through which the Company
holds its international operations. The remaining 79% of the outstanding
shares of International Group were owned by the Company. See Note 20 for the
potential purchase by the Company of Fuji Bank's 21% interest in International
Group.
Effective January 2, 1998, Fuji Bank formed Fuji America Holdings, Inc.
("FAHI"), to combine Fuji Bank's United States non-bank operations under one
holding company. On that day, Fuji Bank transferred ownership of the Company
from HIC to FAHI. As of January 2, 1998, all of the outstanding Common Stock
of the Company is owned by FAHI.
Basis of Presentation--
The accompanying consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. Investments
in affiliated companies owned 50% or less are accounted for by the equity
method. Certain temporary interests are included in investments and carried at
cost.
Use of Estimates--
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents--
Cash and cash equivalents consist of cash deposits maintained in banks and
short-term debt securities with original maturities of less than 60 days.
F-7
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Receivables--
Receivables are presented net of unearned income which generally includes
deferred loan origination and commitment fees, direct loan origination costs
and other amounts attributed to the fair value of equity interests and other
investments received in connection with certain financings. These amounts are
amortized to interest income using the effective interest method over the life
of the related loan or commitment period.
The Company originates certain loans which may be syndicated or portions
sold to participants to manage borrower, industry or product concentrations.
These receivables are also presented net of unearned income. In the event the
Company sells a portion of a loan that it had originated, any deferred fees or
discounts relating to the portion of the loan sold are recognized in interest
income. For loan sales that qualify as participations, income is recognized,
subject to certain yield tests, when the participation is complete.
Income recognition is reviewed on an account by account basis. Collateral is
evaluated regularly, primarily by assessing the related current and future
cash flow streams. Loans are classified as nonearning and all interest and
unearned income amortization is suspended when there is significant doubt as
to the ability of the debtor to meet current contractual terms. Numerous
factors including loan covenant defaults, deteriorating loan-to-value
relationships, delinquencies greater than 90 days, the sale of major income
generating assets or other major operational or organizational changes may
lead to income suspension. An account taken nonearning may be restored to
earning status either when all delinquent principal and interest have been
paid under the original contractual terms or the account has been restructured
and has demonstrated both the capacity to service the amended terms of the
debt and has adequate loan to value coverage.
Allowance for Losses--
The allowance for losses of receivables is established through direct
charges to income. Losses are charged to the allowance when all or a portion
of a receivable is deemed impaired and uncollectible as determined by account
management procedures. These procedures include assessing how the borrower is
affected by economic and market conditions, evaluating operating performance
and reviewing loan-to-value relationships. Impaired receivables are measured
based on the present value of expected future cash flows discounted at the
receivable's effective interest rate, at the observable market price of the
receivable or at the fair value of the collateral if the receivable is
collateral dependent. When the recorded balance of an impaired receivable
exceeds the relevant measure of value, impairment is recorded through an
increase in the provision for losses.
Management evaluates the allowance for losses on a quarterly basis.
Nonearning assets and loans with certain loan grading characteristics are
reviewed to determine if there is a potential risk of loss under varying
scenarios of performance. The estimates of potential loss for these individual
loans are aggregated and added to a general allowance requirement, which is
based on the total of all other loans in the portfolio. This total allowance
requirement is then compared to the existing allowance for losses and
adjustments are made, if necessary.
Securitized Receivables--
Certain commercial mortgage and equipment loans have been securitized and
sold to investors. In the securitization process, loans are originated and
sold to trusts which, in turn, issue asset-backed securities to investors.
Upon the sale of the loans in a securitization, a gain is recognized for the
F-8
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
difference between the carrying value of the receivables and the fair value of
the securities sold, in accordance with Statement of Financial Accounting
Standards 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" ("SFAS 125"). If the Company does not retain
any risk in the transaction and sells all of the securities to third party
investors on a nonrecourse basis, the gain recorded equals the proceeds on the
transaction less the carrying value of the securities sold. If the Company
retains any of the securities, then the gain on sale is reduced by any reserve
established for estimated future losses. Retained securities, if any, are
recorded as debt securities available for sale. The gain recognized is
recorded in fees and other income. In general, the Company does not establish
servicing assets or liabilities because in securitization transactions to date
the servicing fees earned are considered consistent with market rates and the
Company's cost of servicing. Income from the acceleration of discounts and
deferred fees attributed to the loans sold is recorded as interest income.
The Company adopted SFAS 125 as amended by Statement of Financial Accounting
Standards No. 127, "Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125" on January 1, 1997, collectively referred to as SFAS
125. 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. Securitizations of finance
receivables are accounted for as sales when legal and effective control over
the related receivables is surrendered. Servicing assets or liabilities are
recognized when the servicing rights are retained by the seller. The adoption
of this pronouncement did not have a material impact on the Company's
consolidated financial statements.
Investments in Joint Ventures--
Investments in unconsolidated joint ventures represent investments in
companies with operations in 15 foreign countries. The Company accounts for
its investments in joint ventures under the equity method of accounting. Under
this method, the Company recognizes its share of the earnings or losses of the
joint venture in the period in which they are earned by the joint venture.
These amounts are recorded as income of international joint ventures in the
consolidated statements of income. Dividends received from joint ventures
reduce the carrying amount of the investment.
Investments--
Equity interests and investments--Investments in warrants, certain common
and preferred stocks and certain equity investments, which are not subject to
the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," are
carried at cost. The valuation of all of these investments is periodically
reviewed and the investment balance is written down to reflect declines in
value determined to be other than temporary. Gains or losses recognized upon
sale or write-down of these investments are recorded as a component of fees
and other income. Certain other equity investments in limited partnership
funds are accounted for under the equity method of accounting in accordance
with Accounting Principles Board Opinion No. 18, "The Equity Method of
Accounting for Investments in Common Stock". These investments in limited
partnerships were previously carried at cost. The impact of this change in
accounting method, net of tax, was $4 million in 1997. The Company changed its
policy to be consistent with industry practice.
F-9
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Equipment on lease--Aircraft and equipment under operating lease are
recorded at cost and depreciated over their estimated useful lives using the
straight line method for financial reporting purposes and accelerated methods
for tax purposes. Rental revenue is reported over the lease term as it becomes
receivable according to the provisions of the lease.
Available for sale, trading, and held to maturity securities--Investments
designated as available for sale securities are carried at fair value using
the specific identification method with unrealized gains or losses included in
stockholders' equity, net of related taxes. Trading securities, if any, are
carried at fair value with the related unrealized gains or losses included
currently in fees and other income. Securities that are held to maturity are
recorded at amortized cost. Available for sale and held to maturity securities
may be written down to fair value to reflect declines in value determined to
be other than temporary. The amount of the writedown is included in fees and
other income.
Real Estate Investments--The Company provides financing through certain real
estate loan arrangements that are recorded as acquisition, development and
construction investment transactions by the Company. Income is generally
recognized only to the extent that cash received exceeds the investment
carrying amount.
Other Assets--
Repossessed Assets--Assets which have been legally acquired in satisfaction
of receivables are carried at fair value less selling costs and are included
in other assets. After repossession, operating costs are expensed and cash
receipts are applied to reduce the asset balance.
Goodwill--The excess of the cost of an acquisition of an entity over the
book value of the acquired entity's net assets is recorded as goodwill and
amortized on a straight line basis over the expected beneficial period of the
acquisition not to exceed 25 years.
Income Taxes--
The Company and its wholly-owned domestic subsidiaries are included in the
consolidated United States federal income tax return of HIC. International
Group files a separate United States federal income tax return. The Company
reports income tax expense as if it were a separate taxpayer and records
future tax benefits as soon as it is more likely than not that such benefits
will be realized.
Derivative Financial Instruments--
Derivatives are used as an integral part of asset/liability management to
reduce the 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 swap
agreements are generally held to maturity and the differential paid or
received under these agreements is recognized over the life of the related
agreement. 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. 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. Unrealized gains and receivables and
unrealized losses and payables on derivative financial instruments are
immaterial and are reported as other payables in the consolidated balance
sheet.
F-10
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company periodically enters into forward currency exchange contracts
which are designated as hedges of its exposure to foreign currency
fluctuations from the translation of its foreign currency denominated
investments in certain European, Asian and Latin American joint ventures and
subsidiaries. Through these contracts, the Company primarily sells the local
currency and buys U.S. dollars. Gains or losses resulting from translation of
foreign currency financial statements and the related effects of the hedges of
net investments in joint ventures and subsidiaries outside the United States
are accumulated in stockholders' equity, net of related taxes, until the
international investment is sold or substantially liquidated. 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. Unrealized gains and receivables and unrealized
losses and payables on derivative financial instruments are immaterial and are
reported as other payables in the consolidated balance sheet.
The Company also periodically enters into forward contracts or purchases
options. These financial instruments serve as hedges of its foreign investment
in international subsidiaries and joint ventures or effectively hedge the
translation of the related foreign currency income. The contracts which serve
as hedges of investments in international subsidiaries and joint ventures are
carried at fair value with gains or losses deferred and included in the
stockholders' equity section of the consolidated balance sheets. The change in
fair value of contracts which serve to effectively hedge the translation of
foreign currency income is included in the determination of net income.
Reclassifications--
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
2. ACQUISITION OF FACTOFRANCE
On April 2, 1997, 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 included $18 million for a noncompetition agreement which is
being amortized over the five year life of the agreement.
The following table presents unaudited pro forma combined income statements
of the Company and Factofrance and its subsidiaries for the years ended
December 31, 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 the Company 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.
F-11
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
YEAR ENDED
DECEMBER
31,
-----------
1997 1996
----- -----
(IN
MILLIONS)
(UNAUDITED)
<S> <C> <C>
Interest income.............................................. $ 940 $ 889
Interest expense............................................. 526 497
----- -----
Net interest income........................................ 414 392
Fees and other income........................................ 215 108
Factoring commissions........................................ 118 128
Income of international joint ventures....................... 33 28
----- -----
Operating revenues......................................... 780 656
Operating expenses........................................... 377 338
Provision for losses......................................... 167 114
----- -----
Income before income taxes and minority interest........... 236 204
Income tax provision......................................... 67 55
Minority interest............................................ 10 12
----- -----
Net income................................................. $ 159 $ 137
===== =====
</TABLE>
3. LENDING ASSETS
Lending assets include receivables and repossessed assets.
Total receivables at December 31, 1997 consist of $8.6 billion of domestic
receivables and $2.1 billion of foreign receivables. Of the foreign
receivables, $2.0 billion represent factored accounts receivable of which $1.8
billion relate to Factofrance and $0.2 billion are from the other foreign
consolidated subsidiaries. Total receivables at December 31, 1996 consist of
$8.2 billion of domestic receivables and $301 million of foreign receivables.
Diversification of Credit Risk--
Concentrations of lending assets of 5% or more at December 31, 1997 and
1996, based on the standard industrial classification of the borrower, are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1996
-------------- --------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
General industrial machines................ $637 6% $500 6%
Food, grocery and other miscellaneous
retail.................................... 603 6 669 8
Business services.......................... 556 5 435 5
Department and general merchandise retail
stores.................................... 511 5 987 12
</TABLE>
F-12
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The general industrial machines classification is distributed among
machinery used for many different industrial applications. The majority of
lending assets in the food, grocery and miscellaneous retail category are
revolving and term facilities with borrowers primarily in the business of
manufacturing and retailing of food products. Business services is primarily
comprised of computer and data processing services, credit reporting and
collection, and miscellaneous business services. The department and general
merchandise retail stores category is primarily comprised of factored accounts
receivable which represent short-term trade receivables from numerous
customers.
Contractual Maturity of Loan Receivables--
The contractual maturities of the Company's receivables at December 31,
1997, which are presented in the table below, should not be regarded as a
forecast of cash flows (in millions):
<TABLE>
<CAPTION>
AFTER
1998 1999 2000 2001 2002 2002 TOTAL
------ ------ ------ ---- ---- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial loans............... $ 677 $ 650 $ 571 $494 $621 $1,258 $ 4,271
Real estate loans.............. 375 179 158 205 100 1,221 2,238
Factored accounts receivable... 2,223 -- -- -- -- -- 2,223
Equipment loans and leases..... 504 398 321 266 171 330 1,990
------ ------ ------ ---- ---- ------ -------
Total........................ $3,779 $1,227 $1,050 $965 $892 $2,809 $10,722
====== ====== ====== ==== ==== ====== =======
</TABLE>
Commercial loans consist principally of asset based and corporate finance
receivables. Asset based receivables are collateralized by receivables,
inventory, or property, plant and equipment owned by the borrowers. Real
estate loans are principally collateralized by first mortgages on commercial
and residential real estate. Corporate finance receivables are predominantly
collateralized by senior liens on the borrower's assets. Factored accounts
receivable are purchased from clients and the Company provides credit and
collection services in return for a commission. Equipment loans and leases are
secured by the underlying equipment and the Company may have at least partial
recourse to the equipment vendor. Of the loans maturing after 1998, $2.7
billion have fixed interest rates and $4.2 billion have floating interest
rates.
Impaired Receivables, Repossessed Assets, and Troubled Debt Restructurings--
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>
DECEMBER
31,
----------
1997 1996
---- ----
(IN
MILLIONS)
<S> <C> <C>
Impaired receivables.......................................... $141 $264
Repossessed assets............................................ 14 14
---- ----
Total nonearning assets..................................... $155 $278
==== ====
Ratio of total nonearning assets to total lending assets...... 1.4% 3.3%
Ratio of allowance for losses to nonearning assets............ 168 81
</TABLE>
Nonearning assets include $19 million and $25 million in 1997 and 1996,
respectively, for consolidated international subsidiaries.
F-13
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The average investment in impaired receivables was $236 million and $283
million for the years ended December 31, 1997 and 1996 respectively.
The Company had $13 million and $14 million of loans that are considered
troubled debt restructurings at December 31, 1997 and December 31, 1996,
respectively. The following table indicates the effect on income if interest
on nonearning impaired receivables and troubled debt restructurings
outstanding at year-end had been recognized at original contractual rates
during the year:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
---------------------- ----------------------
1997 1996 1995 1997 1996 1995
------ ------ ------ ------ ------ ------
DOMESTIC FOREIGN
---------------------- ----------------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Interest income which
would have been recorded. $ 16 $ 40 $ 40 $ 12 $ 6 $ 3
Interest income recorded.. 3 13 20 1 1 1
------ ------ ------ ------ ------ ------
Effect on interest income. $ 13 $ 27 $ 20 $ 11 $ 5 $ 2
====== ====== ====== ====== ====== ======
</TABLE>
Loan Modifications--
The Company had $13 million of receivables at December 31, 1997 that were
restructured at a market rate of interest and written down from the original
loan balance. The recorded investment of these receivables is expected to be
fully recoverable. Interest income of approximately $1 million has been
recorded on these receivables under modified terms, along with approximately
$1 million of cash interest collections during 1997. At December 31, 1997, the
Company was not committed to lend significant additional funds under the
restructured agreements.
Allowance for Losses--
The changes in the allowance for losses of receivables and repossessed
assets were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER
31,
----------------
1997 1996 1995
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Balance at the beginning of the year.................... $225 $231 $237
Provision for losses.................................. 164 103 223
Writedowns............................................ (169) (163) (259)
Recoveries............................................ 23 55 28
Factofrance consolidation............................. 18 -- --
Transfers and other................................... -- (1) 2
---- ---- ----
Balance at the end of the year.......................... $261 $225 $231
==== ==== ====
</TABLE>
A valuation allowance for repossessed assets of $2 million at December 31,
1995 is included in other assets on the balance sheet. Writedowns occurring at
the time of repossession are considered writedowns of receivables.
F-14
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Impaired receivables with identified reserve requirements were $62 million
and $176 million at December 31, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
DECEMBER
31,
----------
1997 1996
---- ----
(IN
MILLIONS)
<S> <C> <C>
Identified reserve requirements for impaired receivables..... $ 27 $ 57
Additional allowance for losses of receivables............... 234 168
---- ----
Total allowance for losses of receivables.................. $261 $225
==== ====
Ratio of total allowance for losses of receivables to
nonearning impaired receivables............................. 185% 85%
==== ====
</TABLE>
The Company maintains an allowance for losses of receivables based upon
management's estimate of future possible losses in the portfolio of
receivables. Management's estimate is based upon current and forecasted
economic conditions, previous loss history and knowledge of clients' financial
positions and values of underlying collateral. Changes in these estimates
could result in an increase or decrease in the reserve maintained.
4. INVESTMENTS AND OTHER ASSETS
Investments in International Joint Ventures--
The following table sets forth a summary of the financial results of the
international joint ventures on a combined basis:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1996
------- -------
(IN MILLIONS)
<S> <C> <C>
Total receivables......................................... $ 3,356 $ 5,161
Factoring volume.......................................... 18,154 29,501
Net income................................................ 55 90
</TABLE>
The following table shows the investment in international joint ventures by
geographic region:
<TABLE>
<CAPTION>
DECEMBER
31,
---------
1997 1996
---- ----
(IN
MILLIONS)
<S> <C> <C>
Europe.......................................................... $160 $238
Latin America................................................... 22 20
Asia-Pacific.................................................... 16 14
---- ----
Total......................................................... $198 $272
==== ====
</TABLE>
The decrease in total receivables, factoring volume, net income and
investment in European joint ventures is due to the consolidation of
Factofrance.
The Company owns interests of from 40% to 50% of these joint ventures. The
Company's largest investment in international joint ventures is NMB-Heller
Holding N.V., which accounts for 54% of the total investments in international
joint ventures. NMB-Heller Holding N.V. operates finance companies primarily
located in the Netherlands, Germany and the United Kingdom. NMB-Heller Holding
N.V. had total assets of $2.3 billion and $1.8 billion, total liabilities of
$2.1 billion and $1.6 billion and
F-15
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
total stockholders' equity of $0.2 billion at December 31, 1997 and 1996. NMB-
Heller Holding N.V. had revenues of $151 million and $157 million, operating
expenses of $42 million and $43 million and net income of $35 million and $36
million, for the years ended December 31, 1997 and 1996, respectively.
Other Investments--
The following table sets forth a summary of the major components of
investments (in millions):
<TABLE>
<CAPTION>
DECEMBER
31,
---------
1997 1996
---- ----
<S> <C> <C>
Investments:
Real estate investments...................................... $268 $205
Equity interests and investments............................. 205 171
Available for sale equity securities......................... 15 43
---- ----
Equity and real estate investments......................... $488 $419
==== ====
Available for sale debt securities........................... $311 $223
Trading securities........................................... -- 28
---- ----
Debt securities............................................ $311 $251
==== ====
Equipment on lease........................................... $195 $135
==== ====
</TABLE>
Real estate investments are acquisition, development and construction
investment transactions. At December 31, 1997, the Company held investments in
176 projects with balances ranging up to $10 million.
Equity interests and investments principally include common and preferred
stock and investments in limited partnerships and warrants.
The available for sale equity securities are principally comprised of shares
of common stock. Net unrealized holding gains on these securities were $7
million at December 31, 1997, net unrealized holding gains were $28 million at
December 31, 1996 and net unrealized holding losses were $2 million at
December 31, 1995. These amounts are recorded in stockholders' equity on a net
of tax basis.
The available for sale debt securities consist of purchased investments in
debt securities which mature on various dates through 2015 as well as $79
million of subordinated securities retained in connection with the 1994 and
1995 securitizations of certain receivables on mobile home parks, self storage
facilities and limited service hotels. The subordinated securities mature on
various dates through 2005 based on the related stated maturity dates of the
underlying receivables. The Company has established a reserve of $2 million
for possible losses related to the subordinated securities, which is included
in other payables and accruals on the consolidated balance sheet. No losses
have been realized on these securities to date. Net unrealized holding gains
on total available for sale debt securities were $6 million at December 31,
1997 and net unrealized holding losses were $7 million at December 31, 1996
and 1995. These amounts are recorded in stockholder's equity on a net of tax
basis. Cash and cash equivalents includes $3 million of short-term debt
securities at December 31, 1997, which are available for sale.
The Company had realized gains from sales of total investment securities of
$119 million, $106 million and $133 million during the year ended December 31,
1997, 1996 and 1995, respectively, and
F-16
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
had realized losses and writedowns totaling $50 million, $103 million and $59
million for 1997, 1996 and 1995, respectively. Proceeds from the sale of
equity investments may be subject to normal post-closing adjustments, the
impact of which is estimated at the time of closing.
Included in cash and cash equivalents at December 31, 1997 and 1996,
respectively, are $664 million and $198 million of short-term debt securities
that are held to maturity.
In 1996, the Company held certain dollar denominated investments in debt and
equity securities in Brazil which were classified as trading securities. Net
gains of $3 million, $3 million and $4 million related to these investments
were recorded in income for the years ended December 31, 1997, 1996 and 1995,
respectively. These investments were liquidated during 1997.
Equipment on lease is comprised of aircraft and related equipment.
Noncancellable future minimum rental receipts under the leases are $24
million, $21 million, $21 million, $16 million and $9 million for 1998 through
2002. All equipment was under lease as of December 31, 1997.
Other Assets--
The following table sets forth a summary of the major components of other
assets:
<TABLE>
<CAPTION>
DECEMBER
31,
---------
1997 1996
---- ----
(IN
MILLIONS)
<S> <C> <C>
Other Assets:
Repossessed assets........................................... $ 14 $ 14
Deferred income tax benefits, net of allowance of $2 and $16
in 1997 and 1996, respectively.............................. 163 127
Goodwill..................................................... 82 13
Non-Compete Agreement........................................ 15 --
Prepaid expenses and other assets............................ 76 56
Net advances to affiliates................................... -- 20
Furniture, fixtures and equipment............................ 37 19
---- ----
Total other assets......................................... $387 $249
==== ====
</TABLE>
Noncash investing activities which occurred during the period ended December
31, 1997 include $17 million of receivables which were classified as
repossessed assets. During 1996, $15 million of receivables were classified as
repossessed assets. See Note 14 for additional information on deferred income
tax benefits.
5. SENIOR DEBT
Commercial paper and short-term borrowings--The Company uses commercial
paper to finance its domestic operations and short-term borrowings are used by
the consolidated international subsidiaries to finance international
operations. Total commercial paper borrowings represent 27% of total debt at
December 31, 1997. Combined commercial paper and short-term borrowings
represent 36% of total debt at December 31, 1997.
F-17
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table is a summary of the Company's commercial paper and
short-term borrowings as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Domestic commercial paper................................... $2,279 $2,576
Factofrance commercial paper................................ 281 --
Factofrance short-term borrowings........................... 685 --
Other consolidated subsidiaries short-term borrowings....... 187 169
------ ------
Commercial paper and short-term borrowings................ $3,432 $2,745
====== ======
</TABLE>
The table below sets forth information concerning the Company's domestic
commercial paper borrowings. The average interest rates and average borrowings
are computed based on the average daily balances during the year. The Company
issues commercial paper with maturities ranging up to 270 days.
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Commercial Paper--domestic:
Average interest rate--
During the year................................. 5.67% 5.50% 5.96%
During the year, including the effect of
commitment fees................................ 5.78 5.65 6.10
At year-end, including the effect of commitment
fees........................................... 5.99 5.63 5.96
Average borrowings................................ $2,917 $2,367 $2,483
Maximum month-end borrowings...................... 3,264 2,613 2,860
End of period borrowings.......................... 2,279 2,576 2,067
</TABLE>
Factofrance commercial paper issued as of December 31, 1997 had an average
interest rate of 3.46% and its short-term borrowings at December 31, 1997 had
an average interest rate of 3.72%. Factofrance uses primarily short-term debt
and commercial paper to fund its assets which are short-term in nature.
Available credit and asset sale facilities--At December 31, 1997, the
Company had total committed credit and asset sale facilities of $4.0 billion,
and available credit and asset sale facilities of $3.5 billion. This includes
$267 million of additional alternative liquidity which is available by
discounting eligible French receivables with the French Central Bank since
Factofrance is a registered financial institution in France. In addition, the
Company has $36 million available credit under two foreign currency revolving
credit agreements.
The Company has a bank credit facility which provides $3.0 billion of
liquidity support. This 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 one-year credit facility includes a term loan
option which expires one year after the option exercise date. The terms of the
revised bank credit facilities require the Company to maintain stockholders'
equity of $900 million until March 31, 1998 and $1 billion thereafter. Under
the terms of the debt covenants of the agreement, the Company could have
borrowed an additional $6.1 billion of debt at December 31, 1997.
F-18
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has a factored accounts receivable sale facility which 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-sponsored
conduits. The Company had sold approximately $500 million of receivables under
this facility as of December 31, 1997. The underlying liquidity support for
the conduits is provided by unaffiliated entities. One of the conduits has an
operating agreement with Fuji Bank.
During December 1997, the Company established a $400 million secured
committed warehouse line, available to finance fixed rate commercial mortgage
loans which expires in June 1998. The Company drew down $200 million under
this facility which is included as part of the Company's domestic commercial
paper borrowings above. This amount was repaid during January, 1998.
Notes and debentures--The scheduled maturities of debt outstanding at
December 31, 1997, other than commercial paper and short-term borrowings and
excluding the unamortized premium of $2 million, are as follows:
<TABLE>
<CAPTION>
SCHEDULED MATURITIES AT DECEMBER 31,
---------------------------------------------
AFTER
1998 1999 2000 2001 2002 2002 TOTAL
------ ------ ------ ----- ----- ----- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Various fixed rate notes and
debentures................... $1,050 $1,052 $ 920 $ 213 $ 516 $ 200 $3,951
Fixed weighted average rate. 8.17% 7.28% 5.22% 6.54% 6.62% 6.98% 6.90%
Various floating rate notes
and debentures............... $ 952 $ 860 $ 152 $ 25 $ 45 $ 17 $2,051
Floating weighted average
rate....................... 4.84% 5.98% 6.08% 6.11% 6.11% 3.86% 5.44%
Total notes and debentures.... $2,002 $1,912 $1,072 $ 238 $ 561 $ 217 $6,002
</TABLE>
Notes redeemable solely at the option of the Company prior to the final
maturity date are reflected in the table above as maturing on their
contractual maturity date. During the year, the Company issued $200 million of
fixed rate notes due August 15, 2009, which are callable or putable on August
15, 1999. These notes are reflected in the table above as maturing after 2002.
The Company's various fixed and floating rate notes and debentures are
denominated in U.S. dollars, Japanese yen and French francs. In order to fix
the exchange rate of Japanese yen to U.S. dollars on the yen denominated debt,
the Company has entered into cross currency interest rate swap agreements. In
order to convert certain of the Company's fixed rate debt to floating rate
debt and vice-versa, the Company has entered into interest rate swap
agreements. The following table provides the year-end weighted average
interest rate of the U.S. dollar and Japanese yen denominated debt before and
after the effect of the swap agreements. The Company has $31 million of French
franc denominated fixed rate debt and $17 million of French franc denominated
variable rate debt which support French franc denominated assets.
F-19
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
WEIGHTED AVERAGE INTEREST RATE
---------------------------------------------------------------
BEFORE AFTER BEFORE AFTER
EFFECT EFFECT VARIABLE EFFECT EFFECT
FIXED DEBT OF OF DEBT OF OF TOTAL DEBT
OUTSTANDING SWAP SWAP OUTSTANDING SWAP SWAP OUTSTANDING
----------- ------ ------ ----------- ------ ------ -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
1997:
United States dollar.... $3,614 7.22% 6.72% $1,834 5.94% 5.95% $5,448
Japanese yen............ 306 3.26 6.10 200 1.07 6.59 506
------ ------ ------
Total................. $3,920 6.91% 6.67% $2,034 5.46% 6.01% $5,954
====== ====== ======
1996:
United States dollar.... $2,453 7.68% 6.76% $1,531 5.70% 5.71% $3,984
Japanese yen............ 452 3.43 5.87 328 0.87 6.12 780
------ ------ ------
Total................. $2,905 7.02% 6.62% $1,859 4.85% 5.78% $4,764
====== ====== ======
</TABLE>
The contractual interest rates for the U.S. dollar denominated fixed rate
debt range between 5.63% and 9.63% at December 31, 1997 and 1996. The
contractual rates on the U.S. dollar denominated floating rate debt are based
primarily on indices such as the Constant Maturity Treasury Index less a range
of .12% to .40%, the Federal Funds rate plus .40%, the three-month Treasury
Bill rate plus .46%, the one-month London Inter-Bank Offered Rate ("LIBOR")
plus .07% to .14%, three-month LIBOR plus .02% to .75%, six-month LIBOR plus
.25% or the Prime rate less 2.59% to 2.80%.
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to several types of agreements involving financial
instruments with off-balance sheet risk. These instruments are used to meet
the financing needs of borrowers and to manage the Company's own exposure to
interest rate and currency exchange rate fluctuations. These instruments
principally include interest rate swap agreements, forward currency exchange
contracts, purchased options, loan commitments, letters of credit and
guarantees.
Derivative financial instruments used for risk management purposes--The
Company utilizes derivatives as an integral part of its asset/liability
management program to reduce its overall level of financial risk. These
derivatives, particularly interest rate swap agreements, are used to lower
funding costs, diversify sources of funding or alter interest rate exposure
arising from mismatches between assets and liabilities. The Company's
derivative instruments are entirely related to accomplishing these risk
management objectives, which arise from normal business operations. 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.
Before entering into a derivative agreement, management determines that an
inverse correlation exists between the value of the hedged item and the value
of the derivative. At the inception of each agreement, management designates
the derivative to specific assets, pools of assets or liabilities. The risk
that a derivative will become an ineffective hedge is generally limited to the
possibility that an asset or liability being hedged will prepay before the
related derivative expires. Accordingly, after inception of a hedge,
asset/liability managers monitor its effectiveness through an ongoing review
of the amounts and maturities of assets, liabilities and swap positions. This
information is reported to the Company's Financial Risk Management Committee
("FRMC") whose members include the Company's Chairman, Chief Financial Officer
and Treasurer. The FRMC determines the direction the Company will take with
respect to its asset/liability position. The asset/liability position of the
Company and the related activities of the FRMC are reported regularly to the
Executive Committee of the Board of Directors and to the Board of Directors.
F-20
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes the notional amounts of the Company's
interest rate swap agreements, foreign exchange contracts, purchased options
and interest rate cap agreements as of December 31, 1997 and 1996. The credit
risk associated with these instruments is limited to amounts earned but not
collected and to any additional amounts which may be incurred to replace the
instrument under then current market conditions. These amounts will increase
or decrease during the life of the instruments as interest rates and foreign
exchange rates fluctuate, and are substantially less than the notional amounts
of these agreements. The Company manages this risk by establishing minimum
credit ratings for each counterparty and by limiting the exposure to
individual counterparties as measured by the total notional amount and the
current replacement cost of existing agreements. The Company has not
experienced nonperformance by any counterparty related to its derivative
financial instruments.
<TABLE>
<CAPTION>
CONTRACT OR
NOTIONAL
AMOUNT
-------------
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Interest rate swap agreements.............................. $4,553 $2,634
Cross currency interest rate swap agreements............... 612 780
Basis swap agreements...................................... 1,470 1,255
Spot and forward currency exchange contracts............... 623 262
Purchased options.......................................... 74 42
Interest rate cap agreements............................... -- 2
</TABLE>
Interest rate swaps are primarily used to convert fixed rate financings to
variable rate debt. Less frequently, when the issuance of debt denominated in
a foreign currency is deemed more cost effective, cross currency interest rate
swaps are employed to convert foreign currency denominated debt to U.S. dollar
denominated debt and U.S. based indices. The Company also uses swap agreements
to alter the characteristics of specific asset pools to more closely match the
interest terms of the underlying financing. These agreements enhance the
correlation of the interest rate and currency characteristics of the Company's
assets and liabilities and thereby mitigate its exposure to interest rate
volatility. Basis swap agreements involve the exchange of two different
floating rate interest payment obligations and are used to manage the risk
between different floating rate indices. The Company has entered into $160
million of interest rate swaps effective during 1998 which have the effect of
converting fixed rate obligations to a variable rate. The amount of these
interest rate swaps is not included in the table above.
Forwards are contracts for the delivery of an item in which the buyer agrees
to take delivery of an instrument or currency at a specified price and future
date. To minimize the effect of exchange rate movements in the currencies of
foreign countries, in which certain of its subsidiaries and investments are
located, the Company will periodically enter into forward currency exchange
contracts or purchase options. These financial instruments serve as hedges of
its foreign investment in international subsidiaries and joint ventures or
effectively hedge the translation of the related foreign currency income. The
Company also periodically enters into forward contracts to hedge receivables
denominated in foreign currencies or may purchase foreign currencies in the
spot market to settle a foreign currency denominated liability.
Commitments, letters of credit and guarantees--The Company generally enters
into various commitments, letters of credit and guarantees in response to the
financing needs of its customers. As many of the agreements are expected to
expire unused, the total commitment amount does not necessarily represent
future cash requirements. The credit risk involved in issuing these
instruments is
F-21
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
essentially the same as that involved in extending loans to borrowers and the
credit quality and collateral policies for controlling this risk are similar
to those involved in the Company's normal lending transactions. The
contractual amount of the Company's commitments, letters of credit and
guarantees are shown below:
<TABLE>
<CAPTION>
CONTRACT
AMOUNT
-------------
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Loan commitments........................................... $2,154 $1,959
Letters of credit and financial guarantees................. 754 561
Factoring credit guarantees................................ 285 286
Investment commitments..................................... 130 106
</TABLE>
Commitments to fund new and existing borrowers generally have fixed
expiration dates and termination clauses and typically require payment of a
fee. Letters of credit and financial guarantees are conditional commitments
issued by the Company to guarantee the performance of a borrower or an
affiliate to a third party. At December 31, 1997, the contractual amount of
guarantees includes $7 million related to affiliates. For factoring credit
guarantees, the Company receives a fee for guaranteeing the collectibility of
certain factoring clients' accounts receivable. Under this arrangement,
clients generally retain the responsibility for collection and bookkeeping.
Losses related to these services historically have not been significant.
7. LEGAL PROCEEDINGS
The Company is party to a number of legal proceedings as plaintiff and
defendant, all arising in the ordinary course of its business. Although the
ultimate amount for which the Company may be held liable, if any, is not
ascertainable, the Company believes that the amounts, if any, which may
ultimately be funded or paid with respect to these matters will not have a
material adverse effect on the financial condition or results of operations of
the Company.
8. RENTAL COMMITMENTS
The Company and its consolidated subsidiaries have minimum rental
commitments under noncancellable operating leases at December 31, 1997, as
follows (in millions):
<TABLE>
<S> <C>
1998................................. $17
1999................................. 15
2000................................. 14
2001................................. 13
2002................................. 12
Thereafter........................... 20
---
$91
===
</TABLE>
The total rent expense, net of rental income from subleases, was $30
million, $23 million and $18 million for the years ended December 31, 1997,
1996 and 1995, respectively.
9. PREFERRED STOCK
Cumulative Perpetual Senior Preferred Stock ($.01 Par Value; stated value,
$25; 8.125%; 5,000,000 shares authorized and outstanding)--The Company's
Cumulative Perpetual Senior
F-22
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Preferred Stock, Series A ("Series A Preferred Stock") is not redeemable prior
to September 22, 2000. On or after that date, the Perpetual Preferred Stock
will be redeemable at the option of the Company, in whole or in part, at a
redemption price of $25 per share, plus accrued and unpaid dividends. The
Series A Preferred Stock has an annual dividend rate of 8.125%. Dividends are
cumulative and payable quarterly. The Series A Preferred Stock ranks senior
with respect to payment of dividends and liquidation to other preferred stock
of the Company that is not designated as Cumulative Senior Perpetual Preferred
Stock.
Noncumulative Perpetual Senior Preferred Stock ($.01 Par Value; stated
value, $100; 6.687%; 1,500,000 shares authorized and outstanding)--In June,
1997, the Company issued 1,500,000 shares of 6.687% Noncumulative Perpetual
Senior Preferred Stock, Series B ("Series B 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, Pierce, Fenner & Smith Incorporated, 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. Effective January 1998, the Company exchanged 6.687%
Fixed Rate Noncumulative Perpetual Senior Preferred Stock, Series C ("Series C
Preferred Stock") for all formerly outstanding Series B Preferred Stock.
Series C Preferred Stock remains outstanding and is registered with the
Securities and Exchange Commission. The Series C Preferred Stock is not
redeemable prior to August 15, 2007. On or after such date, the Series C
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.
Conversion of Convertible Preferred Stock--In May 1997, HIC converted all of
its shares of Cumulative Convertible Preferred Stock, Series D ("Series D
Preferred Stock"), no par value, 1/2% under prime, into common stock of the
Company. No shares of the Series D Preferred Stock remain outstanding. The
conversion was accounted for as a stock dividend and therefore has been
retroactively reflected in the consolidated financial statements. Also all
dividends paid on the Series D Preferred Stock have been retroactively
reclassified to common dividends.
Redeemable Preferred Stock--The Company has authorized the issuance of
100,000 shares of a series of preferred stock designated NW Preferred Stock,
Class B (No Par Value) ("NW Preferred Stock"), pursuant to the Keep Well
Agreement between the Company and Fuji Bank, dated as of April 23, 1983 and as
subsequently amended ("Keep Well Agreement"), wherein, among other things,
Fuji Bank has agreed to purchase NW Preferred Stock in an amount required to
maintain the Company's stockholders' equity at $500 million. The Company's
stockholders' equity was $1,678 million at December 31, 1997. If and when
issued, dividends will be paid quarterly on NW Preferred Stock at a rate per
annum equal to 1% over the three-month LIBOR. Subject to certain conditions,
NW Preferred Stock will be redeemable at the option of the holder within a
specified period of time after the end of a calendar quarter in an aggregate
amount not greater than the excess of the stockholders' equity of the Company
as of the end of such calendar quarter over $500 million and at a redemption
price equal to the price paid for such stock plus accumulated dividends. No
purchases of NW Preferred Stock have been made by Fuji Bank under the Keep
Well Agreement.
10. DIVIDEND RESTRICTIONS AND PAYMENTS
Dividends may legally be paid only out of the Company's surplus, as
determined under the provisions of the Delaware General Corporation Law, or
net profits for either the current or preceding fiscal year, or both. In
addition, the Company is prohibited from paying dividends on Common Stock
F-23
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
unless all current and full cumulative dividends on the Series A Preferred
Stock and the current dividends on the Series C Preferred Stock have been
paid. In addition, the Company is prohibited from paying dividends on any
other preferred stock that ranks, with respect to the payment of dividends,
equal or junior to the Series A Preferred Stock or the Series C Preferred
Stock, unless all current and full cumulative dividends on the Series A
Preferred Stock and Series C Preferred Stock have been paid.
The Company declared and paid dividends on the Series A Preferred Stock of
$10 million in 1997 and 1996 and declared and paid dividends of $4 million on
the Series B Preferred Stock during 1997. Common Stock dividends paid in 1997
consisted of $43 million paid in cash and $26 million paid in the form of
International Group Preferred Stock. The Company paid cash dividends of $58
million in 1996.
11. FEES AND OTHER INCOME
Non-Interest Income: The following table summarizes the Company's non-
interest income for the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1997 1996 1995
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Fee income and other...................................... $ 84 $52 $ 49
Net investment gains...................................... 69 3 74
Participation income...................................... 27 24 24
Gains on securitization of receivables.................... 26 -- 1
---- --- ----
Total................................................... $206 $79 $148
==== === ====
</TABLE>
Fee income and other includes servicing income, late fees, prepayment fees,
other miscellaneous fees and equipment residual gains.
12. OPERATING EXPENSES
The following table sets forth a summary of the major components of
operating expenses:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1997 1996 1995
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Salaries and other compensation........................... $214 $154 $135
Space costs............................................... 30 23 18
Legal and consulting costs................................ 26 12 9
Equipment costs........................................... 17 12 13
Travel and entertainment.................................. 15 12 10
Business acquisition costs................................ 15 9 6
Goodwill and noncompete agreement amortization............ 6 1 1
Other..................................................... 34 24 24
---- ---- ----
Total................................................... $357 $247 $216
==== ==== ====
</TABLE>
Of the increase in operating expenses in 1997, $59 million related to the
consolidation of Factofrance in April, 1997.
F-24
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. BENEFIT PLANS AND OTHER POST RETIREMENT BENEFITS
The Company has various incentive compensation plans and a savings and
profit-sharing plan which provide for annual contributions to eligible
employees based on the Company's achievement of certain financial objectives
and employee achievement of certain objectives.
The Company has a noncontributory defined benefit pension plan covering
substantially all of its domestic employees and a supplemental retirement plan
in which certain employees participate. The Company's policy is to fund, at a
minimum, pension contributions as required by the Employee Retirement Income
Security Act of 1974. Benefits under the defined benefit and supplemental
retirement plans are based on an employee's years of service and average
earnings for the five highest consecutive years of compensation occurring
during the last ten years before retirement. The assets of the defined benefit
plan are held in a collective investment fund of the Multiple Fund Investment
Trust for Employee Benefit Plans. The assets are managed by American National
Bank Investment Management and Trust Company.
The following table summarizes the funding status of the defined benefit and
supplemental retirement plans at the end of each year and identifies the
assumptions used to determine the projected benefit obligation.
<TABLE>
<CAPTION>
SUPPLEMENTAL
RETIREMENT
DEFINED BENEFIT PLAN PLAN
---------------------- ----------------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
---------------------- ----------------
1997 1996 1995 1997 1996 1995
------ ------ ------ ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Actuarial present value of benefit
obligations
Vested benefit obligation....... $ 26 $ 21 $ 17 $ 1 $ 2 $ 2
Nonvested benefit obligation.... 4 3 3 -- -- --
------ ------ ------ ---- ---- ----
Accumulated benefit obligation.... 30 24 20 1 2 2
Effect of projecting future salary
increases on past service........ 17 14 12 3 2 2
------ ------ ------ ---- ---- ----
Projected benefit obligation...... 47 38 32 4 4 4
Plan assets at market value....... 42 37 34 -- -- --
------ ------ ------ ---- ---- ----
Plan assets in excess of (less
than) projected benefit
obligation....................... $ (5) $ (1) $ 2 $ (4) $ (4) $ (4)
====== ====== ====== ==== ==== ====
Assumptions:
Discount rate..................... 7.25% 7.75% 7.25% 7.25% 7.75% 7.25%
Expected return on assets......... 9.00 9.00 9.00 N/A N/A N/A
Rate of salary increases.......... 6.00 6.00 6.00 6.00 6.00 6.00
</TABLE>
Components of net pension cost for the defined benefit plan for the
following periods are:
<TABLE>
<CAPTION>
DEFINED BENEFIT PLAN
------------------------
YEAR ENDED DECEMBER
31,
------------------------
1997 1996 1995
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost-benefits
earned during the year... $ 3 $ 3 $ 2
Interest accrued on
projected benefit
obligation............... 3 2 2
Actual return on assets... (6) (3) (6)
Net amortization and
deferral................. 2 -- 3
------ ------ ------
Net periodic pension
cost................... $ 2 $ 2 $ 1
====== ====== ======
</TABLE>
F-25
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Supplemental Retirement Plan had a net periodic pension cost of
approximately $1 million in the years ended December 31, 1997, 1996 and 1995.
The prepaid pension cost (liability) of the defined benefit and supplemental
retirement plans were as follows:
<TABLE>
<CAPTION>
SUPPLEMENTAL
DEFINED RETIREMENT
BENEFIT PLAN PLAN
---------------- ----------------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
---------------- ----------------
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Plan assets in excess of (less than)
projected benefit obligation.............. $(5) $(1) $ 2 $ (4) $ (4) $ (4)
Unrecognized prior service (asset) cost.... (1) (1) (1) 2 2 1
Unrecognized net (gain) loss from past
experience different from that assumed.... 4 2 2 (2) (1) 1
Unrecognized net asset from initial
application............................... (1) (1) (1) -- -- --
--- --- --- ---- ---- ----
Pension (liability) prepaid cost......... $(3) $(1) $ 2 $ (4) $ (3) $ (2)
=== === === ==== ==== ====
</TABLE>
The Company adjusts the discount and salary rates, as well as the rates of
return on assets, to reflect market conditions at the measurement date.
Changes in these assumptions will impact the amount of the pension expense in
future years. The change in the discount rate at December 31, 1997 is expected
to increase pension expense by $1 million in 1998. The change in the discount
rate at December 31, 1996 decreased 1997 pension expense by $1 million. The
Company maintained the salary rate assumption at 6% at December 31, 1997,
based on the Company's experience.
The Company also provides health care benefits for eligible retired
employees and their eligible dependents. The following table presents the
funded status of the post-retirement benefits other than pensions of active
and retired employees as of December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
POST-RETIREMENT
HEALTH CARE PLAN
-------------------
DECEMBER 31,
-------------------
1997 1996 1995
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Accumulated postretirement obligation:
Retirees.......................................... $ 5 $ 4 $ 4
Fully eligible active plan participants........... 2 1 1
Other active plan participants.................... 3 2 2
----- ----- -----
Total unfunded accumulated postretirement
benefit obligation............................. 10 7 7
Unrecognized net gain (loss) from past experience
different from that assumed........................ (1) 1 1
Unrecognized net asset from initial application..... (5) (6) (6)
----- ----- -----
Accrued postretirement benefit cost............. $ 4 $ 2 $ 2
===== ===== =====
Assumptions:
Discount rate..................................... 7.25% 7.75% 7.25%
</TABLE>
F-26
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company adjusts the discount, salary and health care cost trend rates to
reflect market conditions at the measurement date. Changes in these
assumptions will impact the amount of the benefit expense in future years. The
accumulated postretirement benefit obligation, under the terms of the amended
healthcare plan, was calculated using relevant actuarial assumptions and
health care cost trend rates projected at annual rates ranging from 9.0% in
1997 to 5.5% in 2004 and thereafter. The effect of a 1.0% annual increase in
these assumed cost trend rates would increase the accumulated postretirement
benefit obligation by $1 million, while annual service and interest cost
components in the aggregate would not be materially affected. The change in
the discount rate at December 31, 1997 had no effect on the 1997 expense and
is expected to increase 1998 expense by less than $1 million. The change in
the discount rate at December 31, 1996 decreased the 1997 expense by less than
$1 million. The unamortized balance of the transition asset was $5 million at
December 31, 1997 and $6 million at December 31, 1996 and 1995. The net
periodic postretirement benefit cost was $1 million for the years ended
December 31, 1997, 1996 and 1995.
The Company has an Executive Deferred Compensation Plan (the "Plan"), a
nonqualified deferred compensation plan, in which certain employees of HIC and
the Company may elect to defer a portion of their annual compensation on a
pre-tax basis. The amount deferred remains an asset of the Company and may be
invested in any of certain mutual funds at the participant's direction.
Payment of amounts deferred are made in a lump sum or in annual installments
over a five, ten or fifteen year period as determined by the participant. Plan
assets were approximately $24 million and $13 million at December 31, 1997 and
1996, respectively. Earnings on plan assets totaled $5 million and $1 million
in 1997 and 1996, respectively, and are included as part of fees and other
income, while the offsetting compensation expense amount is included in
operating expenses.
The Company has long-term incentive plans in which participants receive
performance units that are granted at the beginning of a three year
performance period. The value of a performance unit is based on the three year
average return on equity target for the Company. The total expense related to
the long-term incentive plans was $3 million in 1997 and $3 million in 1996
and $2 million in 1995.
14. INCOME TAXES
The provision for income taxes is summarized in the following table:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Current:
Federal............................................... $107 $ 60 $116
Utilization of investment and foreign tax credits..... (46) (29) (22)
---- ---- ----
Net federal......................................... 61 31 94
State................................................. 5 (4) 2
Foreign............................................... 19 4 3
---- ---- ----
Total current....................................... 85 31 99
---- ---- ----
Deferred:
Federal............................................... (17) 11 (43)
State................................................. (2) 1 (7)
---- ---- ----
Total deferred...................................... (19) 12 (50)
---- ---- ----
$ 66 $ 43 $ 49
==== ==== ====
</TABLE>
Although the Company files a consolidated U.S. tax return with HIC, the
Company reports income tax expense as if it were a separate taxpayer and
records deferred tax benefits for deductible temporary differences if it is
more likely than not that these benefits will be realized. Included in income
tax expense are amounts relating to the International Group, which files a
separate United States
F-27
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
federal income tax return. United States federal income taxes paid by
International Group amounted to $3 million in 1997 and $5 million in 1996.
Under the terms of the tax allocation agreement between HIC and the Company,
as amended, each company covered by the agreement calculates its current and
deferred income taxes based on its separate company taxable income or loss,
utilizing separate company net operating losses, tax credits, capital losses
and deferred tax assets or liabilities. In accordance with the provisions of
the current tax allocation agreement, net payments of $73 million, $43 million
and $70 million were made to HIC in 1997, 1996 and 1995, respectively.
The reconciliation between the statutory federal income tax provision and
the actual effective tax provision for each of the three years ended December
31 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Tax provision at statutory rate........................ $ 82 $ 64 $ 63
State and foreign income taxes, net of federal income
tax effects........................................... 23 8 4
Income of foreign subsidiaries and joint ventures and
foreign tax credit utilization........................ (32) (13) (12)
Net foreign tax rate differential...................... -- -- 4
Resolution of tax issues............................... (2) (7) (13)
Other, net............................................. (5) (9) 3
---- ---- ----
$ 66 $ 43 $ 49
==== ==== ====
</TABLE>
The significant components of the deferred tax assets and deferred tax
liabilities at December 31, 1997 and 1996 are shown below:
<TABLE>
<CAPTION>
DECEMBER
31,
----------
1997 1996
---- ----
(IN
MILLIONS)
<S> <C> <C>
Deferred Tax Assets:
Allowance for loan losses................................... $ 97 $ 77
Repossessed properties...................................... -- 1
Foreign tax credits......................................... 8 16
Alternative minimum tax credit carryforward................. -- 1
Net operating losses........................................ 41 28
Equity interests and other investments...................... 22 10
Terminated swap income...................................... 5 17
Accrued expenses............................................ 25 18
---- ----
Gross deferred tax assets..................................... 198 168
Valuation allowance........................................... (8) (16)
---- ----
Gross deferred tax assets, net of valuation allowance......... 190 152
Deferred Tax Liabilities:
Repossessed properties...................................... $ (6) $--
Fixed assets and deferred income from lease financing....... (17) (17)
Unrealized appreciation of securities available for sale.... (4) (8)
---- ----
Gross deferred tax liabilities................................ (27) (25)
---- ----
Net deferred tax asset........................................ $163 $127
==== ====
</TABLE>
F-28
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Provision has not been made for United States or additional foreign taxes on
$80 million of undistributed earnings of subsidiaries outside the United
States, as those earnings are intended to be reinvested. Such earnings would
become taxable upon the sale or liquidation of these international operations
or upon the remittance of dividends. Given the availability of foreign tax
credits and various tax planning strategies, management believes any tax
liability which may ultimately be paid on these earnings would be
substantially less than that computed at the statutory federal income tax
rate. Upon remittance, certain foreign countries impose withholding taxes that
are then available, subject to certain limitations, for use as credits against
the Company's U.S. tax liability. The amount of withholding tax that would be
payable upon remittance of the entire amount of undistributed earnings would
be approximately $14 million.
The Company had unused foreign tax credit carryforwards of $8 million and
$16 million at December 31, 1997 and 1996, respectively. Due to substantial
restrictions on the utilization of foreign tax credits imposed by the Tax
Reform Act of 1986, the Company may not be able to utilize a significant
portion of foreign tax credit carryforwards prior to expiration. Accordingly,
the Company has recognized a valuation allowance for the amount of foreign tax
credits recorded at December 31, 1997 and 1996. Consistent with this approach,
the Company reduced income tax expense by $15 million in 1997 representing
utilization of such foreign tax credit carryovers.
The Company has recorded a net deferred tax asset of $163 million as of
December 31, 1997. Although realization is not assured, management believes it
is more likely than not that the deferred tax assets will be realized. The
amount of the deferred tax assets considered realizable, however, could be
reduced if estimates of future taxable income are reduced.
15. RELATED PARTIES
Several financial, administrative or other service arrangements exist
between the Company and Fuji Bank, HIC or related affiliates. In management's
opinion, the terms of these arrangements were similar to those the Company
would have been able to obtain in like agreements with unaffiliated entities
in arms-length transactions.
KEEP WELL AGREEMENT WITH FUJI BANK. The Keep Well Agreement provides that if
the Company should lack sufficient cash or credit facilities to meet its
commercial paper obligations, Fuji Bank will lend the Company up to $500
million. That loan would be payable on demand and the proceeds from the loan
could only be used by the Company to meet its commercial paper obligations.
The Keep Well Agreement further provides that Fuji Bank will maintain the
Company's stockholders' equity in an amount equal to $500 million.
Accordingly, if the Company should determine, at the close of any month, that
its stockholders' equity is less than $500 million, then Fuji Bank will
purchase, or cause one of its subsidiaries to purchase, shares of the
Company's NW Preferred Stock in an amount necessary to increase the Company's
stockholders' equity to $500 million. Commitment fees paid by the Company to
Fuji Bank under the Keep Well Agreement amounted to less than $1 million in
1997, 1996 and 1995. Interest on any loans will be charged at the prime rate
of Morgan Guaranty Trust Company of New York plus .25% per annum. No loans or
purchases of NW Preferred Stock have been made by Fuji Bank under this
agreement.
In connection with the issuance of the Series B Preferred Stock (Note 9),
the Company and Fuji Bank amended the termination provisions of the Keep Well
Agreement. The Keep Well Agreement cannot be terminated by either party prior
to December 31, 2002. After December 31, 2002, the Agreement cannot be
terminated by either party unless the Company has received written
certifications
F-29
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
from Moody's Investor Service, Inc. and Standard and Poor's Corporation that
upon such termination, the Series A Preferred Stock will be rated no lower
than "a3" and "A--," respectively and the Series C Preferred Stock will be
rated no lower than "baa1" and "BBB" respectively. 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. After
December 31, 2007, either Fuji Bank or the Company may terminate the agreement
upon 30 business days prior written notice.
SERVICES PROVIDED BY FUJI BANK AND HIC FOR THE COMPANY. Certain employees of
Fuji Bank and HIC performed managerial, administrative and other related
functions for the Company during 1997. The Company compensated Fuji Bank and
HIC for the use of such individuals' services at a rate which reflects current
costs to Fuji Bank and HIC. The amounts paid to Fuji Bank and HIC for these
services were $2 million and $77 million, respectively for 1997, $2 million
and $60 million for 1996 and $2 million and $53 million for 1995. In
conjunction with the transfer of the Company to FAHI, the majority of
employees of HIC who were providing services to the Company were transferred
to the Company. Additionally, certain subsidiaries of Fuji Bank served as
managers for various offerings of the Company's debt securities and acts as
registrar and paying agent for certain debt issuances by the Company. These
services are provided at market rates. The Company has entered into similar
agreements with FAHI. In the Company's opinion, the amounts to be paid under
such agreements will be significantly less than the amounts paid in 1997.
SERVICES PROVIDED BY THE COMPANY FOR FUJI BANK AND HIC. The Company performs
services for its affiliates, including FAHI, and charges them for the cost of
the work performed. The Company may also guarantee the obligations of its
clients or the clients of certain joint ventures, under letters of credit
issued by financial institutions, some of which are affiliates of the Company.
Additionally, the Company guaranteed payment under a deferred compensation
arrangement between HIC and certain of its employees. The Company had
agreements with HIC and certain other subsidiaries of HIC which provide for
the Company to receive an annual negotiated fee for servicing assets which had
been sold by the Company to HIC and these affiliates. The amount of fees for
servicing these assets in 1997, 1996 and 1995, was approximately $200,000, $1
million and $1 million, respectively.
Heller Capital Markets Group, Inc. ("CMG"), a wholly-owned subsidiary of the
Company, acted as placement agent for the sale of commercial paper issued by
HIC during 1997. CMG received compensation based upon the face amount of the
commercial paper notes sold. HIC paid compensation to CMG pursuant to this
arrangement of $61,000 during 1997 and less than $1 million during each of
1996 and 1995. The HIC commercial paper program was terminated during 1997.
INTERCOMPANY RECEIVABLES, PAYABLES, TRANSACTIONS AND FINANCIAL INSTRUMENTS.
At December 31, 1997, other liabilities included net amounts due to affiliates
of $29 million, and at December 31, 1996, other assets included net amounts
due from affiliates of $20 million. These amounts are principally comprised of
interest bearing demand notes representing amounts due to or from the Company
arising from an interest rate swap agreement with HIC, advances,
administrative fees and costs charged to other subsidiaries of HIC and amounts
payable to HIC for services provided. The notes bear interest at rates which
approximate the average rates on the Company's commercial paper obligations or
short-term bank borrowing rates outstanding during the period. During 1997,
the Company paid interest of $3 million to HIC related to these notes.
During 1997, the Company was a party to a $200 million notional amount
interest rate swap agreement with HIC, which expires December 15, 2000 and was
assumed by FAHI effective January 2, 1998. The purpose of this agreement is to
manage the Company's exposure to interest rate fluctuations. Under this
agreement, the Company pays interest to the counterparty at a variable rate
based on the commercial paper rate published by the Board of Governors of the
Federal Reserve
F-30
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
System. The counterparty pays interest to the Company at a fixed rate of
5.57%. This agreement, which FAHI assumed from HIC effective January 1998,
increased the Company's interest expense by $295,000 and $3 million in 1997
and 1996, respectively.
During 1997, HIC converted all of its shares of Series D Preferred Stock
into common stock of the Company. Prior to the conversion, the Company paid a
dividend to HIC on the Series D Preferred Stock of approximately $500,000.
Also, during 1997, the Company paid to Fuji Bank a commitment fee of
approximately $317,000, related to the Keep Well Agreement.
The trust department of Fuji Bank may purchase commercial paper of the
Company for its clients. Interest expense paid by the Company related to such
commercial paper borrowings was $235,000 in 1997.
In the ordinary course of its business, the Company participates in joint
financings with Fuji Bank or certain affiliates. During 1997, the Company sold
$10 million of an outstanding $25 million commitment to Fuji Bank at book
value. No gain or loss was recorded on the sale. During 1996, the Company
jointly participated with Fuji Bank in $53 million of financings, of which the
Company retained an $8 million interest.
Fuji Bank and one of its subsidiaries provided uncommitted lines of credit
to consolidated international subsidiaries totaling $29 million and $15
million at December 31, 1997 and 1996, respectively. Borrowings under these
facilities totaled $5 million and $4 million at December 31, 1997 and 1996,
respectively. In addition, Fuji Bank provides committed and uncommitted lines
of credit to certain international joint ventures.
The Company has an accounts receivable sale facility which 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-sponsored conduits. The
Company sold approximately $500 million of receivables under this facility as
of December 31, 1997. The underlying liquidity support for the conduits is
provided by unaffiliated entities. One of the conduits has an operating
agreement with Fuji Bank. The Company paid fees of $346,000 to Fuji Bank
during 1997 for services provided under this agreement.
In conjunction with the formation of FAHI, the Company purchased, at book
value, less than $10 million of assets from HIC on December 31, 1997. The
assets are primarily recorded as real estate receivables at the purchase
price.
16. FAIR VALUE DISCLOSURES
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosure of fair value information
for certain financial instruments, for which it is practicable to estimate
that value. Since there is no well-established market for many of the
Company's assets and financial instruments, fair values are estimated using
present value, property yield, historical rate of return and other valuation
techniques. These techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows. These
assumptions are inherently judgmental and changes in such assumptions could
significantly affect fair value calculations. The derived fair value estimates
may not be substantiated by comparison to independent markets and may not be
realized in immediate liquidation of the instrument.
F-31
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1997 1996
------------------- ------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- --------- -------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net receivables..................... $10,461 $10,883 $8,304 $8,509
Total investments................... 994 1,044 805 863
Debt................................ 9,436 9,371 7,506 7,514
Swap agreements
Asset............................. 4 12 4 20
Liability......................... (7) (111) (6) (37)
Forward contracts................... 623 623 262 262
Purchased options................... 74 74 42 42
</TABLE>
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments. Carrying values
approximate fair values for all financial instruments which are not
specifically addressed.
For variable rate receivables that reprice frequently and are performing at
acceptable levels, fair values were assumed to equal carrying values. All
other receivables were pooled by loan type and risk rating. The fair value for
these receivables was estimated by employing discounted cash flow analyses,
using interest rates equal to the London Inter-Bank Offered Rate or the Prime
rate offered as of December 31, 1997 and 1996 plus an adjustment for normal
spread, credit quality and the remaining terms of the loans.
Carrying and fair values of the trading securities and securities available
for sale are based on quoted market prices. The fair values of equity
interests and other investments are calculated by using the Company's business
valuation model to determine the estimated value of these investments as of
the anticipated exercise date. The business valuation model analyzes the cash
flows of the related company and considers values for similar equity
investments. The determined value is then discounted back to December 31, 1997
and 1996, using a rate appropriate for returns on equity investments. Although
the investments in international joint ventures accounted for by the equity
method are not considered financial instruments and, as such, are not included
in the above table, management believes that the fair values of these
investments significantly exceed the carrying value of these investments.
The fair value of the notes and debentures was estimated using discounted
cash flow analyses, based on current incremental borrowing rates for
arrangements with similar terms and remaining maturities, as quoted by
independent financial institutions as of December 31, 1997 and 1996. Fair
values were assumed to equal carrying values for commercial paper and other
short term borrowings.
The carrying value of the swap agreements represents the interest receivable
and interest payable as of December 31, 1997 and 1996. The estimated fair
value represents the mark to market loss and mark to market gain outstanding
as of December 31, 1997 and 1996, respectively, as based upon quoted market
prices obtained from independent financial institutions. Forwards and
purchased options are carried at fair value. The fair values of loan
commitments, letters of credit and guarantees are negligible.
F-32
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. FINANCIAL DATA BY REGION
The following table shows certain financial information by geographic region
for the years ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
UNITED ASIA- LATIN
STATES EUROPE PACIFIC AMERICA CONSOLIDATED
------- ------ ------- ------- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Assets
1997...................... $10,048 $2,378 $267 $168 $12,861
1996...................... 9,157 330 306 133 9,926
1995...................... 8,981 295 265 97 9,638
Total revenues
1997...................... $ 1,063 $ 159 $ 29 $ 19 $ 1,270
1996...................... 893 47 30 15 985
1995...................... 1,009 39 28 8 1,084
Income before taxes and
minority interest
1997...................... $ 183 $ 59 $ 6 $(15) $ 233
1996...................... 145 36 6 (4) 183
1995...................... 148 23 7 3 181
Net income
1997...................... $ 126 $ 41 $ 5 $(14) $ 158
1996...................... 100 31 5 (3) 133
1995...................... 95 21 5 4 125
</TABLE>
F-33
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18. SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following financial information for the calendar quarters of 1997, 1996
and 1995, is unaudited. In the opinion of management, all adjustments
necessary to present fairly the results of operations for such periods have
been included.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- -------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net interest income--
1997.................................. $ 92 $107 $104 $105
1996.................................. 90 87 87 91
1995.................................. 94 95 98 100
Operating revenues--
1997.................................. $141 $199 $193 $221
1996.................................. 131 129 124 149
1995.................................. 146 132 161 181
Provision for losses--
1997.................................. $ 22 $ 34 $ 48 $ 60
1996.................................. 24 25 12 42
1995.................................. 50 28 56 89
Net income--
1997.................................. $ 39 $ 44 $ 40 $ 35
1996.................................. 34 35 35 29
1995.................................. 30 34 35 26
</TABLE>
19. ACCOUNTING DEVELOPMENTS
The Company adopted Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 125") as amended by Statement of
Financial Accounting Standards No. 127, "Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125" (collectively referred to
hereafter as "SFAS 125") on January 1, 1997. SFAS 125 uses a "financial
components" approach that focuses on control to determine the proper
accounting for financial asset transfers and addresses the accounting for
servicing rights on financial assets in addition to mortgage loans.
Securitizations of finance receivables are accounted for as sales when legal
and effective control over the related receivables is surrendered. Servicing
assets or liabilities are recognized when the servicing rights are retained by
the seller.
In June, 1997, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income,"
which the Company has adopted effective January 1, 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 Financial Accounting Standards No. 131, "Disclosures About
Segments of an Enterprise and Related Information" ("SFAS 131") was also
released in June, 1997 and has also been adopted effective January 1, 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.
As SFAS 130 and 131 relate to disclosure requirements, management believes
that neither statement will have a material impact on the financial results of
the Company.
F-34
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. SUBSEQUENT EVENTS
On January 29, 1998, Fuji Bank announced that it is considering an initial
public offering of Common Stock by the Company. Fuji Bank will retain majority
ownership of the Company after any such offering. The timing and the terms of
the offering have not yet been determined.
In anticipation of an initial public offering, the Company amended its
Restated Certificate of Incorporation to increase the number of authorized
shares of Common Stock. The total number of shares of stock which the Company
shall have authority to issue is 852 million, of which 2 million shares, no
par value, are to be of a class designated "Preferred Stock", 50 million
shares, of the par value of $.01 each, are to be of a class designated "Senior
Preferred Stock" and 800 million shares, of the par value of $0.25 each, are
to be of a class designated "Common Stock." The Company's Board of Directors
authorized two classes of Common Stock, Class A Common Stock and Class B
Common Stock. The authorization of the two classes of Common Stock has been
retroactively reflected in the Company's consolidated financial statements.
Prior to the consummation of the offering, the Keep Well Agreement would be
amended to allow the Company or Fuji Bank or any of its affiliates to sell or
dispose of Common Stock to any person or entity, provided that after any such
sale or disposition, Fuji Bank continues to hold greater than 50% of the
combined voting power of the outstanding Common Stock.
In February 1998, the Company paid a dividend of 51 million shares of Class
B Common Stock to FAHI, which has been retroactively reflected in the
Company's consolidated financial statements.
In February 1998, the Company was authorized to purchase the 21% ownership
interest in International Group held by Fuji Bank for approximately $85
million. If completed the Company intends to account for this transaction in a
manner similar to a pooling of interests.
On February 24, 1998, the Company paid a dividend on the Common Stock owned
by FAHI of $450 million. The dividend was paid out of the surplus of the
Company and in the form of a subordinated note maturing six years from the
date of issuance with an interest rate of LIBOR plus 0.50%. The note can be
prepaid at any time without a premium.
21. BASIC AND DILUTED NET INCOME PER SHARE
Net income applicable to common stock per share is computed based on the
number of common shares outstanding of 51,050,000, reflecting the common stock
dividend in February 1998.
22. PRO FORMA EARNINGS PER SHARE (UNAUDITED)
As mentioned in Note 20, the Company's Board of Directors has authorized the
purchase of International Group. The Company intends to account for the
acquisition in a manner consistent with pooling of interest accounting, which
will have the effect of increasing net income to $168 million, $143 million
and $132 million for 1997, 1996 and 1995, respectively, and increasing net
income applicable to common stock to $154 million, $133 million and $122
million for 1997, 1996 and 1995, respectively. These amounts do not reflect
the ongoing costs related to the acquisition of Fuji Bank's 21% interest in
International Group for interest expense related to the purchase price and
certain income tax expenses that will be incurred due to the inclusion of
International Group in the Company's consolidated U.S. Federal Income Tax
Return.
F-35
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pro forma net income applicable to common stock per share for 1997 is
computed based on net income applicable to common stock of $153 million (which
includes the increase in net income due to the acquisition of International
Group accounted for in a manner similar to a pooling of interests), divided by
million shares of common stock, reflecting the number of shares
outstanding after the Company's initial public offering of common stock.
F-36
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the U.S. Underwriters named below, and
each of such U.S. Underwriters, for whom Goldman, Sachs & Co., J.P. Morgan
Securities Inc., BT Alex. Brown Incorporated, Lehman Brothers Inc. and Merrill
Lynch, Pierce, Fenner & Smith Incorporated are acting as representatives, has
severally agreed to purchase from the Company, the respective number of shares
of Class A Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF CLASS A
UNDERWRITER COMMON STOCK
----------- -----------------
<S> <C>
Goldman, Sachs & Co.....................................
J.P. Morgan Securities Inc..............................
BT Alex. Brown Incorporated.............................
Lehman Brothers Inc.....................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated......
---------
Total...............................................
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the U.S.
Underwriters are committed to take and pay for all of the shares offered
hereby, if any are taken.
The U.S. Underwriters propose to offer the shares of Class A Common Stock in
part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus and in part to certain securities dealers at
such price less a concession of $ per share. The U.S. Underwriters
may allow, and such dealers may reallow, a concession not in excess of
$ per share to certain brokers and dealers. After the shares of
Class A Common Stock are released for sale to the public, the offering price
and other selling terms may from time to time be varied by the
representatives.
The Company and Fuji Bank have entered into an underwriting agreement (the
"International Underwriting Agreement") with the underwriters of the
international offering (the "International Underwriters") providing for the
concurrent offer and sale of shares of Class A Common Stock in an
international offering outside the United States. The offering price and
aggregate underwriting discounts and commissions per share for the two
offerings are identical. The closing of the offering made hereby is a
condition to the closing of the international offering, and vice versa. The
representatives of the International Underwriters are Goldman Sachs
International, J.P. Morgan Securities Ltd., BT Alex. Brown International,
division of Bankers Trust International PLC, Lehman Brothers International
(Europe) and Merrill Lynch International.
Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the "Agreement Between") relating to the two Offerings, each of
the U.S. Underwriters named herein has agreed that, as a part of the
distribution of the shares offered hereby and subject to certain exceptions,
it will offer, sell or deliver the shares of Class A Common Stock, directly or
indirectly, only in the United States of America (including the States and the
District of Columbia), its territories, its possessions and other areas
subject to its jurisdiction (the "United States") and to U.S. persons, which
term shall mean, for purposes of this paragraph: (a) any individual who is a
resident of the United States or (b) any
U-1
<PAGE>
corporation, partnership or other entity organized in or under the laws of the
United States or any political subdivision thereof and whose office most
directly involved with the purchase is located in the United States. Each of
the International Underwriters has agreed pursuant to the Agreement Between
that, as a part of the distribution of the shares offered as a part of the
International Offering, and subject to certain exceptions, it will (i) not,
directly or indirectly, offer, sell or deliver shares of Class A Common Stock
(a) in the United States or to any U.S. persons or (b) to any person who it
believes intends to reoffer, resell or deliver the shares in the United States
or to any U.S. persons, and (ii) cause any dealer to whom it may sell such
shares at any concession to agree to observe a similar restriction.
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the International Underwriters of such number of shares of
Class A Common Stock as may be mutually agreed. The price of any shares so
sold shall be the initial public offering price, less an amount not greater
than the selling concession.
The Company has granted the U.S. Underwriters an option exercisable for 30
days after the date of this Prospectus to purchase up to an aggregate of
additional shares of Class A Common Stock solely to cover over-
allotments, if any. If the U.S. Underwriters exercise their over-allotment
option, the U.S. Underwriters have severally agreed, subject to certain
conditions, to purchase approximately the same percentage thereof that the
number of shares to be purchased by each of them, as shown in the foregoing
table, bears to the shares of Class A Common Stock offered hereby.
The Company has granted the International Underwriters a similar option to
purchase up to an aggregate of additional shares of Class A Common
Stock.
The Company and Fuji Bank have agreed that, during the period beginning from
the date of this Prospectus and continuing to and including the date 180 days
after the date of the Prospectus, they will not, directly or indirectly,
offer, sell, contract to sell or otherwise dispose of any shares of Common
Stock or any other securities of the Company (other than pursuant to employee
stock option plans existing, or on the conversion or exchange of convertible
or exchangeable securities outstanding, on the date of this Prospectus) which
are substantially similar to the shares of the Common Stock or which are
convertible into or exchangeable for securities which are substantially
similar to the shares of the Common Stock, or enter into transactions to hedge
or that otherwise relate to such shares or securities, without the prior
written consent of Goldman, Sachs & Co., except for the shares of Class A
Common Stock issued in connection with the concurrent U.S. and International
Offerings.
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares
of Class A Common Stock offered by them.
Prior to the Offerings, there has been no public market for the shares of
Class A Common Stock. The initial public offering price will be negotiated
among the Company and the representatives of the U.S. Underwriters and the
International Underwriters. Among the factors to be considered in determining
the initial public offering price of the Class A Common Stock, in addition to
prevailing market conditions, are the Company's historical performance,
estimates of the business potential and earnings prospects of the Company, an
assessment of the Company's management and the consideration of the above
factors in relation to market valuation of companies in related businesses.
Application will be made to list the Class A Common Stock on the New York
Stock Exchange under the symbol "HF". In order to meet one of the requirements
for listing the Class A Common Stock on the New York Stock Exchange, the U.S.
Underwriters have undertaken to sell lots of 100 or more shares to a minimum
of 2,000 beneficial holders.
The Company and Fuji Bank have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act.
U-2
<PAGE>
This Prospectus may be used by underwriters and dealers in connection with
offers and sales of the Class A Common Stock, including shares initially sold
in the International Offering, to persons located in the United States.
In connection with the Offerings, the Underwriters may purchase and sell the
Class A Common Stock in the open market. These transactions may include over-
allotment and stabilizing transactions and purchases to cover syndicate short
positions created in connection with the Offerings. Stabilizing transactions
consist of certain bids or purchases for the purpose of preventing or
retarding a decline in the market price of the Class A Common Stock, and
syndicate short positions involve the sale by the Underwriters of a greater
number of shares of Class A Common Stock than they are required to purchase
from the Company in the Offerings. The Underwriters also may impose a penalty
bid, whereby selling concessions allowed to syndicate members or other broker-
dealers in respect of the securities sold in the Offerings for their account
may be reclaimed by the syndicate if such shares of Class A Common Stock are
repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Class A Common Stock, which may be higher than the price that might otherwise
prevail in the open market; and these activities, if commenced, may be
discontinued at any time. These transactions may be effected on the New York
Stock Exchange, in the over-the-counter market or otherwise.
Certain of the Underwriters perform investment banking and financial
advisory and other financial services for the Company, Fuji Bank and their
affiliates from time to time. Affiliates of certain of the Underwriters engage
from time to time in general financing and banking transactions with the
Company, Fuji Bank and their affiliates.
At the request of the Company, the U.S. Underwriters have reserved for sale,
at the initial offering price, up to 5% of the shares of Class A Common Stock
offered hereby for directors, officers and employees of the Company. The
number of shares of Class A Common Stock available for sale to the general
public will be reduced to the extent such persons purchase such reserved
shares. Any reserved shares which are not so purchased will be offered by the
U.S. Underwriters to the general public on the same basis as the other shares
offered hereby.
U-3
<PAGE>
LOGO
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH
SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPEC-
TUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IM-
PLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 2
Incorporation of Certain Documents by Reference........................... 2
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 10
Special Note Regarding Forward-looking Statements......................... 16
Use of Proceeds........................................................... 17
Dividend Policy........................................................... 17
Capitalization............................................................ 18
Selected Financial Data................................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 22
Business.................................................................. 36
Risk Management........................................................... 58
Management................................................................ 65
Certain Relationships and Related Transactions............................ 78
Ownership of Common Stock................................................. 83
Shares Available for Future Sale.......................................... 83
Description of Capital Stock.............................................. 84
Validity of Shares of Class A Common Stock................................ 92
Independent Public Accountants............................................ 92
Index to Consolidated Financial Statements................................ F-1
Underwriting.............................................................. U-1
</TABLE>
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- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SHARES
LOGO
CLASS A COMMON STOCK
(PAR VALUE $0.25 PER SHARE)
----------------
PROSPECTUS
----------------
GOLDMAN, SACHS & CO.
J.P. MORGAN & CO.
BT ALEX. BROWN
LEHMAN BROTHERS
MERRILL LYNCH & CO.
REPRESENTATIVES OF THE UNDERWRITERS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Set forth below is an estimate (other than the Securities and Exchange
Commission registration fee, NASD filing fee and New York Stock Exchange
listing fee) of the fees and expenses (other than underwriting discounts)
payable by the Registrant in connection with the Offerings. The Registrant
will pay all of these expenses.
<TABLE>
<CAPTION>
APPROXIMATE
AMOUNT
-----------
<S> <C>
Securities and Exchange Commission registration fee........... $147,500
NASD filing fee............................................... 30,500
New York Stock Exchange listing fee........................... *
Accountants' fees and expenses................................ *
Legal fees and expenses....................................... *
Transfer Agent and Registrar fees and expenses................ *
Printing and engraving expenses............................... *
Miscellaneous expenses........................................ *
--------
Total..................................................... $ *
========
</TABLE>
- --------
* To be provided by amendment
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant, a Delaware corporation, is empowered by Section 145 of the
Delaware General Corporation Law, subject to the procedures and limitations
stated therein, to indemnify any person against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in the defense of any threatened, pending or completed
action, suit or proceeding in which such person is made a party by reason of
his being or having been a director or officer of the Registrant. The statute
provides that indemnification pursuant to its provisions is not exclusive of
other rights of indemnification to which a person may be entitled under any
by-law, agreement, vote of stockholders or disinterested directors, or
otherwise. The Amended and Restated By-Laws of the Registrant provide for
indemnification by the Registrant of its directors and officers to the full
extent permitted by the Delaware General Corporation Law. Also, as permitted
by the Delaware General Corporation Law, the Registrant's Amended and Restated
Certificate of Incorporation eliminates the personal liability of each
director of the Registrant to the Registrant or its stockholders for monetary
damages arising out of or resulting from any breach of such director's
fiduciary duty as a director, except where such director breached such
director's duty of loyalty to the Registrant or its stockholders, failed to
act in good faith, engaged in intentional misconduct or a knowing violation of
the law, paid an unlawful dividend, approved an unlawful stock purchase or
redemption, or obtained an improper personal benefit.
Prior to consummation of the Offerings, the Registrant will enter into
indemnity agreements with each of its directors. These agreements may require
the Registrant, among other things, to indemnify such directors against
certain liabilities that may arise by reason of their status or service as
directors, to advance expenses to them as they are incurred, provided that
they undertake to repay the amount advanced if it is ultimately determined by
a court that they are not entitled to indemnification, and to obtain
directors' liability insurance if available on reasonable terms.
Prior to the consummation of the Offerings, the Registrant intends to
purchase a directors' and officers' liability insurance policy.
II-1
<PAGE>
Under the terms of the Underwriting Agreement, the Underwriters have agreed
to indemnify, under certain conditions, the Registrant, its directors, certain
of its officers and persons who control the Company within the meaning of the
Securities Act of 1933, as amended, against certain liabilities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<S> <C> <C>
1* Form of Underwriting Agreement.
4.1* Amended and Restated Certificate of Incorporation of the Registrant.
4.2* Amended and Restated Bylaws of the Registrant.
4.3* Specimen stock certificate representing Class A Common Stock.
5* Opinion of Katten Muchin & Zavis as to the legality of the securities be-
ing registered (including consent).
10.1* 1998 Heller Financial, Inc. Employee Incentive Plan.
10.2* Form of Director Indemnification Agreement.
10.3* Form of Registration Rights Agreements to be entered into by and between
the Registrant and The Fuji Bank, Limited ("Fuji Bank").
10.4 Employment Letter Agreement dated as of December 31, 1997, between the
Registrant and Richard J. Almeida (the "Almeida Employment Agreement"),
incorporated by reference to Exhibit 10(w) to the Registrant's Annual Re-
port on Form 10-K for the Fiscal Year ended December 31, 1997 (the "1997
10-K").
10.5 Employment Letter Agreement dated as of December 31, 1997, between the
Registrant and Frederick E. Wolfert (the "Wolfert Employment Agreement"),
incorporated by reference to Exhibit 10(x) to the 1997 10-K.
10.6* Amended and Restated Keep Well Agreement, as amended, between the Regis-
trant and Fuji Bank.
10.7 Services Agreement dated January 1, 1985 between the Registrant and Fuji
Bank, incorporated by reference to Exhibit (10)(e) to the 1992 10-K.
10.8 Management Agreement dated as of January 1, 1991 between Heller Interna-
tional Corporation, Inc. ("HIC") and the Registrant, incorporated by ref-
erence to Exhibit (10)(m) to the Registrant's Quarterly Report on Form 10-
Q for the period ending March 31, 1991.
10.9 Management Services Agreement dated as of January 2, 1998 between Fuji
American Holdings, Inc. ("FAHI") and the Registrant, incorporated by ref-
erence to Exhibit 10(d) to the 1997 10-K.
10.10 Agreement for the Allocation of Federal, State and Foreign Income Tax Lia-
bility and Benefits Among HIC and its Subsidiaries, effective as of July
1, 1996, incorporated by reference to Exhibit (10)(g) to the Company's An-
nual Report on Form
10-K for the Fiscal Year ended December 31, 1996 ("1996 10-K").
10.11 Supplemental Executive Retirement Benefit Plan, amended and restated ef-
fective January 1, 1996, incorporated by reference to Exhibit (10)(e) to
the 1996 10-K.
10.12 Long Term Incentive Plan, effective January 1, 1994, incorporated by ref-
erence to Exhibit 10(n) to the Company's Annual Report on Form 10-K for
the Fiscal Year ended December 31, 1994 ("1994 10-K").
10.13 1996-1998 Long Term Incentive Plan, effective January 1, 1996, incorpo-
rated by reference to Exhibit 10(h) to the 1997 10-K.
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C> <C>
10.14 1997-1999 Long Term Incentive Plan, effective January 1, 1997, incorpo-
rated by reference to Exhibit 10(i) to the 1997 10-K.
10.15 Executive Deferred Compensation Plan, dated January 1, 1994, as amended on
October 1, 1994, incorporated by reference to Exhibit 10(o) to the 1994
10-K.
10.16 Second Amendment to the Executive Deferred Compensation Plan, dated De-
cember 29, 1995, incorporated by reference to Exhibit 10(n) to the
Company's Annual Report on Form 10-K for the Fiscal Year ended December
31, 1995
("1995 10-K").
10.17 Third Amendment to the Executive Deferred Compensation Plan, dated January
1, 1996, incorporated by reference to Exhibit (10)(m) to the 1996 10-K.
10.18 Fourth Amendment to the Executive Deferred Compensation Plan, dated Novem-
ber 26, 1996, incorporated by reference to Exhibit (10)(n) to the 1996 10-
K.
10.19 Fifth Amendment to the Executive Deferred Compensation Plan, dated Novem-
ber 21, 1997 and effective January 1, 1997, incorporated by reference to
Exhibit 10(n) to the 1997 10-K.
10.20 Cross Guaranty for the Executive Deferred Compensation Plan, incorporated
by reference to Exhibit (10)(p) to the 1994 10-K.
10.21 Management Incentive Plan (effective January 1, 1987, revised January 1,
1989), incorporated by reference to Exhibit 10(m) to the 1995 10-K.
10.22 Savings and Profit Sharing Plan, amended and restated effective as of Jan-
uary 1, 1989, incorporated by reference to Exhibit (10)(q) to the 1996 10-
K.
10.23 First Amendment to Savings and Profit Sharing Plan, dated December 23,
1993, incorporated by reference to Exhibit (10)(r) to the 1996 10-K.
10.24 Second Amendment to Savings and Profit Sharing Plan, dated December 20,
1994, incorporated by reference to Exhibit (10)(s) to the 1996 10-K.
10.25 Third Amendment to Savings and Profit Sharing Plan, dated September 9,
1996, incorporated by reference to Exhibit (10)(t) to the 1996 10-K.
10.26 Fourth Amendment to Savings and Profit Sharing Plan, dated April 30, 1997,
incorporated by reference to Exhibit 10(u) to the 1997 10-K.
10.27* Form of Amendment to the Almeida Employment Agreement.
10.28* Form of Amendment to the Wolfert Employment Agreement.
10.29* Form of Change in Control Agreement.
10.30 Subordinated Promissory Note in the principal amount of $450 million is-
sued by the Registrant to FAHI, incorporated by reference to Exhibit 10(y)
to the 1997 10-K.
12 Computation of ratio of earnings to fixed charges, incorporated by refer-
ence to Exhibit 12 to the 1997 10-K.
23.1 Consent of Arthur Andersen LLP.
23.2* Consent of Katten Muchin & Zavis (contained in its opinion to be filed as
Exhibit 5 hereto).
24 Power of Attorney (included on signature page hereto).
</TABLE>
- --------
* To be filed by amendment.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) That, for purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the Offerings of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
(3) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL THE
REQUIREMENTS FOR FILING ON FORM S-2 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF CHICAGO, STATE OF ILLINOIS ON THE 26TH DAY OF
FEBRUARY, 1998.
Heller Financial, Inc.
/s/ Richard J. Almeida
By: _________________________________
Richard J. Almeida
Chairman and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Lauralee E. Martin, Debra H. Snider and Mark J. Ohringer, and each of them his
true and lawful attorneys-in-fact and agents, with full power of substitution,
to sign on his behalf, individually and in each capacity stated below, all
amendments and post-effective amendments to this Registration Statement on
Form S-2 (including any registration statement filed pursuant to Rule 462(b)
of the Securities Act and any amendments thereto) and to file the same, with
all exhibits thereto and any other documents in connection therewith, with the
Commission under the Securities Act, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as each might or could do in person, hereby ratifying
and confirming each act that said attorneys-in-fact and agents may lawfully do
or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on February 26, 1998.
/s/ Richard J. Almeida /s/ Michael J. Litwin
_____________________________________ _____________________________________
Richard J. Almeida Michael J. Litwin
Chairman, Chief Executive Officer Director
(Principal Executive Officer) and
Director
/s/ Dennis P. Lockhart
_____________________________________
/s/ Atsushi Takano Dennis P. Lockhart
_____________________________________ Director
Atsushi Takano
Director /s/ Lauralee E. Martin
_____________________________________
/s/ Yukihiko Chayama Lauralee E. Martin
_____________________________________ Executive Vice President, Chief
Yukihiko Chayama Financial Officer and Director
Director (Principal Financial Officer)
/s/ Kenichi Tomita /s/ Takeshi Takahashi
_____________________________________ _____________________________________
Kenichi Tomita Takeshi Takahashi
Director Director
II-5
<PAGE>
/s/ Tsutomu Hayano /s/ Osamu Ogura
_____________________________________ _____________________________________
Tsutomu Hayano Osamu Ogura
Director Director
/s/ Mark Kessel /s/ Hideo Nakajima
_____________________________________ _____________________________________
Mark Kessel Hideo Nakajima
Director Director
/s/ Masahiro Sawada /s/ Kenichiro Tanaka
_____________________________________ _____________________________________
Masahiro Sawada Kenichiro Tanaka
Director Director
/s/ Lawrence G. Hund
_____________________________________
Lawrence G. Hund
Senior Vice President and Controller
(Principal Accounting Officer)
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C> <C>
23.1 Consent of Arthur Anderson LLP
24 Power of Attorney (included on signature page hereto)
</TABLE>
<PAGE>
Exhibit 23.1
[LETTERHEAD OF ARTHUR ANDERSEN]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
included in this registration statement and to the incorporation by reference in
this registration statement of our report dated January 23, 1998 (except with
respect to the matters discussed in Note 20, as to which the date is February
24, 1998) included in Heller Financial, Inc.'s Form 10-K for the year ended
December 31, 1997 and to all references to our firm included in this
registration statement.
/s/ Arthur Andersen LLP
Chicago, Illinois
February 25, 1998
