<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report for the period ended September 30, 1998 pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 1-6157
Heller Financial, Inc.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 36-1208070
- ---------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 W. Monroe Street, Chicago, Illinois 60661
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(312) 441-7000
--------------
(Registrant's telephone number, including area code)
None
----
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
38,696,449 shares of Class A Common Stock, $.25 par value, outstanding at
November 16, 1998.
51,050,000 shares of Class B Common Stock, $.25 par value, outstanding at
November 16, 1998.
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Website is: http://www.hellerfin.com
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HELLER FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in millions, except for information on shares)
<TABLE>
<CAPTION>
ASSETS September 30, December 31,
1998 1997
------------- -------------
(unaudited)
<S> <C> <C>
Cash and cash equivalents................................................ $ 486 $ 821
Receivables (Note 4)
Commercial loans
Term loans............................................................ 3,108 2,597
Revolving loans....................................................... 2,017 1,674
Real estate loans........................................................ 2,561 2,238
Factored accounts receivable............................................. 2,802 2,223
Equipment loans and leases............................................... 2,301 1,990
------- -------
Total receivables................................................... 12,789 10,722
Less: Allowance for losses of receivables (Note 4)....................... 312 261
------- -------
Net receivables..................................................... 12,477 10,461
Equity and real estate investments....................................... 611 488
Debt securities.......................................................... 319 311
Operating leases......................................................... 166 195
Investments in international joint ventures.............................. 228 198
Other assets............................................................. 485 387
------- -------
Total assets........................................................ $14,772 $12,861
======= =======
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Senior debt
<S> <C> <C>
Commercial paper and short-term borrowings.............................. $ 3,847 $ 3,432
Notes and debentures (Note 5)........................................... 7,192 6,004
------- -------
Total senior debt................................................... 11,039 9,436
Credit balances of factoring clients..................................... 1,383 1,255
Other payables and accruals.............................................. 551 405
------- -------
Total liabilities................................................... 12,973 11,096
Minority interest........................................................ 8 87
Stockholders' equity
Cumulative Perpetual Senior Preferred Stock, Series A.................. 125 125
Noncumulative Perpetual Senior Preferred Stock, Series B (Note 10)..... - 150
Noncumulative Perpetual Senior Preferred Stock, Series C (Note 10)..... 150 -
Class A Common Stock ($.25 Par Value; 500,000,000 shares authorized;
39,020,775 shares issued and 38,693,781 shares outstanding) (Note 2).. 10 -
Class B Common Stock ($.25 Par Value; 300,000,000 shares authorized;
51,050,000 shares issued and outstanding) (Note 2).................... 13 13
Additional paid in capital............................................. 1,433 672
Retained earnings...................................................... 78 730
Treasury stock (326,994 shares) (Note 7)............................... (9) -
Accumulated other comprehensive income (Note 12)....................... (9) (12)
------- -------
Total stockholders' equity.......................................... 1,791 1,678
------- -------
Total liabilities and stockholders' equity.......................... $14,772 $12,861
======= =======
</TABLE>
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these statements.
2
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in millions, except for per share information)
(unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Interest income..................................... $ 270 $ 233 $ 776 $ 679
Interest expense.................................... 161 129 463 376
----- ----- ----- -----
Net interest income............................... 109 104 313 303
Fees and other income............................... 48 53 151 132
Factoring commissions............................... 31 28 90 71
Income of international joint ventures.............. 8 8 22 27
----- ----- ----- -----
Operating revenues................................ 196 193 576 533
Operating expenses.................................. 97 91 290 243
Provision for losses................................ 27 48 59 104
----- ----- ----- -----
Income before income taxes and minority interest.. 72 54 227 186
Income tax provision................................ 25 12 78 57
Minority interest................................... - 2 3 6
----- ----- ----- -----
Net income........................................ $ 47 $ 40 $ 146 $ 123
===== ===== ===== =====
Dividends on preferred stock...................... $ 5 $ 4 $ 15 $ 10
===== ===== ===== =====
Net income applicable to common stock............. $ 42 $ 36 $ 131 $ 113
===== ===== ===== =====
Basic and diluted net income applicable to
common stock per share (Note 8).................. $ .47 $ .71 $1.80 $2.21
===== ===== ===== =====
Pro forma basic net income applicable to
common stock per share (Note 8).................. $ .47 $ .40 $1.46 $1.26
===== ===== ===== =====
Pro forma diluted net income applicable to
common stock per share (Note 8).................. $ .47 $ .40 $1.45 $1.25
===== ===== ===== =====
</TABLE>
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these statements.
3
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
(in millions)
(unaudited)
<TABLE>
<CAPTION>
Noncum. Accum.
Perpetual Other
Perpetual Sr. Pref. Compre- Compre-
Sr. Pref. Stock Class A Class B Treasury Add'l hensive hensive
Stock Series B/C Common Common Stock Paid In Income Retained Income
Series A (Note 10) Stock Stock (Note 7) Capital (Note 12) Earnings Total (Note 12)
--------- ---------- ------- ------- -------- ------- --------- -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1996...................... $125 $ -- $-- $13 $ -- $ 675 $ (1) $ 655 $1,467
Comprehensive Income:
(Note 12)
Net income................. -- -- -- -- -- -- -- 123 123 $123
Other comprehensive
income, net of tax:
Unrealized gain on
securities, net of
tax of $(3)........... -- -- -- -- -- -- -- -- (7) (7)
Foreign currency
translation
adjustments, net of
tax of $(6)........... -- -- -- -- -- -- -- -- (14) (14)
----
Other comprehensive
income................. -- -- -- -- -- -- (21) -- -- (21)
----
Comprehensive income....... -- -- -- -- -- -- -- -- -- $102
====
Issuance of Noncumulative
Perpetual Senior
Preferred Stock, Series B. -- 150 -- -- -- (3) -- -- 147
Preferred stock dividends.. -- -- -- -- -- -- -- (10) (10)
Common stock dividends..... -- -- -- -- -- -- -- (42) (42)
---- ---- --- --- ---- ------ ---- ------ ------
BALANCE AT SEPTEMBER 30,
1997...................... $125 $150 $-- $13 $ -- $ 672 $(22) $ 726 $1,664
==== ==== === === ==== ====== ==== ===== ======
BALANCE AT DECEMBER 31,
1997...................... $125 $150 $-- $13 $ -- $ 672 $(12) $ 730 $1,678
Comprehensive Income:
(Note 12)
Net income.............. -- -- -- -- -- -- -- 146 146 $146
Other comprehensive
income, net of tax:
Unrealized gain on
securities, net of
tax of $4............. -- -- -- -- -- -- -- -- 8 8
Foreign currency
translation
adjustments, net of
tax of $(3)........... -- -- -- -- -- -- -- -- (5) (5)
----
Other comprehensive
income................. -- -- -- -- -- -- 3 -- -- 3
----
Comprehensive income....... -- -- -- -- -- -- -- -- -- $149
====
Issuance of Class A Common
Stock..................... -- -- 10 -- -- 976 -- -- 986
Repurchase of Class A
Common Stock.............. -- -- -- -- (9) -- -- -- (9)
Preferred stock dividends.. -- -- -- -- -- -- -- (15) (15)
Common stock dividends..... -- -- -- -- -- (215) -- (783) (998)
---- ---- --- --- ----- ------ ---- ----- ------
BALANCE AT SEPTEMBER 30,
1998...................... $125 $150 $10 $13 $ (9) $1,433 $ (9) $ 78 $1,791
==== ==== === === ===== ====== ==== ===== ======
</TABLE>
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these statements.
4
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
-------------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income..................................... $ 146 $ 123
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for losses.......................... 59 104
Losses from equity investments................ 33 38
Provision (benefit) for deferred taxes........ 5 (6)
Increase in accounts payable and accrued
liabilities.................................. 18 6
Undistributed income of international joint
ventures..................................... (17) (19)
Increase in interest payable.................. 33 27
Other......................................... 17 29
------- -------
Net cash provided by operating activities... 294 302
INVESTING ACTIVITIES
Long-term loans funded......................... (5,302) (3,593)
Collections of principal....................... 2,276 2,187
Securitizations, participations, syndications
and loan sales................................ 2,194 1,440
Net increase in short-term loans and advances
to factoring clients.......................... (1,168) (1,376)
Investment in operating leases................. (45) (101)
Investments in equity interests and other
investments................................... (362) (248)
Sales of investments and equipment on lease.... 290 272
Factofrance goodwill and noncompetition
agreement..................................... - (96)
Other.......................................... (27) (14)
------- -------
Net cash used for investing activities...... (2,144) (1,529)
FINANCING ACTIVITIES
Senior note issuances.......................... 2,295 969
Retirement of notes and debentures............. (1,107) (1,108)
Increase in commercial paper and other
short-term borrowings......................... 415 1,294
Proceeds from preferred stock issuance......... - 147
Net proceeds from common stock issuance........ 986 -
Repurchase of Class A Common Stock for
executive deferred compensation plan.......... (9) -
Net decrease in advances (from)/to affiliates.. (26) 20
Cash dividends paid on preferred stock......... (15) (10)
Cash dividends paid on common stock............ (998) (42)
Other.......................................... (26) (8)
------- -------
Net cash provided by financing activities... 1,515 1,262
------- -------
(Decrease)/increase in cash and cash equivalents. (335) 35
Cash and cash equivalents at the beginning of
the period...................................... 821 296
------- -------
Cash and cash equivalents at the end of the
period.......................................... $ 486 $ 331
======= =======
</TABLE>
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these statements.
5
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
(1) Basis of Presentation
These consolidated condensed financial statements should be read in
conjunction with the audited financial statements and notes included in the
annual report on Form 10-K of Heller Financial, Inc. (the "Company") for the
year ended December 31, 1997. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included in these
financial statements and were of a normal, recurring nature. Certain prior year
amounts have been reclassified to conform to the current year's presentation.
(2) Initial Public Offering
In May 1998, the Company issued 38,525,000 shares of Class A Common Stock
in an initial public offering (the "offering"). The net proceeds to the Company
were $986 million, $450 million of which was used to repay indebtedness of the
Company consisting of a $450 million subordinated note to Fuji America Holdings,
Inc. ("FAHI"), a wholly owned subsidiary of The Fuji Bank, Limited ("Fuji
Bank"), issued February 24, 1998 for a previously declared dividend to FAHI, and
$533 million of which was paid as a cash dividend to FAHI. The 51,050,000
outstanding Class B Common Shares are held by FAHI. In addition, 495,775 shares
of restricted Class A Common Stock were issued to management of the Company
during the second quarter of 1998. 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 may never represent more than 79% of the combined voting power of
all outstanding shares of the Company's voting stock). After the offering and
the issuance of shares to management, there were 90,070,775 shares of common
stock of the Company issued resulting in FAHI's ownership of 79% of the voting
interest and 57% of the economic interest of the Company's issued common stock.
Prior to May 1998, FAHI owned 100% of the issued and outstanding common stock of
the Company.
In May 1998, the Company purchased the 21% interest held by Fuji Bank in
Heller International Group, Inc. ("International Group") for total cash
consideration of $83 million. The Company financed this acquisition through the
issuance of senior debt.
(3) Acquisition of Factofrance
In April 1997, the Company's subsidiary, International Group, purchased the
interest held by its joint venture partner in Factofrance Heller S.A.
("Factofrance").
The following table presents pro forma combined income statements of the
Company and Factofrance and its subsidiaries for the nine months ended September
30, 1998 and 1997. The pro forma combined income statements are presented as if
the acquisition had been effective January 1, 1997. The combined historical
results of operations of Heller and Factofrance for 1997 have been adjusted to
reflect the amortization of goodwill, the amortization of the noncompetition
agreement and the costs of financing for the transaction. This information is
intended for informational purposes only and is not necessarily indicative of
the future results of operations of the Company or of the results of operations
of the Company that would have occurred had the acquisition been effective in
the periods presented.
6
<PAGE>
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
1998 1997
---- ----
(in millions)
<S> <C> <C>
Interest income..................................... $776 $695
Interest expense.................................... 463 385
---- ----
Net interest income............................... 313 310
Fees and other income............................... 151 139
Factoring commissions............................... 90 84
Income of international joint ventures.............. 22 24
---- ----
Operating revenues................................ 576 557
Operating expenses.................................. 290 263
Provision for losses................................ 59 106
---- ----
Income before income taxes and minority interest.. 227 188
Income tax provision................................ 78 57
Minority interest................................... 3 7
---- ----
Net income........................................ $146 $124
==== ====
</TABLE>
(4) Impaired Receivables and Repossessed Assets
The Company does not recognize interest and fee income on impaired
receivables or repossessed assets, both of which are classified as nonearning,
as set forth in the following table:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -------------
(in millions)
<S> <C> <C>
Impaired receivables...................................... $157 $141
Repossessed assets........................................ 5 14
---- ----
Total nonearning assets................................. $162 $155
==== ====
Ratio of total nonearning assets to total lending assets.. 1.3% 1.4%
==== ====
Ratio of allowance for losses of receivables to
nonearning impaired receivables......................... 199% 185%
==== ====
</TABLE>
Nonearning assets included $23 million at September 30, 1998 and $19
million at December 31, 1997 for consolidated international subsidiaries.
The average investment in nonearning impaired receivables was $152 million
for the nine months ended September 30, 1998 and $252 million for the nine
months ended September 30, 1997.
Loan Modifications--
The Company had $13 million of loans that are considered troubled debt
restructures at September 30, 1998 and December 31, 1997. The Company also had
$13 million of loans that were restructured at a market rate of interest,
written down from the original loan balance and returned to earning status at
September 30, 1998. The Company is not committed to lend significant additional
funds under the restructured agreements.
Allowance for Losses--
The change in the allowance for losses of receivables during the nine month
period ended September 30, 1998 included an additional provision of $59 million
and gross writedowns and recoveries of $70 million and $59 million,
respectively. Impaired receivables with identified reserve requirements were $98
million at September 30, 1998 and $62 million at December 31, 1997.
7
<PAGE>
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(in millions)
<S> <C> <C>
Identified reserve requirement for impaired receivables.. $ 26 $ 27
Additional allowance for losses of receivables........... 286 234
----- -----
Total allowance for losses of receivables............. $ 312 $ 261
===== =====
</TABLE>
(5) Senior Debt - Notes and Debentures
The Company issued and retired the following notes and debentures during
the nine months ended September 30, 1998 (excluding unamortized premium and
discount):
<TABLE>
<CAPTION>
Principal
Amount
---------
(in millions)
<S> <C>
Issuances:
Variable rate medium-term notes due on various
dates ranging from April 13, 1999 to May 18, 2010...... $1,488
Fixed rate medium-term notes with interest rates
ranging from 5.75% to 6.25% due on various dates
ranging from April 13, 2000 to September 23, 2003...... 807
------
$2,295
======
Retirements:
Variable rate medium-term notes due on various
dates ranging from January 15, 1998 to
September 29, 1998..................................... $ 562
Fixed rate medium term notes with interest rates
ranging from 6.27% to 9.63% due on various dates
ranging from March 15, 1998 to September 1, 1998....... 545
------
$1,107
======
</TABLE>
The Company's major bank credit facility of $3 billion is comprised of two
substantially equal facilities, a 364-day facility expiring April 6, 1999 and
another facility expiring April 8, 2002. The 364-day facility was renewed in
April 1998.
In July 1998, the Company filed with the Securities and Exchange Commission
a shelf registration statement covering the sale of up to $5 billion in debt
securities, senior preferred stock and Class A Common Stock.
In October 1998, the Company entered into an additional 364-day bank credit
facility with commitments of $575 million.
(6) Derivative Financial Instruments Used for Risk Management Purposes
The Company entered into $5.5 billion of interest rate swaps during the
nine months ended September 30, 1998. During this period, $3.3 billion of
interest rate swaps were terminated or matured. The interest rate swaps are
utilized to modify the interest rate and currency characteristics of the
Company's debt and assets to control the overall level of financial risk arising
from normal business operations. These instruments had the effect of converting
$1.4 billion of fixed rate assets to a variable rate, $550 million of variable
rate assets to a fixed rate, $1.1 billion of fixed rate debt to a variable rate,
and $2.4 billion of variable rate assets to another variable rate index. At
September 30, 1998, the Company held $5.5 billion in interest rate swap
agreements, $412 million in cross-currency interest rate swap agreements and
$3.0 billion of basis swap agreements.
The Company also periodically enters into forward contracts or options. The
Company held $641 million of forward contracts at September 30, 1998 which serve
to hedge its investment in international subsidiaries and joint
8
<PAGE>
ventures or to effectively hedge the translation of the related foreign currency
income. The Company executed $226 million of options during the first nine
months of 1998 to manage foreign exchange exposure.
(7) Treasury Stock
The Company has an executive deferred compensation plan ("the 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 deferred remains an asset of
the Company, and is invested in several mutual funds and Class A Common Stock of
the Company. The acquisitions of Class A Common Stock of the Company, under this
Plan, are reported as treasury stock. At September 30, 1998, 326,994 shares of
treasury stock were held by the Company through the Plan.
(8) Basic and Diluted Net Income Per Share and Pro Forma Net Income Per Share
Net income applicable to common stock per share on a basic and diluted basis for
the periods indicated is calculated as follows:
<TABLE>
<CAPTION>
Quarter Ended September 30, Nine Months Ended September 30,
Basic Diluted Basic Diluted
----- ------- ----- -------
1998 1997 1998 1997 1998 1997 1998 1997
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income applicable
to common stock
(in millions) $ 42 $ 36 $ 42 $ 36 $ 131 $ 113 $ 131 $ 113
======= ======= ======= ======= ======= ======= ======= =======
Average equivalent
shares of common
stock outstanding
(in thousands): 89,738 51,050 89,738 51,050 72,618 51,050 72,618 51,050
Treasury stock - - 333 - - - 241 -
Stock options - - - - - - 5 -
------- ------- ------- ------- ------- ------- ------- -------
Total average
equivalent shares 89,738 51,050 90,071 51,050 72,618 51,050 72,864 51,050
======= ======= ======= ======= ======= ======= ======= =======
Net income per share $ .47 $ .71 $ .47 $ .71 $ 1.80 $ 2.21 $ 1.80 $ 2.21
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The table below identifies the pro forma net income applicable to common
stock per share on a basic and diluted basis. Pro forma basic net income
applicable to common stock per share is computed based on net income applicable
to common stock divided by the average number of shares outstanding after the
Company's initial public offering. Pro forma diluted net income applicable to
common stock per share is computed based on net income applicable to common
stock divided by the average number of shares outstanding after the offering,
plus any shares held as treasury stock and the dilutive effect of the stock
options as if they had been outstanding since the beginning of the period.
<TABLE>
<CAPTION>
Quarter Ended September 30, Nine Months Ended September 30,
Basic Diluted Basic Diluted
----- ------- ----- -------
1998 1997 1998 1997 1998 1997 1998 1997
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income applicable
to common stock
(in millions) $ 42 $ 36 $ 42 $ 36 $ 131 $ 113 $ 131 $ 113
======= ======= ======= ======= ======= ======= ======= =======
Pro forma shares
(in thousands):
Shares of common
stock outstanding 89,744 89,744 89,744 89,744 89,702 89,702 89,702 89,702
Treasury stock - - 327 327 - - 369 369
Stock options - - - - - - 17 17
------- ------- ------- ------- ------- ------- ------- -------
Total pro forma
shares 89,744 89,744 90,071 90,071 89,702 89,702 90,088 90,088
======= ======= ======= ======= ======= ======= ======= =======
Net income per share $ .47 $ .40 $ .47 $ .40 $ 1.46 $ 1.26 $ 1.45 $ 1.25
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
9
<PAGE>
(9) Statement of Cash Flows
Noncash investing activities which occurred during the nine month period
ended September 30, 1998 included $4 million of receivables which were
classified as repossessed assets. For the nine month period ended September 30,
1998, the Company paid income taxes of $30 million. For the nine month period
ended September 30, 1997, the Company paid $32 million to its former parent,
Heller International Corporation, for the payment of income taxes.
(10) Noncumulative Perpetual Senior Preferred Stock
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 6.687% Noncumulative Perpetual Senior
Preferred Stock, Series B. 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.
(11) Subsequent Events
On October 12, 1998, the Company executed purchase agreements to acquire
the U.S. assets of the Dealer Products Group of Dana Commercial Credit
Corporation ("DCC") and the stock of DCC's international subsidiaries. The U.S.
and international divisions of the Dealer Products Group of DCC provide lease
financing to commercial enterprises primarily for the acquisition of computer
and telecom equipment. The total assets of the entire Dealer Products Group
acquired are approximately $625 million. Closing on the transaction is expected
in the fourth quarter of 1998 following approval by certain foreign regulatory
agencies and certain other third parties. This acquisition will be accounted for
under the purchase method of accounting. The Company plans to finance the
acquisition using a combination of the Company's cash and short-term
investments, over $300 million of undrawn liquidity from its factoring conduit
facility and the issuance of additional debt and preferred stock.
On October 16, 1998, the Company declared a quarterly dividend of $0.09 on
each outstanding share of its Class A Common Stock and Class B Common Stock,
payable on November 16, 1998 to the holders of record thereof on October 30,
1998. The Company also declared quarterly dividends of $0.5078125 and $1.67175
on each outstanding share of the Cumulative Perpetual Senior Preferred Stock,
Series A, and Fixed Rate Noncumulative Perpetual Senior Preferred Stock, Series
C, respectively, payable on November 16, 1998 to the holders of record thereof
on October 30, 1998.
During the third quarter, the CMBS securitization market experienced
considerable volatility resulting in the Company's decision to retain CMBS
receivables on its balance sheet, given the lack of liquidity and significantly
wider credit spreads for securities issued. Subsequent to September 30, 1998,
the CMBS securitization market improved, and the Company decided to sell these
assets which resulted in the reclassification of approximately $900 million of
CMBS receivables to "held for sale." The reclassification at market value in the
fourth quarter of 1998, generated a writedown of $40 million through the
Company's allowance for losses of receivables. On November 12, 1998, the Company
executed a securitization and sold these assets.
(12) Accounting Developments
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"),
which requires companies to report all changes in equity during a period, except
those resulting from investment by owners and distributions to owners, in a
financial statement for the period in which they are recognized. The Company has
chosen to disclose comprehensive income, which encompasses net income, foreign
currency translation adjustments and unrealized gains and losses on securities,
in the Consolidated Statement of Changes in Stockholders' Equity. Prior years
have been restated to conform to the SFAS No. 130 requirements.
The Financial Accounting Standards Board ("FASB") also issued Statement of
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information." This statement requires segments to be reported based on
the way management organizes segments within the Company for making operating
decisions and assessing performance. The Company will adopt this statement in
its 1998 year end financial statements. As these statements relate to
disclosure requirements, neither SFAS No. 130 nor SFAS No. 131 had a material
impact on the financial results of the Company.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures
about Pensions and Other Post Retirement Benefits," effective for fiscal years
beginning after December 31, 1997. SFAS No. 132 revises employer's disclosures
about pensions and other post retirement benefit plans but does not change the
measurement or recognition of those plans. The Company will adopt this statement
in its 1998 year end financial statements.
10
<PAGE>
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires that companies
recognize all derivatives as either assets or liabilities in the statement of
financial position at fair value. The statement is effective for fiscal years
beginning after September 15, 1999. The Company is assessing the impact of this
statement and will adopt it in its 2000 interim financial statements.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview. Net income for the nine months ended September 30, 1998 totaled $146
million, an increase of $23 million or 19% over the first nine months of 1997,
while net income for the third quarter of 1998 totaled $47 million compared to
$40 million for the third quarter of 1997, an increase of 18%. Net income
applicable to common stock was $131 million for the nine months ended September
30, 1998, representing an increase of 16% from $113 million for the nine months
ended September 30, 1997. Net income applicable to common stock totaled $42
million for the quarter ended September 30, 1998, an increase of $6 million or
17% over the third quarter of 1997.
Growth in earnings for the nine months and the third quarter was the result
of increased new business financing and factoring volume as well as continued
strong credit quality. New business financing volume totaled $5.7 billion year
to date and $2.0 billion for the third quarter of 1998, increases of 42% and
35%, respectively over the prior year periods. Factoring volume increased 47%
for the first nine months and 20% for the third quarter over the same periods in
the prior year. The Company continued to show strong credit quality with net
writedowns of only $11 million for the first nine months of 1998 compared with
$90 million for the same period in 1997. Nonearning assets of $162 million
represent only 1.3% of total lending assets at September 30, 1998, compared to
$238 million or 2.3% at September 30, 1997.
As previously reported, the Company increased its ownership of Factofrance
in April 1997. The Company's results for the first nine months of 1998 include
Factofrance on a consolidated basis for the entire period, while the 1997
results include Factofrance on a consolidated basis for the second and third
quarters only. Including Factofrance's results on a consolidated basis for an
additional quarter in 1998 had the effect of increasing operating revenues,
operating expenses and factoring commissions by $27 million, $21 million and $14
million, respectively, and decreasing income of international joint ventures by
$3 million.
Operating Revenues. The following tables summarize the Company's operating
revenues, as a percentage of average funds employed, for the nine months and
quarters ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
--------------------------------------
1998 Percent 1997 Percent
Amount of AFE Amount of AFE
------ -------- ------ ------------
(annualized) (annualized)
(dollars in millions)
<S> <C> <C> <C> <C>
Net interest income...................... $ 313 3.6% $ 303 4.1%
Non-interest income:
Fees and other income................... 151 1.7 132 1.8
Factoring commissions................... 90 1.0 71 .9
Income of international joint ventures.. 22 .3 27 .4
----- --- ----- ---
Total operating revenues.............. $ 576 6.6% $ 533 7.2%
===== === ===== ===
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended
September 30,
--------------------------------------
1998 Percent 1997 Percent
Amount of AFE Amount of AFE
------ -------- ------ ------------
(annualized) (annualized)
(dollars in millions)
<S> <C> <C> <C> <C>
Net interest income...................... $ 109 3.5% $ 104 4.1%
Non-interest income:
Fees and other income................... 48 1.6 53 2.0
Factoring commissions................... 31 1.0 28 1.1
Income of international joint ventures.. 8 .3 8 .3
----- --- ----- ---
Total operating revenues.............. $ 196 6.4% $ 193 7.5%
===== === ===== ===
</TABLE>
Operating revenues for the nine months ended September 30, 1998 totaled
$576 million, an increase of 8% over the prior year period. This increase is
driven primarily by increases in net interest income, fees and other income and
factoring commissions. Operating revenues for the third quarter of 1998 totaled
$196 million, an increase of 2% over the third quarter of 1997 due to an
increase in net interest income and factoring commissions.
Net Interest Income: Net interest income totaled $313 million and $109 million
for the nine months and quarter ended September 30, 1998, up 3% and 5% from $303
million and $104 million for the same periods in 1997. The increases in net
interest income are primarily attributable to an increase in AFE driven by year
to date record new business financing volume. Net interest income as a
percentage of AFE decreased to 3.6% and 3.5% for the nine months and quarter
ended September 30, 1998 compared to 4.1% for the same prior year periods. These
decreases reflect the impact of competitive market pricing pressures in certain
product categories and the impact of higher levels of CMBS receivables which
have a significantly lower net interest margin than other receivables of the
Company. The lower yielding CMBS portfolio decreased the Company's total net
interest margin by approximately 0.3% and 0.4%, respectively, for the nine
months and quarter ended September 30, 1998.
Non-Interest Income: The following tables summarize the Company's non-interest
income for the nine and three months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30, Increase/(Decrease)
------------------- --------------------
1998 1997 Amount Percent
--------- -------- --------- ---------
(dollars in millions)
<S> <C> <C> <C> <C>
Factoring commissions................... $ 90 $ 71 $ 19 27%
Income of international joint ventures.. 22 27 (5) (19)
Fees and other income:
Fee income and other (1)............... 98 73 25 34
Net investment gains................... 38 33 5 15
Securitization income.................. 15 26 (11) (42)
----- ----- ---- ---
Total fees and other income.......... $ 151 $ 132 $ 19 14%
===== ===== ==== ===
Total non-interest income............ $ 263 $ 230 $ 33 14%
===== ===== ==== ===
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
For the Three Months
Ended September 30, Increase/(Decrease)
-----------------------------------------
1998 1997 Amount Percent
-------- -------- -------- ---------
(dollars in millions)
<S> <C> <C> <C> <C>
Factoring commissions................... $ 31 $ 28 $ 3 11%
Income of international joint ventures.. 8 8 - -
Fees and other income:
Fee income and other (1)............... 33 25 8 32
Net investment gains................... 15 26 (11) (42)
Securitization income.................. - 2 (2) (100)
----- ----- ---- ----
Total fees and other income.......... $ 48 $ 53 $ (5) (9)%
===== ===== ==== ====
Total non-interest income............ $ 87 $ 89 $ (2) (2)%
===== ===== ==== ====
</TABLE>
(1) Fee income and other consists primarily of loan servicing income, real
estate participation income, late fees, prepayment fees, other
miscellaneous fees and gains on asset sales.
Factoring commissions for the nine months ended September 30, 1998
increased $19 million or 27% over the prior year period due to the impact of the
Factofrance consolidation for nine months in 1998 versus six months in 1997 as
well as growth in both domestic and international factoring volumes. For the
third quarter of 1998, factoring commissions increased $3 million or 11% over
1997 due to a 20% increase in factoring volume, partially offset by lower
factoring commission rates.
Income of international joint ventures decreased $5 million or 19% for the
nine months ended September 30, 1998 compared to the same period in 1997 due
primarily to the consolidation of Factofrance and modest decreases in income
from Asian and Latin American joint ventures.
Fees and other income totaled $151 million and increased $19 million or 14%
for the first nine months of 1998, compared to the same period in 1997. The
increase in the year to date results is due to increases in both fee income and
other and net investment gains, offset by lower securitization income related to
CMBS securitization activity. Fee income and other for the first nine months of
1998 increased in comparison to 1997 as the Company recognized higher income on
asset sales in Small Business Lending and Real Estate Finance, and larger
prepayment fees in Project Finance. Fees and other income for the third quarter
of 1998 decreased by $5 million as lower investment gains were only partially
offset by an increase in fee income and other due to higher prepayment fees and
residual income as compared to the third quarter of 1997.
Operating Expenses. The following tables summarize the Company's operating
expenses for the nine and three months ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30, Increase/(Decrease)
------------------------------------------
1998 1997 Amount Percent
---------- --------- -------- ---------
(dollars in millions)
<S> <C> <C> <C> <C>
Salaries and other compensation............................. $ 169 $ 152 $17 11%
General and administrative expenses......................... 121 91 30 33
----- ----- --- --
Total operating expenses............................. $ 290 $ 243 $47 19%
===== ===== === ==
Total operating expenses as a percentage of Average
Managed Assets (annualized).................... 3.0% 3.1%
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
For the Three Months
Ended September 30, Increase/(Decrease)
--------------------- -------------------
1998 1997 Amount Percent
---------- --------- --------- ---------
(dollars in millions)
<S> <C> <C> <C> <C>
Salaries and other compensation............................. $ 54 $ 56 $(2) (4)%
General and administrative expenses......................... 43 35 8 23
----- ----- --- ---
Total operating expenses............................. $ 97 $ 91 $ 6 7%
===== ===== === ===
Total operating expenses as a percentage of Average
Managed Assets (annualized).................... 2.9% 3.3%
</TABLE>
Year to date operating expenses, excluding the impact of the Factofrance
consolidation, increased by $26 million or 11% over the first nine months of
1997. Operating expenses for the third quarter of 1998 increased by $6 million
or 7% over the third quarter of 1997. These increases are primarily due to
investment in lower risk businesses, increased information technology expenses
including amounts associated with year 2000 compliance efforts and investment in
Heller's national brand building marketing campaign ("Straight Talk, Smart
Deals"). Operating expenses as a percentage of averaged managed assets
decreased to 3.0% and 2.9% for the nine months and quarter ended September 30,
1998, from 3.1% and 3.3% for the same prior year periods, reflecting improved
leveraging of the Company's cost base.
Allowance for Losses. The following tables summarize the changes in the
Company's allowance for losses of receivables, including the Company's provision
for losses of receivables, for the nine and three months ended September 30,
1998 and 1997.
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30, Increase/(Decrease)
--------------------- -------------------
1998 1997 Amount Percent
---------- --------- --------- ---------
(dollars in millions)
<S> <C> <C> <C> <C>
Balance at beginning of period............. $ 261 $ 225 $ 36 16%
Provision for losses...................... 59 104 (45) (43)
Writedowns................................ (70) (103) (33) (32)
Recoveries................................ 59 13 46 354
Factofrance consolidation at acquisition.. - 18 (18) (100)
Other..................................... 3 (2) 5 250
----- ----- ---- ----
Balance at end of period................... $ 312 $ 255 $ 57 22%
===== ===== ==== ====
For the Three Months
Ended September 30, Increase/(Decrease)
-------------------- -------------------
1998 1997 Amount Percent
---------- -------- -------- --------
(dollars in millions)
Balance at beginning of period............. $ 277 $ 250 $ 27 11%
Provision for losses...................... 27 48 (21) (44)
Writedowns................................ (28) (44) (16) (36)
Recoveries................................ 33 3 30 1000
Other..................................... 3 (2) 5 250
----- ----- ---- ----
Balance at end of period................... $ 312 $ 255 $ 57 22%
===== ===== ==== ====
</TABLE>
The Company continued to show strong credit quality through the third
quarter of 1998, resulting in a reduction in the provision for losses of $45
million or 43% for the first nine months of 1998 as compared to 1997. The
provision for losses for the third quarter decreased $21 million or 44% over the
same period in 1997. Net writedowns for the first nine months of 1998 totaled
only $11 million or 0.1% of average lending assets compared to $90 million or
1.3% for the same period in 1997. The Company recorded gross writedowns of $70
million and $28 million for the nine months and quarter ended September 30, 1998
compared to $103 million and $44 million for the same prior year periods
reflecting the continued strengthening of asset quality and reduction of the
pre-1990 portfolio. Gross recoveries for the nine months and quarter ended
September 30, 1998 totaled $59 million and $33 million compared to $13 million
and $3 million for the same prior year periods. Of the total recoveries recorded
in the third quarter of 1998, $20 million related to one pre-1990 credit.
15
<PAGE>
Income Taxes. The Company's effective tax rate was 34% and 35% for the nine
months and quarter ended September 30, 1998. The effective tax rate for 1998
remained below federal and state combined statutory rates due to the effect of
earnings from international joint ventures and the use of foreign tax credits.
LENDING ASSETS AND INVESTMENTS
Growth in new business volume for the first nine months and third quarter
of 1998 increased 42% and 35% over the same periods in 1997. Particularly strong
volume increases were achieved in Corporate Finance and the Real Estate CMBS
product along with modest growth in Sales Finance and Small Business Lending.
New business volume for the first nine months of 1998 was partially offset by
securitizations, syndications, participations and loan sales, as detailed in the
following table:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
----------------- ------------------
1998 1997 1998 1997
-------- ------- -------- --------
(dollars in millions)
<S> <C> <C> <C> <C>
New business volume.......................... $5,709 $4,010 $2,009 $1,490
Securitizations.............................. 1,190 770 - 260
Syndications, participations and loan sales.. 1,004 670 374 280
</TABLE>
The following table presents the Company's lending assets and investments
by business category and asset type as of September 30, 1998 and December 31,
1997.
<TABLE>
<CAPTION>
Lending Assets and Investments as of
September 30, December 31,
---------------- ---------------
1998 Percent 1997 Percent
-------- ------- ------- -------
By Business Category: (dollars in millions)
<S> <C> <C> <C> <C>
Asset Based Finance.................... $ 5,553 39% $ 4,726 40%
Corporate Finance...................... 2,889 21 2,010 17
Real Estate Finance.................... 2,565 18 2,093 18
International Group (1)................ 2,532 18 2,361 20
Project Finance........................ 128 1 144 1
Pre-1990 Portfolio..................... 295 2 492 4
Other.................................. 156 1 102 -
------- --- ------- -----
Total lending assets and investments.. $14,118 100% $11,928 100%
======= === ======= =====
By Asset Type:
Receivables............................ $12,789 91% $10,722 90%
Repossessed assets..................... 5 - 14 -
------- --- ------- ----
Total lending assets.................. $12,794 91% $10,736 90%
Equity and real estate investments..... 611 4 488 4
Debt securities........................ 319 2 311 3
Operating leases....................... 166 1 195 1
International joint ventures........... 228 2 198 2
------- --- ------- -----
Total lending assets and investments.. $14,118 100% $11,928 100%
======= === ======= =====
Funds employed (2).................... $12,735 $10,673
======= =======
Average funds employed (2)............ $11,623 $10,081
======= =======
Total managed assets (3).............. $13,594 $11,800
======= =======
Average managed assets (3)............ $12,739 $10,687
======= =======
</TABLE>
16
<PAGE>
(1) Includes $228 million and $198 million in investments in international
joint ventures at September 30, 1998 and December 31, 1997, respectively,
representing 2% of total lending assets and investments.
(2) Funds employed include lending assets and investments, less credit balances
of factoring clients.
(3) Total managed assets include funds employed, plus receivables previously
sold or securitized and currently managed by the Company. At September 30,
1998, managed assets include approximately $140 million from the 1997
equipment securitization in which the Company has not retained any credit
risk, $390 million of loans previously sold or securitized which are fully
guaranteed by the U.S. Government through the Small Business Administration
7(a) loan program and $237 million of factored accounts receivable sold.
The asset based lending portfolio is comprised of factored accounts
receivable, secured working capital finance, equipment loans and leases to end-
users, vendor finance program loans and leases, small business loans and loans
to leasing companies and timeshare developers. The following provides a
breakdown among the Company's various asset based product groups:
<TABLE>
<CAPTION>
Lending Assets and Investments as of
September 30, December 31,
--------------- ---------------
1998 Percent 1997 Percent
------- ------- ------- -------
(dollars in millions)
<S> <C> <C> <C> <C>
Equipment Finance and Leasing.......... $1,459 26% $1,316 28%
Sales Finance.......................... 1,324 24 1,228 26
Business Credit........................ 1,027 18 1,025 22
Current Asset Management (1)........... 877 16 391 8
Small Business Lending................. 866 16 766 16
------ --- ------ -----
Total lending assets and investments.. $5,553 100% $4,726 100%
====== === ====== =====
</TABLE>
(1) Reflects the sale of $237 million of factored accounts receivable at
September 30, 1998 and $500 million of factored accounts receivable at
December 31, 1997.
Growth in asset based lending assets and investments of $827 million during
the first nine months was driven by strong new business volume in the Equipment
Finance and Leasing, Sales Finance, and Small Business Lending Groups, along
with increased seasonal borrowings under existing lines in Current Asset
Management. The Company funded approximately $2.0 billion of new asset based
financings during the first nine months of 1998 and 1997. The Company achieved
this level of funding while continuing to maintain strong credit disciplines in
its asset based businesses. Small Business Lending asset growth during the nine
months ended September 30, 1998 was partially offset by $64 million in loan
sales primarily representing the government guaranteed portion of SBA 7(a)
loans, and the securitization of $96 million of the unguaranteed portion of SBA
7(a) loans during the second quarter of 1998. The Company retained an
investment in this securitization of $14 million as required by the SBA.
Corporate Finance lending assets and investments grew by $879 million
during the first nine months of 1998 due to strong new business volume of $1.8
billion compared to $1.1 billion for the same period in the prior year, an
increase of 64%. Asset growth due to this new business volume was partially
offset by syndications of $716 million during the first nine months of 1998.
During the second quarter of 1998, Corporate Finance made an investment in a
media lending company. At September 30, 1998, the Company's investment
represents a 23% interest. As part of this transaction, the Company has a loan
of $87 million which is currently secured by 34 individual loans to media
companies with an average commitment size of approximately $6.8 million at
September 30, 1998. This is a strategic investment for Corporate Finance, which
provides access to certain segments of the media communications industry.
Real Estate Finance experienced strong new business volume of approximately
$1.9 billion for the first nine months of 1998 up 94% over the prior year
period. This new business volume, mainly in the CMBS area, was partially offset
by a $1.1 billion securitization of CMBS receivables in the first quarter of
1998. The Company did not retain any residual risk in this transaction as all of
the commercial mortgage pass-through certificates were sold to third parties on
a non-recourse basis. The Company also did not retain any servicing obligations
on this portfolio. CMBS receivables total $1.4 billion at September 30, 1998 or
55% of the Company's real estate assets.
During the third quarter, the CMBS securitization market experienced
considerable volatility resulting in the Company's decision to retain CMBS
receivables on its balance sheet, given the lack of liquidity and significantly
wider credit spreads for securities issued. Subsequent to September 30, 1998,
the CMBS securitization market improved, and the Company decided to sell these
assets which resulted in the reclassification of appproximately $900 million of
CMBS receivables to "held for sale." The reclassification at market value in the
fourth quarter of 1998, generated a writedown of $40 million through the
Company's allowance for losses of receivables. On November 12, 1998, the Company
executed a securitization and sold these assets.
17
<PAGE>
The pre-1990 portfolio continued to decline as lending assets and
investments decreased $197 million or 40% from December 31, 1997. The pre-1990
portfolio represents only 2% of total lending assets and investments at
September 30, 1998.
Total revenues, as detailed in the following table, include interest
income, factoring commissions, fees and other income from domestic and
consolidated international operations, and the Company's share of the net income
of its international joint ventures.
<TABLE>
<CAPTION>
Total Revenues
For the Nine Months Ended September 30,
-----------------------------------------
1998 Percent 1997 Percent
--------- ---------- ------ ----------
(dollars in millions)
<S> <C> <C> <C> <C>
Asset Based Finance.. $ 444 43% $ 369 41%
Corporate Finance.... 200 19 182 20
Real Estate Finance.. 179 17 185 20
International Group.. 176 17 124 14
Project Finance...... 8 1 13 1
Pre-1990 Portfolio... 32 3 36 4
------ --- ----- ---
Total revenues...... $1,039 100% $ 909 100%
====== === ===== ===
</TABLE>
Total revenues, exceeding $1 billion year to date, increased $130 million
or 14% from the prior year, principally reflecting increases in interest income,
factoring commissions and fees and other income. Asset Based Finance and
Corporate Finance experienced increases in interest income of $60 million and
$18 million, respectively, resulting primarily from the increase in lending
assets and investments. International Group revenues grew by $52 million or 42%
over the first nine months of 1997. This increase was the result of the
consolidation of Factofrance for nine months in 1998 versus six months in 1997,
continued growth in factoring volume and a modest increase in lending assets and
investments of $171 million or 7.2%, which resulted in higher net interest
income. Real Estate Finance revenues decreased primarily due to the recognition
of lower securitization income in 1998.
18
<PAGE>
PORTFOLIO QUALITY
The credit quality of the portfolio continues to reflect the effectiveness
of the Company's credit strategies, underwriting and portfolio management and
disciplined credit approval process. Nonearning assets declined to 1.3% of
lending assets at September 30, 1998 from 1.4% at December 31, 1997. In
addition, the Company's allowance for losses of receivables remained at 2.4% and
represented 199% of nonearning receivables as of September 30, 1998. The
following table presents certain information with respect to the credit quality
of the Company's portfolio:
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
1998 1997
------------- ------------
(dollars in millions)
<S> <C> <C>
Lending Assets and Investments:
Receivables....................................................... $12,789 $10,722
Repossessed assets................................................ 5 14
------- -------
Total lending assets........................................... 12,794 10,736
Equity and real estate investments................................ 611 488
Debt securities................................................... 319 311
Operating leases.................................................. 166 195
Investments in international joint ventures....................... 228 198
------- -------
Total lending assets and investments........................... $14,118 $11,928
======= =======
Nonearning Assets:
Impaired receivables.............................................. $ 157 $ 141
Repossessed assets................................................ 5 14
------- -------
Total nonearning assets........................................ $ 162 $ 155
======= =======
Ratio of nonearning receivables to receivables.................... 1.2% 1.3%
======= =======
Ratio of total nonearning assets to total lending assets.......... 1.3% 1.4%
======= =======
Allowances for Losses:
Allowance for losses of receivables............................... $ 312 $ 261
======= =======
Ratio of allowance for losses of receivables to:
Receivables....................................................... 2.4% 2.4%
======= =======
Nonearning receivables............................................ 199% 185%
======= =======
Delinquencies:
Earning loans delinquent 60 days or more.......................... $ 197 $ 151
======= =======
Ratio of earning loans delinquent 60 days or more to receivables.. 1.5% 1.4%
======= =======
</TABLE>
<TABLE>
<CAPTION>
For The Nine Months
Ended September 30,
-----------------------
1998 1997
------- --------
<S> <C> <C>
Net writedowns of lending assets: (dollars in millions)
Net writedowns on receivables..................................... $ 11 $ 89
Net writedowns on repossessed assets.............................. - 1
------- -------
Total net writedowns........................................... $ 11 $ 90
======= =======
Ratio of net writedowns to average lending assets (annualized).... 0.1% 1.3%
======= =======
</TABLE>
Nonearning Assets. The Company's level of nonearning assets remained low at $162
million at September 30, 1998, compared with $155 million at December 31, 1997.
The level of nonearning assets as a percentage of receivables of 1.3% at
September 30, 1998 represents a slight decrease from 1.4% as of December 31,
1997 and remains favorable to the Company's targeted level.
19
<PAGE>
Allowance for Losses. The allowance for losses of receivables totaled $312
million or 2.4% of receivables at September 30, 1998, consistent with 2.4% at
December 31, 1997. The ratio of allowance for losses of receivables to
nonearning receivables totaled 199% at September 30, 1998 and 185% at December
31, 1997. As previously discussed, during the fourth quarter of 1998, the
Company reclassified approximately $900 million of CMBS receivables to "held for
sale," and recorded a writedown of $40 million through the Company's allowance
for losses of receivables.
Loan Modifications. Loans considered troubled debt restructures were $13
million at September 30, 1998, unchanged from December 31, 1997. The Company
also had $13 million of receivables at September 30, 1998 that were restructured
at market rates of interest, written down from the original loan balance and
returned to earning status.
Writedowns. Net writedowns were very low at 0.1% of average lending assets for
the nine months ended September 30, 1998 as compared to 1.3% for the same period
in the prior year. Gross writedowns declined to $70 million from $103 million
while recoveries were $59 million as compared to $13 million in the first nine
months of 1998 and 1997, respectively. The recoveries related primarily to the
pre-1990 portfolio and included a $20 million recovery on one pre-1990 account
during the third quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
The following table presents information regarding the Company's capital
structure:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(in millions)
<S> <C> <C>
Commercial paper and short-term borrowings....................... $ 3,847 $ 3,432
Notes and debentures............................................. 7,192 6,004
------- -------
Total senior debt............................................. 11,039 9,436
Minority interest................................................ 8 87
Stockholders' equity............................................. 1,791 1,678
------- -------
Total capitalization.......................................... $12,838 $11,201
======= =======
Leverage (net of short-term investments)......................... 6.0x 5.2x
Commercial paper and short-term borrowings to total senior debt.. 35% 36%
</TABLE>
During the first nine months of 1998, the Company funded $5.7 billion of
long-term loans, leases and investments and $1.2 billion of short-term loans.
Approximately two-thirds of this business activity was financed by portfolio
liquidity in the form of collections of principal of $2.3 billion and
securitizations, loan sales and sales of investments and equipment on lease of
$2.5 billion. The remaining new business volume, as well as the retirement of
$1.1 billion of senior notes, was financed by $294 million of cash flow provided
by operations, the issuance of $2.3 billion of senior notes, a net increase in
short-term debt of $415 million and a reduction of $335 million in the cash
balance from the high level at the beginning of the year.
The ratio of commercial paper and short-term borrowings to total senior
debt was 35% at September 30, 1998 and 36% at December 31, 1997. Leverage (net
of short-term investments) was 6.0x at September 30, 1998 and 5.2x at December
31, 1997. The level of commercial paper and short-term borrowings continues to
remain within ranges targeted by the Company. The current level of leverage is
at the higher end of the Company's target range and the Company does not
anticipate that it will exceed this level through the end of the year.
The Company has a $3 billion credit facility which is comprised of two
substantially equal facilities, a 364-day facility, which was renewed in April
1998 and expires April 6, 1999 and another facility expiring April 8, 2002. In
addition, at September 30, 1998 the Company had $658 million (U.S. dollar
equivalent) in committed foreign bank credit facilities for the consolidated
international subsidiaries, and $36 million available under foreign currency
revolving credit facilities. Committed credit and sale facilities represent 104%
of outstanding commercial paper and short-term borrowings at September 30, 1998.
In October 1998, the Company entered into an additional 364-day bank credit
facility with commitments of $575 million.
20
<PAGE>
Initial Public Offering
In May 1998, the Company issued 38,525,000 shares of Class A Common Stock
in an initial public offering (the "offering"). The net proceeds to the Company
were $986 million, $450 million of which was used to repay indebtedness of the
Company consisting of a $450 million subordinated note to Fuji America Holdings,
Inc. ("FAHI"), a wholly owned subsidiary of The Fuji Bank, Limited ("Fuji
Bank"), issued February 24, 1998 for a previously declared dividend to FAHI, and
$533 million of which was paid as a cash dividend to FAHI. The 51,050,000
outstanding Class B Common Shares are held by FAHI. In addition, 495,775 shares
of restricted Class A Common Stock were issued to management of the Company
during the second quarter of 1998. 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 may never represent more than 79% of the combined voting power of
all outstanding shares of the Company's voting stock). After the offering and
the issuance of shares to management, there were 90,070,775 shares of common
stock of the Company issued resulting in FAHI's ownership of 79% of the voting
interest and 57% of the economic interest of the Company's issued common stock.
Prior to May 1998, FAHI owned 100% of the issued and outstanding common stock of
the Company.
In May 1998, the Company purchased the 21% interest held by Fuji Bank in
International Group for total cash consideration of $83 million. The Company
financed this acquisition through the issuance of senior debt.
Risk Management - Asset/Liability Management
Derivatives were entered into during the first nine months of 1998 to
accomplish the Company's risk management objectives, which are to control the
overall level of financial risk arising from normal business operations. The
Company entered into interest rate swap agreements with aggregate notional
amounts of approximately $5.5 billion during the first nine months of 1998. In
addition, $3.3 billion of interest rate swaps were terminated or matured during
the nine month period. At September 30, 1998, the Company held $5.5 billion in
interest rate swap agreements, $412 million in cross-currency interest rate swap
agreements and $3.0 billion of basis swap agreements.
As of September 30, 1998, the Company held $641 million of forward currency
exchange contracts which serve to effectively hedge the translation of its
investment in international subsidiaries and joint ventures or to hedge the
translation of the related foreign currency income. The Company executed $226
million of options during the first nine months of 1998 to manage foreign
exchange exposure.
ACCOUNTING DEVELOPMENTS
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"),
which requires companies to report all changes in equity during a period, except
those resulting from investment by owners and distributions to owners, in a
financial statement for the period in which they are recognized. The Company has
chosen to disclose comprehensive income, which encompasses net income, foreign
currency translation adjustments and unrealized gains and losses on securities,
in the Consolidated Statement of Changes in Stockholders' Equity. Prior years
have been restated to conform to the SFAS No. 130 requirements.
The Financial Accounting Standards Board ("FASB") also issued Statement of
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information." This statement requires segments to be reported based on
the way management organizes segments within the Company for making operating
decisions and assessing performance. The Company will adopt this statement in
its 1998 year end financial statements. As these statements relate to disclosure
requirements, neither SFAS No. 130 nor SFAS No. 131 had a material impact on the
financial results of the Company.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures
about Pensions and Other Post Retirement Benefits," effective for fiscal years
beginning after December 31, 1997. SFAS No. 132 revises employer's disclosures
about pensions and other post retirement benefit plans but does not change the
measurement or recognition of those plans. The Company will adopt this statement
in its 1998 year end financial statements.
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In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires that companies
recognize all derivatives as either assets or liabilities in the statement of
financial position at fair value. The statement is effective for fiscal years
beginning after September 15, 1999. The Company is assessing the impact of this
statement and will adopt it in its 2000 interim financial statements.
22
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OTHER DEVELOPMENTS
The Company has retained the business consulting group of Arthur Andersen
L.L.P. to work with the Company to identify and implement measures designed to
improve its operational efficiency, both by generating additional revenues and
by reducing the costs of doing business. As a preliminary step toward achieving
the goals of the project, the Company intends to reorganize its domestic
operation into five core units: Structured Finance (combining the Corporate
Finance, Asset Based Business Credit and Commercial Funding groups), Real
Estate, Leasing Services (combining two equipment leasing groups), Small
Business Lending and Current Asset Management. The Company currently anticipates
establishing detailed plans for this project by the end of this year with
implementation of these plans expected to begin in the fourth quarter 1998 and
continuing into 1999.
On October 12, 1998, the Company executed purchase agreements to acquire
the U.S. assets of the Dealer Products Group of Dana Commercial Credit
Corporation ("DCC") and the stock of DCC's international subsidiaries. The U.S.
and international divisions of the Dealer Products Group of DCC provide lease
financing to commercial enterprises primarily for the acquisition of computer
and telecom equipment. The total assets of the entire Dealer Products Group
acquired are approximately $625 million. Closing on the transaction is expected
in the fourth quarter of 1998 following approval by certain foreign regulatory
agencies and certain other third parties. This acquisition will be accounted for
under the purchase method of accounting. The Company plans to finance the
acquisition using a combination of the Company's cash and short-term
investments, over $300 million of undrawn liquidity from its factoring conduit
facility and the issuance of additional debt and preferred stock.
On October 16, 1998, the Company declared a quarterly dividend of $0.09 on
each outstanding share of its Class A Common Stock and Class B Common Stock,
payable on November 16, 1998 to the holders of record thereof on October 30,
1998. The Company also declared quarterly dividends of $0.5078125 and $1.67175
on each outstanding share of the Cumulative Perpetual Senior Preferred Stock,
Series A, and Fixed Rate Noncumulative Perpetual Senior Preferred Stock, Series
C, respectively, payable on November 16, 1998 to the holders of record thereof
on October 30, 1998.
Year 2000 Compliance
The Company has adopted a phased approach to assessing and, where
necessary, remediating or otherwise addressing year 2000 issues. Phases include:
awareness, which, while ongoing, is substantially complete; assessment, which is
substantially complete with respect to information technology systems and
scheduled to be completed in 1998 with respect to potential issues relating to
borrowers, vendors, international affiliates and environmental factors;
remediation or implementation of contingency solutions, which is substantially
complete for all but one of the information technology systems deemed mission-
critical, and will be completed for that system in the second quarter of 1999,
and is scheduled for completion in the first quarter of 1999 for all other
matters; and finally validation, which is scheduled for completion on the final
mission-critical information technology system and certain information
technology infrastructure in the second quarter of 1999 and will continue
throughout 1999 for all other matters.
The Company has made, and will continue to make, certain investments in its
software applications and systems to ensure that 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 and other changes
required to address the issue. 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 with any follow up actions deemed necessary to occur in 1999.
In addition to information technology systems, the Company is assessing
potential year 2000 impacts on its material vendors and borrowers, as well as
year 2000 issues relating to environmental factors such as facilities and
general utilities. With respect to vendors, the Company has categorized vendors
with reference to materiality and availability of other sources for the provided
services and supplies, and is making inquiry of those vendors deemed material.
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Responses are reviewed to assess the need for any follow-up action. This
assessment and any resulting remediation or contingency solutions are scheduled
for completion during 1999. With respect to borrowers, a year 2000 risk
assessment has been incorporated into the Company's underwriting and portfolio
management activities in order to evaluate exposure due to any lack of
compliance on the part of borrowers. The Company categorizes prospective and
existing borrowers by level of year 2000 risk, and is underwriting new
transactions and managing portfolio accounts accordingly. Finally, the Company
is incorporating year 2000 contingency planning into its overall business
resumption program in consideration of facilities and other environmental
factors. This effort is also scheduled for completion in the first quarter of
1999.
To date, the Company has incurred approximately $6 million of expenses
related to the year 2000 issue and estimates that an additional amount, not to
exceed $10 million, will be incurred through the end of 1999. Remediation,
compliance, maintenance and modification costs will be expensed as incurred.
The Company continues to bear some risk related to the year 2000 issue and
could be materially adversely affected if its own remediation and contingency
planning efforts fall behind schedule or if other entities not affiliated with
the Company (e.g., vendors, including those providing contingency plans or
outsourced technology services such as mainframe and application support,
borrowers and power companies) do not appropriately address their own year 2000
compliance issues.
Due to uncertainty, the Company is unable to represent that there will be
no material adverse consequences related to the year 2000 issue, however, the
Company believes it is doing what is reasonably necessary to provide the
expertise, resources, assessments, and corrective procedures for the year 2000
issues which could have a material adverse impact on its operations or financial
condition.
Special Note Regarding Forward-Looking Statements
This Form 10-Q contains, and the documents incorporated by reference herein
contain, certain "forward-looking statements" (as defined in Section 21E of the
Securities Exchange 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) effects of economic conditions in the
real estate markets, capital markets or certain other markets or industries
served by the Company and the performance of borrowers; (iii) changes in the
volume of interest-bearing liabilities and the level of interest rates paid on
those interest-bearing liabilities; (iv) currency exchange rate fluctuations,
economic conditions and competition in international markets, and other
international implications; (v) the actions of the Company's competitors and the
Company's ability to respond to such actions; (vi) 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; (vii) the adequacy of the
Company's allowance for losses of receivables; (viii) the Company's ability to
attract and retain qualified and experienced management, sales and credit
personnel; and (ix) changes in governmental regulations, tax rates and similar
matters. The Company assumes no obligation to update publicly any forward-
looking statements, whether as a result of new information, future events or
otherwise.
24
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Part II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Effective September 30, 1998, the Board of Directors of the Company
elected as additional outside directors each of Frank S. Ptak, Vice
Chairman of Illinois Tool Works, Inc., and Michael A. Conway,
President of Aon Advisors, Inc. Messers. Ptak and Conway were also
elected to the Company's Audit Committee, which, including Mark
Kessel, now consists entirely of outside directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(10) Amended and restated Heller Financial, Inc. Executive Deferred
Compensation Plan
(12) Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends
(27) Financial Data Schedule
(b) Reports on Form 8-K
On January 29, 1998, the Company filed with the U.S. Securities and
Exchange Commission ("SEC") a Current Report on Form 8-K, dated January 26,
1998, to announce the Company's earnings for the year ended December 31, 1997.
On January 30, 1998, the Company filed with the SEC a Current Report on
Form 8-K, dated January 29, 1998, to announce the consideration of an initial
public offering of Common Stock of the Company by The Fuji Bank, Limited.
On February 20, 1998, the Company filed with the SEC a Current Report on
Form 8-K, dated February 20, 1998, to announce the Company's payment of a
dividend to its parent, Fuji America Holdings, Inc.
On February 27, 1998, the Company filed with the SEC a Current Report on
Form 8-K, dated February 26, 1998, announcing the filing of a Registration
Statement with the SEC in connection with an initial public offering of the
Company's Class A Common Stock.
On April 21, 1998, the Company filed with the SEC a Current Report on Form
8-K, dated April 20, 1998, to announce the Company's earnings for the quarter
ended March 31, 1998.
On June 18, 1998, the Company filed with the SEC a Current Report on Form
8-K dated May 22, 1998, in connection with a press release of The Fuji Bank,
Limited's financial statements for the fiscal year ended March 31, 1998.
On July 22, 1998, the Company filed with the SEC a Current Report on Form
8-K, dated July 20, 1998, to announce the Company's earnings for the quarter
ended June 30, 1998.
On September 17, 1998, the Company filed with the SEC a Current Report on
Form 8-K, dated September 17, 1998, to announce the selection of two outside
directors, Frank S. Ptak, Vice Chairman of Illinois Tool Works Inc. and Michael
A. Conway, President of Aon Advisors, Inc.
On September 18, 1998, the Company filed with the SEC a Current Report on
Form 8-K, dated September 1, 1998, to announce the commencement of an offering
under its Registration Statement on Form S-3 No. 333-58723 and pursuant to a
Prospectus Supplement of up to $5 billion of Medium Term Notes, Series I.
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On October 13, 1998, the Company filed with the SEC a Current Report on
Form 8-K, dated October 13, 1998, to announce the signing of a purchase
agreement to acquire the U.S. assets of the Dealer Products Group of Dana
Commercial Credit Corporation ("DCC") and the stock of DCC's international
subsidiaries.
On October 20, 1998 the Company filed with the SEC a Current Report on Form
8-K, dated October 19, 1998, to announce the declaration of dividends on its
Class A and Class B Common Stock, and on two of the company's preferred stocks,
its Cumulative Perpetual Senior Preferred Stock, Series A, and Fixed Rate
Noncumulative Perpetual Senior Preferred Stock, Series C.
On October 22, 1998 the Company filed with the SEC a Current Report on Form
8-K, dated October 20, 1998, to announce the Company's earnings for the quarter
ended September 30, 1998.
26
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this quarterly report to be signed on its behalf by
the undersigned thereunto duly authorized.
HELLER FINANCIAL, INC.
By: Lauralee E. Martin
------------------------
Lauralee E. Martin
Executive Vice President and
Chief Financial Officer
By: Lawrence G. Hund
------------------------
Lawrence G. Hund
Executive Vice President, Controller and
Chief Accounting Officer
Date: November 16, 1998
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HELLER FINANCIAL, INC.
EXECUTIVE DEFERRED COMPENSATION PLAN
Section 1
Introduction
1.1 The Plan and Its Effective Date. The Heller International
Corporation Executive Deferred Compensation Plan (the "Original Plan") was
established by Heller International Corporation effective as of January 1, 1994
(the "Effective Date"). The Original Plan was renamed the Heller Financial,
Inc. Executive Deferred Compensation Plan (the "Plan") effective as of January
1, 1998.
1.2 Purpose. Heller International Corporation established the Original
Plan effective January 1, 1994 for a select group of management and highly
compensated employees of Heller International Corporation or any subsidiary or
affiliate that adopted the Original Plan in accordance with Section 6 to retain
and attract highly qualified personnel by offering the benefits of a non-
qualified, unfunded plan of deferred compensation. This Plan allows Eligible
Employees to make deferrals and receive benefits regardless of the benefit and
contribution limits applicable to qualified retirement plans under the Internal
Revenue Code of 1986, as amended. Heller International Corporation transferred
sponsorship of the Original Plan to Heller Financial, Inc. (the "Company"),
effective as of January 1, 1998. The Plan is intended to be a top-hat plan
described in Section 201(2) of the Employee Retirement Income Security Act of
1974 ("ERISA").
1.3 Administration. The Plan shall be administered by a committee (the
"Committee") appointed by the Compensation Committee of the Board of Directors
of the Company (the "Compensation Committee"). In the event the Compensation
Committee fails to appoint such a committee, then the Compensation Committee
itself shall constitute the Committee. The Committee shall have the powers set
forth in the Plan and the power to interpret its provisions. Any decisions of
the Committee shall be final and binding on all persons with regard to the Plan.
The Committee may delegate its authority hereunder to one or more officers or
directors of the Company. The members of the Committee shall serve at the
pleasure of the Compensation Committee and may be removed, with or without
cause, by the Compensation Committee.
Section 2
Participation and Deferral Elections
2.1 Eligibility and Participation. Subject to the conditions and
limitations of the Plan, all leadership executives (salary grade 18 and above)
of the Company or an Employer (as defined in Section 6.1), such other executives
of the Company or an Employer identified as eligible by the Committee, and those
non-employee members of the Board of Directors of the Company identified as
eligible by the Committee shall be eligible to participate in the Plan
("Eligible Employees"). Any Eligible Employee who makes a Deferral Election as
described in Section 2.2 below shall become a participant in the Plan
("Participant") and shall remain a Participant until the entire balance of his
Deferral Account (defined in Section 3.1 below) is distributed to him.
<PAGE>
2.2 Rules for Deferral Elections. Any Eligible Employee may make an
irrevocable election ("Deferral Election") to defer receipt of one or more of
his Incentive Payments, Annual Bonus, Annual Base Salary, REFS Plan Amount and
Retainer (as these terms are defined in Section 2.3) for a calendar year in
accordance with the rules set forth below:
(a) An individual shall be eligible to make a Deferral Election only if he
is an Eligible Employee on the date such election is made. Effective
July 17, 1998, an individual who first becomes an Eligible Employee
during a given calendar year may make an election to participate in
the Plan during that calendar year, so long as the election:
(i) is submitted to the Committed or its delegate within thirty days
after the individual becomes an Eligible Employee; and
(ii) relates only to compensation earned for services performed during
that calendar year after the election is properly submitted to
the Committee or its delegate.
July 17, 1998 will be a special date upon which individuals first
hired by the Company or an Employer earlier in 1998 become Eligible
Employees (assuming the Committee has named them as eligible, if
applicable).
(b) All Deferral Elections must be made in writing on such forms as the
Committee may prescribe and must be received by the Committee no later
than the date specified by the Committee. In no event will the date
specified by the Committee be later than the end of the month that
precedes the earliest date that the amount being deferred is made
available to such Eligible Employee.
(c) Deferred amounts will be deferred to the date specified by the
Eligible Employee at the time of his initial Deferral Election (the
"Distribution Date"). Except as provided in subsections 2.2(f),
2.2(k) or 2.2(l) below, the Distribution Date specified at the time of
the Eligible Employee's initial Deferral Election is irrevocable and
shall apply to all amounts deferred by the Eligible Employee under the
Plan.
(d) The Distribution Date specified by the Participant at the time of his
initial Deferral Election shall be either (i) a specified date not
earlier than January 1 immediately following the third anniversary of
the date on which the Eligible Employee files his initial Deferral
Election (the "Designated Distribution Date"), (ii) the Eligible
Employee's Termination of Employment (as defined in subsection (e),
below) or a specified date coinciding with or next following the
Eligible Employee's Termination of Employment (e.g., January 1
coinciding with or next following the Eligible Employee's Termination
of Employment), or (iii) the earlier of (i) or (ii) above, as may be
elected by the Eligible Employee at the time of his initial Deferral
Election.
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(e) For purposes of this Plan, a "Termination of Employment" occurs when a
person leaves the employ of the Company (including all subsidiaries
and affiliates), or, as applicable, ceases to be a member of the Board
of Directors of the Company, by reason of a resignation, discharge,
retirement, or death; provided that in the event a person receives
periodic severance payments after he leaves the employ of the Company
(or an subsidiary or affiliate), then such person's Termination of
Employment shall occur on the date on which the final periodic
severance payment is made. For a Participant who is a non-employee
member of the Board of Directors of the Company, a "Termination of
Employment" occurs when the Participant ceases to be a non-employee
director.
(f) A Participant may make a one-time election after the Participant's
initial Deferral Election to extend the Distribution Date; provided
that such election shall not be effective unless the Committee
receives the election at least one year and one day before the
Distribution Date elected by the Participant at the time of his
initial Deferral Election and provided that with respect to
acceleration of the Distribution Date, the Participant's Employer
provides prior written consent to such acceleration.
(g) At the time of the Participant's initial Deferral Election, the
Participant must elect, in writing on such form as the Committee may
prescribe, the form of payment of the Participant's Deferral Account.
The Deferral Account may be paid in a single lump sum or in
substantially equal annual installments over a five, ten or fifteen
year period in accordance with Section 4.1. Except as provided in
Section 4.1, the Participant's election as to the form of payment of
his Deferral Account made at the time of the Participant's initial
Deferral Election shall apply to all amounts deferred by the Eligible
Employee under the Plan.
(h) At the time of the Participant's initial Deferral Election, the
Participant shall specify, in writing on such form as may be
prescribed by the Committee, the manner in which income, gains, losses
and expenses are credited or charged to a Participant's Deferral
Accounts in accordance with Section 3.2.
(i) No Deferral Election shall apply to any amounts which in the absence
of a Deferral Election would be payable to the Eligible Employee on or
after January 1, 2004, or such later date as may be permitted by the
Board of Directors of the Company.
(j) A Deferral Election shall be irrevocable; provided that if the
Committee determines that a Participant has an Unforeseeable Financial
Emergency (as defined in Section 4.6), then the Participant's Deferral
Election in effect at the time of the Unforeseeable Financial
Emergency shall be revoked with respect to all amounts not previously
deferred at the time the Committee determines that the Participant has
an Unforeseeable Financial Emergency; and further provided that if a
Participant receives a distribution on account of hardship under any
qualified plan that is described in Section 401(k) of the Internal
Revenue Code (the "Code") and
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which is maintained by the Company, an Employer or a commonly
controlled entity (as defined in Code Sections 414(b) and (c)) of the
Company or an Employer (a "401(k) Plan"), then no amounts may be
deferred under the Plan for a period of 12 months following the date
the Participant receives the distribution on account of hardship from
the 401(k) Plan.
(k) If a Participant makes a Deferral Election that will first become
effective after the Designated Distribution Date elected in the
Participant's initial Deferral Election, then the Participant must
select a new Distribution Date in the manner described in subsection
2.2(d) as though such Deferral Election were his initial Deferral
Election; provided, that the new Distribution Date selected by the
Participant shall only apply to amounts deferred by the Participant
for calendar years following the year in which the new Distribution
Date is selected.
(l) If a Participant is also a participant in the Heller Financial, Inc.
Real Estate Financial Services Plan ("REFS Plan") for the 1997
calendar year, such Participant may, in accordance with the provisions
of the REFS Plan, elect to transfer all or a portion of his Deferral
Account to the REFS Plan. All amounts so transferred shall be subject
to the terms and conditions of the REFS Plan (including, but not
limited to, the distribution provisions of the REFS Plan), but in no
event shall such amounts be distributed from the REFS Plan prior to
the date that they would otherwise be distributed under the Plan had
such transfer not occurred.
2.3 Amounts Deferred. An Eligible Employee may make a Deferral Election
to defer receipt of the following amounts:
(a) All or any portion of his incentive payments ("Incentive Payments")
under the Long-term Incentive Plan of Heller Financial, Inc. with
respect to performance in the calendar year in which the Deferral
Election is made in increments of 1%.
(b) All or any portion of his annual bonus ("Annual Bonus") for a calendar
year under the Management Incentive Plan of Heller Financial, Inc. in
increments of 1%.
(c) Up to 15% of his annual base salary excluding severance payments
("Annual Base Salary") in increments of 1%.
(d) Such other bonuses and incentive payments under any plan or
arrangement established by an Employer as the Chairman of the Board of
Directors of the Company (the "Chairman") may designate as
compensation eligible for deferral under this Plan in such increments
and subject to such limitations and restrictions as the Chairman may
establish.
(e) Subject to the terms and conditions of the REFS Plan, all of his
distribution from a given subaccount under the REFS Plan ("REFS Plan
Amount").
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(f) All or any portion of his retainer received for services as a non-
employee member of the Board of Directors of the Company ("Retainer").
Section 3
Deferral Accounts
3.1 Deferral Accounts. All amounts deferred pursuant to one or more
Deferral Elections under the Plan shall be allocated to a bookkeeping account in
the name of the Participant ("Deferral Account"). Amounts deferred pursuant to
a Deferral Election shall be credited to the Deferral Account as of the Deferral
Crediting Date (as defined below) coinciding with or next following the date on
which, in the absence of a Deferral Election, the Participant would otherwise
have received the deferred amounts. The "Deferral Crediting Date" shall be the
business day coinciding with or next preceding the 15th day of each calendar
month (the "Mid-Month Deferral Crediting Date") and the business day coinciding
with or next preceding the last day of each calendar month (the "End-of-Month
Deferral Crediting Date").
3.2 Investment Elections and Income Crediting. As of the last business
day of each calendar month (or such other dates as the Committee, in its
discretion, may designate) ("Valuation Date"), each Participant's Deferral
Account will be credited with income and gains and charged with losses, expenses
and distributions equal to the amount by which the Deferral Account would have
been credited or charged since the prior Valuation Date (in the manner described
below) had the Participant's Deferral Account been invested in the Investment
Funds (as defined below) selected by the Participant in accordance with the
Participant's investment elections.
The "Investment Funds" shall consist of two or more mutual funds designated
by the Committee, in its sole discretion, for Participants' investment
elections. The Committee may, in its sole discretion, designate additional
Investment Funds or terminate existing Investment Funds.
A Participant must make an investment election at the time of his initial
Deferral Election. The investment election shall designate the portion of the
amounts deferred which are to be treated as invested in each available
Investment Fund. A Participant's investment election shall remain in effect
with respect to each subsequent deferral until the Participant files a change in
investment election with the Committee. A Participant may change his investment
election either with respect to amounts deferred following the change in
investment election or with respect to the investment allocation of the
Participant's existing Deferral Account, as the Participant may elect. A change
in investment election must be filed with the Committee on a form prescribed by
the Committee. A change in investment election will become effective on the
first business day of the calendar quarter following the Committee's receipt of
the change in investment election; provided that the Committee receives the
change in investment election no later than the 15th day of the last month of
the preceding calendar quarter (or such earlier or later date as may be
permitted or required by the Committee).
Notwithstanding any provisions herein to the contrary, amounts deferred
during any calendar month shall not be treated as invested among the Investment
Funds selected by the Participant in his investment election until the first
business day of the
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<PAGE>
following month. Amounts deferred as of the Mid-Month Deferral Crediting Date
(the "Mid-Month Deferred Amount") shall be deemed to have been invested in the
Transition Fund for the period from the Mid-Month Deferral Crediting Date
through the last day of the month that includes the Mid-Month Deferral Crediting
Date (or, if such last day is not a business day, the next following business
day). The "Transition Fund" is a money market fund or such other investment fund
designated by the Committee in its sole discretion which is invested primarily
in short-term securities. As of each Valuation Date the Committee (or its
delegate) shall determine the net income, gains or losses of the Transition Fund
since the preceding Mid-Month Deferral Crediting Date determined as if
Participants' Mid-Month Deferrals for the month were actually invested in the
Transition Fund. The Committee (or its delegate) shall proportionately allocate
the net income, gains or losses of the Transition Fund among the Participants'
Deferral Accounts by crediting (or charging) each such Deferral Account by an
amount equal to the net income, gains or losses of the Transition Fund
multiplied by a fraction, the numerator of which is the amount of the
Participant's Mid-Month Deferred Amount for such month and the denominator of
which is the total amount of all Participants' Mid-Month Deferred Amounts for
such month. As of the first business day of each month the amounts deferred
during the immediately preceding month increased by any income or gains and
reduced by any losses and expenses credited or charged with respect to the
Participant's Mid-Month Deferred Amounts for the immediately preceding month
shall be treated as if invested among the Investment Funds selected by the
Participant in his investment election.
As of each Valuation Date the Committee (or its delegate) shall determine
the net income, gains or losses of each Investment Fund since the preceding
Valuation Date determined as if Participants' Deferral Accounts were actually
invested in the Investment Funds in accordance with Participants' investment
elections. The Committee (or its delegate) shall proportionately allocate the
net income, gains or losses of each Investment Fund among the Participants'
Deferral Accounts as valued as of the preceding Valuation Date (reduced by any
distributions therefrom since the preceding Valuation Date) by crediting (or
charging) each such Deferral Account by an amount equal to the net income, gains
or losses of each Investment Fund multiplied by a fraction, the numerator of
which is the balance of such Deferral Account deemed invested in such Investment
Fund as of the preceding Valuation Date (reduced by any distributions therefrom
since the preceding Valuation Date) and the denominator of which is the total
value of all Deferral Accounts deemed invested in such Investment Funds as of
the preceding Valuation Date (reduced by any distributions therefrom since the
preceding Valuation Date); provided however that for the purpose of allocating
such income as of the first Valuation Date, the numerator and denominator of the
preceding fraction shall be determined by using Deferral Account balances as of
the first Valuation Date after all contributions are credited thereto and before
income is allocated as provided in this Section 3.2.
Notwithstanding the foregoing provisions of this Section 3.2, the date on
which shares of the Company's Class A Common Stock, par value $0.25 ("Common
Stock") are first offered to the public in connection with the initial public
offering undertaken in April of 1998 (the "Public Offering Date") will be the
Valuation Date for April, 1998. The Public Offering Date will also be a special
investment election change date, but only for purposes of electing into an
investment fund consisting of Company Stock. Provided a Participant files the
prescribed form with the Committee no later than the date
6
<PAGE>
prescribed by the Committee, his or her election to invest a portion of his or
her future deferrals or already existing Deferral Account in an investment fund
consisting of Company Stock will be effective on the Public Offering Date.
3.3. Vesting. A Participant shall be fully vested at all times in the
balance of his Deferral Account.
Section 4
Payment of Benefits
4.1 Time and Method of Payment. Payment of a Participant's Deferral
Account shall be made in the form of a single lump sum or shall commence in the
form of installments as elected by the Participant at the time of his initial
Deferral Election. A Participant may make a one-time election after the
Eligible Employee's initial Deferral Election to change the form of payment
elected by the Participant; provided that such election shall not be effective
unless the election to change the form of payment is received by the Committee
at least one year and one day before the Participant's Distribution Date.
Notwithstanding the foregoing, a Participant who also is a participant in the
REFS Plan (as described in Section 2.2(l)) may make a one-time election pursuant
to the terms of the REFS Plan to transfer all or a portion of his Deferral
Account to the REFS Plan.
If a Participant's Deferral Account is payable in a single lump sum, the
payment shall be made as soon as possible following the Valuation Date
coinciding with or next following the Participant's Distribution Date in an
amount equal to the value of the Participant's Deferral Account as of the most
recent valuation completed prior to the date on which the balance of the
Deferral Account is paid to the Participant.
If a Participant's Deferral Account is payable in the form of installment
payments, then the Participant's Deferral Account shall be paid in substantially
equal installments over a five, ten or fifteen year period (as elected by the
Participant in accordance with this Section 4.1) commencing as soon as practical
after the Valuation Date coinciding with or next following the Participant's
Distribution Date.
Each installment payment shall be computed by dividing the balance of the
Participant's Deferral Account as of the most recent valuation completed prior
to the installment payment date by the number of payments remaining in the
installment period.
4.2 Payment Upon Disability. In the event a Participant becomes Disabled
(as defined below) before his Distribution Date, payment of the Participant's
Deferral Account shall be made or shall commence (in the form of payment elected
by the Participant in accordance with Section 2.2(g) and 4.1) as soon as
practical after the Valuation Date coinciding with or next following the date on
which the Committee determines that the Participant is Disabled.
For purposes of this Section 4.2, a Participant shall be "Disabled" if he
has a physical or mental condition resulting from a bodily injury, disease, or
mental disorder, which renders the Participant presumably permanently incapable
of performing his
7
<PAGE>
normal employment duties. Such determination shall be made by the Committee on
the basis of such medical and other competent evidence as the Committee shall
deem relevant.
4.3 Payment Upon Death of a Participant. Notwithstanding any election by
the Participant regarding the timing and manner of payment of his Deferral
Account, a Participant's Deferral Account shall be paid to the Participant's
Beneficiary (designated in accordance with Section 4.4) in any manner determined
by the Committee in its sole discretion.
4.4 Beneficiary. If a Participant is married on the date of his death,
then his Beneficiary shall be the Participant's spouse, unless the Participant
(with his spouse's written consent) names a Beneficiary or Beneficiaries (other
than the Participant's spouse) to receive the balance of the Participant's
Deferral Account in the event of the Participant's death prior to the payment of
his entire Deferral Account. To be effective, any Beneficiary designation shall
be filed in writing with the Committee. A Participant may revoke an existing
Beneficiary designation by filing another written Beneficiary designation with
the Committee. The latest Beneficiary designation received by the Committee
shall be controlling.
If no Beneficiary is named by a Participant or if he survives all of his
named Beneficiaries, the Deferral Account shall be paid in the following order
of precedence:
(1) the Participant's spouse;
(2) the Participant's children (including adopted children), per
stirpes; or
(3) the Participant's estate.
In order for a married Participant's Beneficiary designation to be
effective, the Participant's spouse must consent to the Beneficiary designation.
A valid spousal consent:
(1) must be in writing acknowledging the effect of the consent;
(2) must be witnessed by a notary public;
(3) must be effective only for the spouse who executes the consent;
and
(4) must designate a Beneficiary or Beneficiaries who may not be
changed by the Participant without the spouse's consent, unless
the Participant names his spouse as his sole Beneficiary or the
spouse's consent in the first instance expressly permits
designations by the Participant without any requirement of
further consent by the spouse.
4.5 Form of Payment. All payment shall be made in cash.
8
<PAGE>
4.6 Unforeseeable Financial Emergency. If the Committee determines that a
Participant has incurred an Unforeseeable Financial Emergency (as defined
below), the Participant may withdraw in cash the portion of the balance of his
Deferral Account needed to satisfy the Unforeseeable Financial Emergency, to the
extent that the Unforeseeable Financial Emergency may not be relieved:
(1) Through reimbursement or compensation by insurance or otherwise;
or
(2) By liquidation of the Participant's assets, to the extent the
liquidation of such assets would not itself cause severe
financial hardship.
An "Unforeseeable Financial Emergency" is a severe financial hardship to
the Participant resulting from:
(1) A sudden and unexpected illness or accident of the Participant or
of a dependent of the Participant;
(2) Loss of the Participant's property due to casualty; or
(3) Such other similar extraordinary and unforeseeable circumstances
arising as a result of events beyond the control of the
Participant as determined by the Committee.
A withdrawal on account of an Unforeseeable Financial Emergency shall be
paid as soon as possible after the Valuation Date coinciding with or next
following the date on which the Committee approves the withdrawal.
In the event a Participant is entitled to a withdrawal from the Plan on
account of an Unforeseeable Financial Emergency and at the same time is entitled
to a distribution on account of hardship from a 401(k) Plan (as defined in
Section 2.2(j)), the Participant must withdraw his entire Deferral Account under
the Plan on account of the Unforeseeable Financial Emergency before he may
receive any distribution on account of hardship under the 401(k) Plan.
4.7 Withholding of Taxes. The Company shall withhold any applicable
Federal, state or local income tax from payments due under the Plan. The
Company shall also withhold Social Security taxes, including the Medicare
portion of such taxes, and any other employment taxes as necessary to comply
with applicable laws.
4.8 Cashout of Account Balances. Notwithstanding any election by the
Participant regarding the timing and manner of a payment of his Deferral
Account, in the event of a Participant's Termination of Employment, (a) the
Employer may elect to pay the Participant a lump sum distribution of the entire
value of the Participant's Deferral Account if the value is less than one
hundred thousand dollars ($100,000) determined as of the Valuation Date
coinciding with or immediately following the Participant's termination of
employment and (b) the Committee may in its sole discretion elect to pay the
Participant a lump sum distribution of the entire value of the Participant's
Deferral Account, if it determines that lump sum payment is desirable.
9
<PAGE>
Section 5
Miscellaneous
5.1 Funding. Benefits payable under the Plan to any Participant shall be
paid directly by the Participant's Employer (including the Company if the
Participant is employed by the Company). The Company and the Employers shall
not be required to fund, or otherwise segregate assets to be used for payment of
benefits under the Plan. While the Company and Employers may, in the discretion
of the Committee, make investments in the mutual funds designated by the
Committee as Investment Funds in amounts equal or unequal to Participants'
investment elections hereunder, the Company and the Employers shall not be under
any obligation to make such investments and any such investment shall remain an
asset of the Company or the Employer subject to the claims of its general
creditors. Notwithstanding the foregoing, the Company and the Employers, in the
discretion of the Committee, may maintain one or more grantor trusts ("Trust")
to hold assets to be used for payment of benefits under the Plan. The assets of
the Trust with respect to benefits payable to the employees of each Employer
shall remain the assets of such Employer subject to the claims of its general
creditors. Any payments by a Trust of benefits provided to a Participant under
the Plan shall be considered payment by the Company or the Employer and shall
discharge the Company or the Employer of any further liability under the Plan
for such payments.
5.2 Benefit Statements. As soon as practical after the end of each
calendar year (or after such additional date or dates as the Committee, in its
discretion, may designate), the Committee shall provide each Participant with a
statement of the balance of his Deferral Account hereunder as of the last day of
such calendar year (or as of such other dates as the Committee, in its
discretion may designate).
5.3 Employment Rights. Establishment of the Plan shall not be construed
to give any Eligible Employee the right to be retained in the Company's service
or to any benefits not specifically provided by the Plan.
5.4 Interests Not Transferable. Except as to withholding of any taxes
under the laws of the United States or any state or locality and the provisions
of Section 4.4, no benefit payable at any time under the Plan shall be subject
in any manner to alienation, sale, transfer, assignment, pledge, attachment, or
other legal process, or encumbrance of any kind. Any attempt to alienate, sell,
transfer, assign, pledge or otherwise encumber any such benefits, whether
currently or thereafter payable, shall be void. No person shall, in any manner,
be liable for or subject to the debts or liabilities of any person entitled to
such benefits. If any person shall attempt to, or shall alienate, sell,
transfer, assign, pledge or otherwise encumber his benefits under the Plan, or
if by any reason of his bankruptcy or other event happening at any time, such
benefits would devolve upon any other person or would not be enjoyed by the
person entitled thereto under the Plan, then the Committee, in its discretion,
may terminate the interest in any such benefits of the person entitled thereto
under the Plan and hold or apply them for or to the benefit of such person
entitled thereto under the Plan or his spouse, children or other dependents, or
any of them, in such manner as the Committee may deem proper.
10
<PAGE>
5.5 Forfeitures and Unclaimed Amounts. Unclaimed amounts shall consist of
the amounts of the Deferral Account of a Participant that cannot be distributed
because of the Committee's inability, after a reasonable search, to locate a
Participant or his Beneficiary, as applicable, within a period of two (2) years
after the Valuation Date upon which the payment of benefits become due.
Unclaimed amounts shall be forfeited at the end of such two-year period. These
forfeitures will reduce the obligations of the Company under the Plan. After an
unclaimed amount has been forfeited, the Participant or Beneficiary, as
applicable, shall have no further right to his Deferral Account.
5.6 Controlling Law. The law of Illinois, except its law with respect to
choice of law, shall be controlling in all matters relating to the Plan to the
extent not preempted by ERISA.
5.7 Gender and Number. Words in the masculine gender shall include the
feminine, and the plural shall include the singular and the singular shall
include the plural.
5.8 Action by the Company. Except as otherwise specifically provided
herein, any action required of or permitted by the Company under the Plan shall
be by resolution of the Board of Directors of the Company or by action of any
member of the Committee or person(s) authorized by resolution of the Board of
Directors of the Company.
Section 6
Employer Participation
6.1 Adoption of Plan. Any subsidiary or affiliate of the Company
(including any domestic or foreign entity which is related to the Company by
less than a 50% direct or indirect ownership interest by or in the Company) (an
"Employer") may, with the approval of the Committee and under such terms and
conditions as the Committee may prescribe, adopt the corresponding portions of
the Plan by resolution of its board of directors. The Committee may amend the
Plan as necessary or desirable to reflect the adoption of the Plan by an
Employer, provided however, that an adopting Employer shall not have the
authority to amend or terminate the Plan under Section 7.
6.2 Withdrawal from the Plan by Employer. Any such Employer shall have
the right, at any time, upon the approval of and under such conditions as may be
provided by the Committee, to withdraw from the Plan by delivering to the
Committee written notice of its election so to withdraw. Upon receipt of such
notice by the Committee, the portion of the Deferral Account of Participants and
Beneficiaries attributable to amounts deferred while the Participants were
employees of such withdrawing Employer, plus any net earnings, gains and losses
on such amounts, shall be distributed from the Trust at the direction of the
Committee in cash at such time or times as the Committee, in its sole
discretion, may deem to be in the best interest of such employees and their
Beneficiaries. To the extent the amounts held in the Trust for the benefit of
such Participants and Beneficiaries are not sufficient to satisfy the Employer's
obligation to such Participants and their Beneficiaries accrued on account of
their employment with the Employer, the remaining amount necessary to satisfy
such obligation shall be an obligation of the
11
<PAGE>
Employer, and the Company shall have no further obligation to such Participants
and Beneficiaries with respect to such amounts.
Section 7
Amendment and Termination
The Company intends the Plan to be permanent, but reserves the right at any
time by action of its Board of Directors to modify, amend or terminate the Plan,
provided, however, that any amendment or termination of the Plan shall not
reduce or eliminate any Deferral Account accrued through the date of such
amendment or termination, increased by any income and gain credited to the
Participant's Deferral Account and reduced by any losses, expenses and
distributions charged to the Participant's Deferral Account in accordance with
Section 3.2.
The Committee shall have the same authority to adopt amendments to the Plan
as the Board of Directors of the Company in the following circumstances:
(a) to adopt amendments to the Plan which the Committee determines
are necessary or desirable for the Plan to comply with or to
obtain benefits or advantages under the provisions of applicable
law, regulations or rulings or requirements of the Internal
Revenue Service or other governmental or administrative agency or
changes in such law, regulations, rulings or requirements; and
(b) to adopt any other procedural or cosmetic amendment that the
Committee determines to be necessary or desirable that does not
materially change benefits to Participants or their Beneficiaries
or materially increase the Company's or adopting Employers'
obligations under the Plan.
The Committee shall provide notice of amendments adopted by the Committee to the
Board of Directors of the Company on a timely basis.
Executed in multiple originals this _______ day of July, 1998.
HELLER FINANCIAL, INC.
By: _________________________
Title: ______________________
Document Number: 333904.2v
12
<PAGE>
EXHIBIT (12)
HELLER FINANCIAL, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS
TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(unaudited)
(dollars in millions)
<TABLE>
<CAPTION>
For the Nine
Months Ended
September 30, 1998
------------------
<S> <C>
Net income before income taxes and minority interest............... $ 227
Add-Fixed charges
Interest and debt expense........................................ 463
One-third of rentals............................................. 7
-----
Total fixed charges......................................... 470
-----
Net income, as adjusted............................................ $ 697
-----
Ratio of earnings to fixed charges................................. 1.48x
=====
Preferred stock dividends on a pre-tax basis....................... 24
Total combined fixed charges and preferred stock dividends.. $ 494
-----
Ratio of earnings to combined fixed charges and
preferred stock dividends........................................ 1.41x
=====
</TABLE>
For purposes of computing the ratio of earnings to combined fixed charges
and preferred stock dividends, "earnings" includes income before income taxes,
minority interest income and fixed charges. "Combined fixed charges and
preferred stock dividends" includes interest on all indebtedness, one third of
annual rentals (approximate portion representing interest) and preferred stock
dividends on a pre-tax basis.
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND> This schedule contains summary financial information extracted from
the Heller Financial Inc. Quarterly Report Form 10Q for the period ending
September 30, 1998 pursuant to Section 13 or 15(D) of the Securities Exchange
Act of 1934 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 0
<INT-BEARING-DEPOSITS> 486
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 389
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 12,789
<ALLOWANCE> (312)
<TOTAL-ASSETS> 14,772
<DEPOSITS> 0
<SHORT-TERM> 3,847
<LIABILITIES-OTHER> 1,934
<LONG-TERM> 7,192
<COMMON> 1,447
0
275
<OTHER-SE> 69
<TOTAL-LIABILITIES-AND-EQUITY> 14,772
<INTEREST-LOAN> 776
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 776
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 463
<INTEREST-INCOME-NET> 313
<LOAN-LOSSES> 59
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 290
<INCOME-PRETAX> 227
<INCOME-PRE-EXTRAORDINARY> 227
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 146
<EPS-PRIMARY> 1.80
<EPS-DILUTED> 1.80
<YIELD-ACTUAL> 3,71
<LOANS-NON> 157
<LOANS-PAST> 89
<LOANS-TROUBLED> 13
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 261
<CHARGE-OFFS> 70
<RECOVERIES> 59
<ALLOWANCE-CLOSE> 312
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 312
<FN>
(F1) The Company is a finance company whose normal operations do not include the
trading of investment securities.
(F2) Net income is net of $78 million income tax provision and $3 million of
minority interest in international income.
</FN>
</TABLE>
