<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report for the period ended June 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.
39,020,775 shares of Class A Common Stock, $.25 par value, outstanding at
July 24, 1998.
51,050,000 shares of Class B Common Stock, $.25 par value, outstanding at
July 24, 1998.
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Website is: http://www.hellerfin.com
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HELLER FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in millions, except for information on shares)
ASSETS June 30, December 31,
1998 1997
-------- ------------
(unaudited)
<S> <C> <C>
Cash and cash equivalents........................... $ 380 $ 821
Receivables (Note 4)
Commercial loans
Term loans........................................ 2,961 2,597
Revolving loans................................... 1,914 1,674
Real estate loans.................................. 1,925 2,238
Factored accounts receivable....................... 2,350 2,223
Equipment loans and leases......................... 2,299 1,990
------- -------
Total receivables.............................. 11,449 10,722
Less: Allowance for losses of receivables (Note 4). 277 261
------- -------
Net receivables................................ 11,172 10,461
Equity and real estate investments.................. 589 488
Debt securities..................................... 360 311
Operating leases.................................... 175 195
Investments in international joint ventures......... 205 198
Other assets........................................ 467 387
------- -------
Total assets................................... $13,348 $12,861
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Senior debt
Commercial paper and short-term borrowings........ $ 3,470 $ 3,432
Notes and debentures (Note 5)..................... 6,359 6,004
------- -------
Total senior debt.............................. 9,829 9,436
Credit balances of factoring clients................ 1,264 1,255
Other payables and accruals......................... 484 405
------- -------
Total liabilities.............................. 11,577 11,096
Minority interest................................... 7 87
Stockholders' equity
Cumulative Perpetual Senior Preferred Stock,
Series A......................................... 125 125
Noncumulative Perpetual Senior Preferred Stock,
Series B (Note 9)............................... - 150
Noncumulative Perpetual Senior Preferred Stock,
Series C (Note 9)............................... 150 -
Class A Common Stock ($.25 Par Value; 500,000,000
shares authorized; 39,020,775 shares issued and
outstanding) (Note 2)........................... 10 -
Class B Common Stock ($.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................................ 36 730
Accumulated other comprehensive income (Note 10). (3) (12)
------- -------
Total stockholders' equity..................... 1,764 1,678
------- -------
Total liabilities and stockholders' equity..... $13,348 $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)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- ------------------
1998 1997 1998 1997
--------- --------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Interest income..................................... $ 252 $ 238 $ 506 $ 446
Interest expense.................................... 147 131 302 247
----- ----- ----- -----
Net interest income............................... 105 107 204 199
Fees and other income............................... 50 53 103 79
Factoring commissions............................... 32 30 59 43
Income of international joint ventures.............. 7 9 14 19
----- ----- ----- -----
Operating revenues................................ 194 199 380 340
Operating expenses.................................. 99 90 193 152
Provision for losses................................ 17 34 32 56
----- ----- ----- -----
Income before income taxes and minority interest.. 78 75 155 132
Income tax provision................................ 26 28 53 45
Minority interest................................... 1 3 3 4
----- ----- ----- -----
Net income........................................ $ 51 $ 44 $ 99 $ 83
===== ===== ===== =====
Dividends on preferred stock...................... $ 5 $ 3 $ 10 $ 6
===== ===== ===== =====
Net income applicable to common stock............. $ 46 $ 41 $ 89 $ 77
===== ===== ===== =====
Basic and diluted net income applicable to
common stock per share (Note 7).................. $ .60 $ .80 $1.39 $1.51
===== ===== ===== =====
Pro forma basic net income applicable to
common stock per share (Note 7).................. $ .51 $ .46 $ .99 $ .85
===== ===== ===== =====
Pro forma diluted net income applicable to
common stock per share (Note 7).................. $ .51 $ .45 $ .99 $ .85
===== ===== ===== =====
</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 Add'l hensive hensive
Stock Series B/C Common Common Paid In Income Retained Income
Series A (Note 9) Stock Stock Capital (Note 10) Earnings Total (Note 10)
--------- ---------- ------- ------- ------- --------- -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996.............. $125 $ -- $-- $13 $ 675 $ (1) $ 655 $1,467
Comprehensive Income: (Note 10)
Net income................................ -- -- -- -- -- -- 83 83 $ 83
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 $(7)... -- -- -- -- -- -- -- (12) (12)
----
Other comprehensive income.............. -- -- -- -- -- (20) -- -- (20)
----
Comprehensive income...................... -- -- -- -- -- -- -- -- $ 63
====
Issuance of Noncumulative Perpetual
Senior Preferred Stock, Series B........ -- 150 -- -- (3) -- -- 147
Preferred stock dividends................. -- -- -- -- -- -- (6) (6)
Common stock dividends.................... -- -- -- -- -- -- (28) (28)
---- ---- --- --- ------ ---- ----- ------
BALANCE AT JUNE 30, 1997.................. $125 $150 $-- $13 $ 672 $(21) $ 704 $1,643
==== ==== === === ====== ==== ===== ======
BALANCE AT DECEMBER 31, 1997.............. $125 $150 $-- $13 $ 672 $(12) $ 730 $1,678
Comprehensive Income: (Note 10)
Net income.............................. -- -- -- -- -- -- 99 99 $ 99
Other comprehensive income,
net of tax:
Unrealized gain on securities,
net of tax of $6.................. -- -- -- -- -- -- -- 11 11
Foreign currency translation
adjustments, net of tax of $(1)... -- -- -- -- -- -- -- (2) (2)
----
Other comprehensive income.............. -- -- -- -- -- 9 -- -- 9
----
Comprehensive income...................... -- -- -- -- -- -- -- -- $108
====
Issuance of Class A Common Stock.......... -- -- 10 -- 976 -- -- 986
Preferred stock dividends................. -- -- -- -- -- -- (10) (10)
Common stock dividends.................... -- -- -- -- (215) -- (783) (998)
---- ---- --- --- ------ ---- ----- ------
BALANCE AT JUNE 30, 1998.................. $125 $150 $10 $13 $1,433 $ (3) $ 36 $1,764
==== ==== === === ====== ==== ===== ======
</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)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
------------------
1998 1997
------- -------
(unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income.......................................................... $ 99 $ 83
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for losses............................................... 32 56
Losses from equity investments..................................... 21 32
Provision for deferred tax asset................................... 9 7
Increase (decrease) in accounts payable and accrued liabilities.... (13) 15
Undistributed income of international joint ventures............... (9) (12)
Increase in interest payable....................................... 20 3
Other.............................................................. 12 23
------- -------
Net cash provided by operating activities......................... 171 207
INVESTING ACTIVITIES
Long-term loans funded.............................................. (3,415) (2,254)
Collections of principal............................................ 1,416 1,434
Securitizations, participations, syndications and loan sales........ 1,816 906
Net increase in short-term loans and advances to factoring clients.. (690) (1,219)
Investment in operating leases...................................... (26) (83)
Investments in equity interests and other investments............... (256) (132)
Sales of investments and equipment on lease......................... 163 165
Factofrance goodwill and noncompetition agreement................... -- (96)
Other............................................................... 45 13
------- -------
Net cash used for investing activities............................ (947) (1,266)
FINANCING ACTIVITIES
Senior note issuances............................................... 1,402 674
Retirement of notes and debentures.................................. (1,047) (852)
Increase in commercial paper and other short-term borrowings........ 38 1,081
Proceeds from preferred stock issuance.............................. -- 147
Net proceeds from common stock issuance............................. 986 --
Net (increase) decrease in advances to affiliates................... (26) 8
Cash dividends paid on preferred stock.............................. (10) (6)
Cash dividends paid on common stock................................. (998) (28)
Other............................................................... (10) 7
------- -------
Net cash provided by financing activities......................... 335 1,031
------- -------
Decrease in cash and cash equivalents................................ (441) (28)
Cash and cash equivalents at the beginning of the period............. 821 296
------- -------
Cash and cash equivalents at the end of the period................... $ 380 $ 268
======= =======
</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 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, 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 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 quarter. 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 are 90,070,775 shares of common stock of the Company issued and
outstanding resulting in FAHI's ownership of 79% of the voting interest and 57%
of the economic interest of the Company's issued and outstanding Common Stock.
Prior to May 1998, FAHI owned 100% of the common stock of the Company.
In May 1998, the Company purchased the 21% interest of 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 of 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 six months ended June 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 Six
Months Ended
June 30,
------------
1998 1997
----- -----
(in millions)
<S> <C> <C>
Interest income..................................... $506 $461
Interest expense.................................... 302 256
---- ----
Net interest income............................... 204 205
Fees and other income............................... 103 88
Factoring commissions............................... 59 56
Income of international joint ventures.............. 14 16
---- ----
Operating revenues................................. 380 365
Operating expenses.................................. 193 172
Provision for losses................................ 32 58
---- ----
Income before income taxes and minority interest.. 155 135
Income tax provision................................ 53 46
Minority interest................................... 3 5
---- ----
Net income........................................ $ 99 $ 84
==== ====
</TABLE>
(4) Impaired Receivables and Repossessed Assets
The Company does not recognize interest and fee income on impaired
receivables classified as nonearning and on repossessed assets, which are set
forth in the following table:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
(in millions)
<S> <C> <C>
Impaired receivables...................................... $147 $141
Repossessed assets........................................ 2 14
---- ----
Total nonearning assets................................. $149 $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......................... 188% 185%
==== ====
</TABLE>
Nonearning assets included $20 million at June 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 six months ended June 30, 1998 and $258 million for the six months ended
June 30, 1997.
Loan Modifications--
The Company had $13 million of loans that are considered troubled debt
restructures at June 30, 1998 and December 31, 1997. The Company had $12 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 June 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 six month
period included an additional provision of $32 million and gross writedowns and
recoveries of $43 million and $27 million, respectively. Impaired receivables
with identified reserve requirements were $96 million at June 30, 1998 and $62
million at December 31, 1997.
7
<PAGE>
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
(in millions)
<S> <C> <C>
Identified reserve requirement for impaired
receivables.......................................... $ 29 $ 27
Additional allowance for losses of receivables........ 248 234
---- ----
Total allowance for losses of receivables.......... $277 $261
==== ====
</TABLE>
(5) Senior Debt - Notes and Debentures
The Company issued and retired the following notes and debentures during
the six months ended June 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............................ $ 852
Fixed rate medium-term notes with interest rates ranging from
6.14% to 6.25% due on various dates ranging from
April 13, 2000 to June 10, 2002................................ 550
------
$1,402
======
Retirements:
Variable rate medium-term notes due on various dates ranging
from January 15, 1998 to May 20, 1998.......................... $ 522
Fixed rate medium term notes with interest rates ranging from
6.27% to 9.53% due on various dates ranging from March 15, 1998
to May 20, 1998.................................................. 525
------
$1,047
======
</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 a
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 to sell up to $5 billion in debt securities, senior
preferred stock and Class A common stock.
(6) Derivative Financial Instruments Used for Risk Management Purposes
The Company entered into $4.6 billion of interest rate swaps during the six
months ended June 30, 1998. During this period, $2.6 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 $900 million of fixed
rate assets to a variable rate, $450 million of variable rate assets to a fixed
rate, $1.1 billion of fixed rate debt to a variable rate, and $2.1 billion of
variable rate assets to another variable rate index. At June 30, 1998, the
Company held $5.1 billion in interest rate swap agreements, $412 million in
cross-currency interest rate swap agreements and $3.1 billion of basis swap
agreements.
The Company also periodically enters into forward contracts or options. The
Company held $546 million of forward contracts at June 30, 1998 which serve as
hedges of its investment in international subsidiaries and joint ventures or
effectively hedge the translation of the related foreign currency income. The
Company executed $114 million of options to manage foreign exchange exposure.
8
<PAGE>
(7) 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 June 30, Six Months Ended June 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) $ 46 $ 41 $ 46 $ 41 $ 89 $ 77 $ 89 $ 77
======= ======= ======= ======= ======= ======= ======= =======
Average equivalent shares of Company stock
outstanding (in thousands): 77,027 51,050 77,027 51,050 64,110 51,050 64,110 51,050
Stock options -- -- 16 -- -- -- 8 --
------- ------- ------- ------- ------- ------- ------- -------
Total average equivalent shares 77,027 51,050 77,043 51,050 64,110 51,050 64,118 51,050
======= ======= ======= ======= ======= ======= ======= =======
Net income per share $ 0.60 $ 0.80 $ 0.60 $ 0.80 $ 1.39 $ 1.51 $ 1.39 $ 1.51
======= ======= ======= ======= ======= ======= ======= =======
</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 number of shares issued and 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 number of shares issued and outstanding after the offering
and the dilutive effect of the stock options as if they had been outstanding
since the beginning of the period.
<TABLE>
<CAPTION>
Quarter Ended June 30, Six Months Ended June 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) $ 46 $ 41 $ 46 $ 41 $ 89 $ 77 $ 89 $ 77
======= ======= ======= ======= ======= ======= ======= =======
Pro forma shares (in thousands):
Shares of Company stock outstanding 90,071 90,071 90,071 90,071 90,071 90,071 90,071 90,071
Stock options -- -- 53 53 -- -- 53 53
------- ------- ------- ------- ------- ------- ------- -------
Total pro forma shares 90,071 90,071 90,124 90,124 90,071 90,071 90,124 90,124
======= ======= ======= ======= ======= ======= ======= =======
Net income per share $ 0.51 $ 0.46 $ 0.51 $ 0.45 $ 0.99 $ 0.85 $ 0.99 $ 0.85
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
(8) Statement of Cash Flows
Noncash investing activities which occurred during the six month period
ended June 30, 1998 included $1 million of receivables which were classified as
repossessed assets. For the six month period ended June 30, 1998, the Company
paid income taxes of $33 million. For the six month period ended June 30, 1997,
the Company paid $25 million to its former parent, Heller International
Corporation for the payment of income taxes.
9
<PAGE>
(9) 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.
(10) 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.
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 June 15, 1999. The Company is assessing the impact that this
statement will have on its financial statements.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview. Net income for the six months ended June 30, 1998 totaled $99 million
and increased by $16 million or 19% over the first six months of 1997, while net
income for the second quarter of 1998 totaled $51 million compared to $44
million for the second quarter of 1997, an increase of 16%. Net income
applicable to common stock was $89 million for the six months ended June 30,
1998 which represented an increase of 16% from $77 million for the six months
ended June 30, 1997. Net income applicable to common stock totaled $46 million
for the quarter ended June 30, 1998, an increase of $5 million or 12% over the
second quarter of 1997.
Growth in earnings was driven by strong new business originations, strong
growth in factoring volume and continued strong credit quality. New business
volume totaled $3.7 billion year to date and $2.0 billion for the second quarter
of 1998, increases of 49% and 29% over the prior year periods. In addition, the
Company continued to show strong growth in international and domestic factoring
volume. Domestic factoring volume increased 12% for the first six months and 14%
for the second quarter compared to the prior year periods. Factofrance factoring
volume increased 38% during the second quarter of 1998 compared to the second
quarter of 1997. The Company also demonstrated very strong credit quality with
nonearning assets of only $149 million, representing 1.3% of total lending
assets. Net writedowns were only $16 million or 0.3% of AFE for the first six
months and $1 million for the second quarter of 1998.
As previously reported, the Company increased its ownership of Factofrance
in April 1997. The Company's results for the first six months of 1998 include
Factofrance on a consolidated basis for the entire period, while the 1997
results include Factofrance on a consolidated basis for only the second quarter.
For the first six months of 1998, this consolidation had the effect of
increasing operating revenues, operating expenses and factoring commissions by
$42 million, $58 million and $33 million, respectively, and decreasing income of
international joint ventures by $8 million.
Operating Revenues. The following tables summarize the Company's operating
revenues for the six and three months ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
------------------------------------------
1998 Percent 1997 Percent
Amount of AFE Amount of AFE
------ ------- ------ --------
(annualized) (annualized)
(dollars in millions)
<S> <C> <C> <C> <C>
Net interest income....................... $204 3.6% $199 4.1%
Non-interest income:
Fees and other income................... 103 1.8 79 1.7
Factoring commissions................... 59 1.1 43 0.9
Income of international joint ventures.. 14 0.3 19 0.4
---- --- ---- ---
Total operating revenues.............. $380 6.8% $340 7.1%
==== === ==== ===
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended
June 30,
------------------------------------------
1998 Percent 1997 Percent
Amount of AFE Amount of AFE
------ ------- ------ --------
(annualized) (annualized)
(dollars in millions)
<S> <C> <C> <C> <C>
Net interest income....................... $105 3.7% $107 4.2%
Non-interest income:
Fees and other income................... 50 1.8 53 2.1
Factoring commissions................... 32 1.1 30 1.2
Income of international joint ventures.. 7 0.3 9 0.3
---- --- ---- ---
Total operating revenues.............. $194 6.9% $199 7.8%
==== === ==== ===
</TABLE>
Operating revenues for the six months ended June 30, 1998 totaled $380
million, an increase of 12% over the prior year period. This increase is driven
primarily by increases in fees and other income and factoring commissions.
Operating revenues as a percentage of AFE were 6.8% for the first six months of
1998, down from 7.1% for the first six months of 1997. Operating revenues for
the second quarter of 1998 totaled $194 million, a decrease of 3% from $199
million for the second quarter of 1997. Operating revenues as a percentage of
AFE for the second quarter of 1998 were 6.9%, down from 7.8% for the second
quarter of 1997. This decline is due to the impact of $24 million of
securitization income recorded in the second quarter of 1997 versus $4 million
of securitization income in the second quarter of 1998.
Net Interest Income: Net interest income totaled $204 million for the six
months ended June 30, 1998, up 3% from $199 million during the same period in
1997. The increase in net interest income is primarily due to an increase in AFE
driven by record new business volume of $3.7 billion for the first six months of
1998. Net interest income as a percentage of AFE for the first six months of
1998 decreased to 3.6% from 4.1% in 1997. For the second quarter of 1998, net
interest income totaled $105 million, a decrease of 2% from the second quarter
of 1997. Net interest income for the second quarter of 1998 decreased to 3.7% of
AFE. These decreases reflect higher levels of CMBS receivables, which carry a
lower yield than other products of the Company and the impact of competitive
pricing pressures in certain product categories. Net interest income in the
first six months of 1998 was also reduced by interest expense of $6 million paid
on the pre-offering dividend declared February 24, 1998 and paid to FAHI on May
6, 1998.
Non-Interest Income: The following tables summarize the Company's non-interest
income for the six and three months ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
For the
Six Months
Ended June 30,
-------------- Increase/(Decrease)
1998 1997 Amount Percent
---- ---- ------ -------
(dollars in millions)
<S> <C> <C> <C> <C>
Factoring commissions................... $ 59 $ 43 $16 37%
Income of international joint ventures.. 14 19 (5) (26)
Fees and other income:
Fee income and other (1)............... 66 48 18 38
Net investment gains................... 22 7 15 214
Securitization income.................. 15 24 (9) (38)
---- ---- --- ---
Total fees and other income.......... $103 $ 79 $24 30%
==== ==== === ===
Total non-interest income............ $176 $141 $35 25%
==== ==== === ===
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
For the Three Months
Ended June 30,
-------------------- Increase/(Decrease)
1998 1997 Amount Percent
------ ------ ------ -------
(dollars in millions)
<S> <C> <C> <C> <C>
Factoring commissions................... $ 32 $ 30 $ 2 7%
Income of international joint ventures.. 7 9 (2) (22)
Fees and other income:
Fee income and other (1)............... 41 25 16 64
Net investment gains................... 5 4 1 25
Securitization income.................. 4 24 (20) (83)
----- ----- ---- ---
Total fees and other income.......... $ 50 $ 53 $ (3) (6)%
===== ===== ==== ===
Total non-interest income............ $ 89 $ 92 $ (3) (3)%
===== ===== ==== ===
</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 increased $16 million or 37% and income of
international joint ventures decreased $5 million or 26% for the six months
ended June 30, 1998 compared to the prior year period primarily due to the
consolidation of Factofrance. Domestic factoring volume for the first six months
and second quarter of 1998 increased 12% and 14%, respectively, compared to the
prior year periods. Factofrance factoring volume increased 38% for the second
quarter of 1998. The growth in factoring commissions was due to the increase in
factoring volume, partially offset by a reduction in factoring commission rates.
Fees and other income totaled $103 million and increased by 30% for the
first six months of 1998. For the second quarter of 1998, total fees and other
income decreased $3 million compared with the quarter ended June 30, 1997 as a
$16 million increase in fee income and other was offset by lower securitization
income. In the second quarter of 1997, the Company recognized $24 million of
securitization income from the securitization of CMBS assets. During the second
quarter of 1998, the Company securitized $96 million of assets representing the
unguaranteed portion of loans in the SBA 7(a) program resulting in
securitization income of $4 million. In addition, during the first quarter of
1998, the Company recognized $11 million on the securitization of CMBS assets.
Included in fee income and other in the second quarter of 1998 is $8 million of
income from the sale of $64 million of government guaranteed SBA 7(a) loans. Net
investment gains increased $15 million to $22 million for the six months ended
June 30, 1998, as the Company realized gains on numerous transactions.
Operating Expenses. The following tables summarize the Company's operating
expenses for the six and three months ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
-------------------- Increase/(Decrease)
1998 1997 Amount Percent
------ ------ ------ -------
(dollars in millions)
<S> <C> <C> <C> <C>
Salaries and other compensation............................. $ 115 $ 96 $19 20%
General and administrative expenses......................... 78 56 22 39
----- ----- --- --
Total operating expenses............................. $ 193 $ 152 $41 27%
===== ===== === ==
Total operating expenses as a percentage of Average
Managed Assets (annualized).................... 3.1% 3.0%
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
For the Three
Months Ended
June 30,
-------------- Increase/(Decrease)
1998 1997 Amount Percent
---- ---- -------- --------
(dollars in millions)
<S> <C> <C> <C> <C>
Salaries and other compensation............................. $58 $54 $4 7%
General and administrative expenses......................... $41 36 5 14
--- --- -- --
Total operating expenses............................. $99 $90 $9 10%
=== === == ==
Total operating expenses as a percentage of Average
Managed Assets (annualized).................... 3.2% 3.4%
</TABLE>
Operating expenses, excluding the impact of the Factofrance consolidation,
increased by $20 million or 13% for the first six months of 1998, as compared to
the first six months of 1997. Operating expenses for the second quarter of 1998
increased by $9 million or 10% over the second quarter of 1997. These increases
were primarily due to the expansion of loan origination and portfolio management
resources in the Company's CMBS loan area, increased investment in technology
including expenses for year 2000 compliance and investment in the Company's new
branding and marketing campaign ("Straight Talk, Smart Deals").
Allowance for Losses. The following table summarizes the changes in the
Company's allowance for losses of receivables, including the Company's provision
for losses of receivables, for the six months ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
For the Six
Months Ended
June 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...................... 32 56 (24) (43)
Writedowns................................ (43) (59) 16 (27)
Recoveries................................ 27 10 17 170
Factofrance consolidation at acquisition.. -- 18 (18) (100)
---- ---- ---- ----
Balance at end of period................... $277 $250 $ 27 11%
==== ==== ==== ====
</TABLE>
[CAPTION]
<TABLE>
For the Three
Months Ended
June 30,
-------------- Increase/(Decrease)
1998 1997 Amount Percent
---- ---- -------- --------
(dollars in millions)
<S> <C> <C> <C> <C>
Balance at beginning of period............. $261 $226 $ 35 15%
Provision for losses...................... 17 34 (17) (50)
Writedowns................................ (23) (33) 10 (30)
Recoveries................................ 22 5 17 340
Factofrance consolidation at acquisition.. - 18 (18) (100)
---- ---- ---- ----
Balance at end of period................... $277 $250 $ 27 11%
==== ==== ==== ====
</TABLE>
The Company's provision for losses was lower in the first six months and
second quarter of 1998 versus the same periods in 1997 as the portfolio
demonstrated continued strong credit quality. Net writedowns totaled only $16
million or 0.3% of average lending assets for the first six months of 1998
compared to $49 million or 1.1% for the first six months of 1997. Net writedowns
for the second quarter of 1998 totaled only $1 million compared to $28 million
in the second quarter of 1997. During the first six months of 1998, the Company
recorded recoveries, primarily from the pre-1990 portfolio, totaling $27 million
compared to $10 million in the first six months of 1997. Recoveries for the
second quarter of 1998 were $22 million compared to $5 million for the second
quarter of 1997. At June 30, 1998 and at December 31, 1997 the allowance for
losses of receivables represented 2.4% of receivables.
Income Taxes. The Company's effective tax rate was 34% for the six months ended
June 30, 1998 and 1997, and decreased to 33% for the second quarter of 1998 from
37% for the second quarter in 1997. 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.
14
<PAGE>
LENDING ASSETS AND INVESTMENTS
The Company achieved record new business volume for the first six months
and second quarter of 1998 with increases of 49% over the first six months of
1997 and 29% over the second quarter of 1997. New business volume growth
occurred across nearly all business groups, with particularly strong
originations activity in Real Estate CMBS and Corporate Finance. New business
volume for the first half of 1998 was partially offset by securitizations,
portfolio runoff, syndications, participations and loan sales. The following
table sets forth information on new business volume, securitizations,
syndications, participations and loan sales.
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
----------------- ------------------
1998 1997 1998 1997
-------- ------ -------- -------
(dollars in millions)
<S> <C> <C> <C> <C>
New business volume.......................... $3,700 $2,490 $1,980 $1,540
Securitizations.............................. 1,190 510 100 510
Syndications, participations and loan sales.. 630 390 470 250
</TABLE>
The following table presents the Company's lending assets and investments by
business category and asset type as of June 30, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
Lending Assets and Investments as of
June 30, December 31,
--------------- ----------------
1998 Percent 1997 Percent
------- ------- ------- -------
By Business Category: (dollars in millions)
<S> <C> <C> <C> <C>
Asset Based Finance.......................... $ 5,152 40% $ 4,726 40%
Corporate Finance............................ 2,625 21 2,010 17
International Group (1)...................... 2,437 19 2,361 20
Real Estate Finance.......................... 1,893 15 2,093 18
Project Finance.............................. 151 1 144 1
Pre-1990 Portfolio........................... 398 3 492 4
Other........................................ 124 1 102 -
------- --- ------- -----
Total lending assets and investments....... $12,780 100% $11,928 100%
======= === ======= =====
By Asset Type:
Receivables.................................. $11,449 90% $10,722 90%
Repossessed assets........................... 2 - 14 -
------- --- ------- -----
Total lending assets....................... $11,451 90% $10,736 90%
Equity and real estate investments........... 589 5 488 4
Debt securities.............................. 360 3 311 3
Operating leases............................. 175 1 195 1
International joint ventures................. 205 1 198 2
------- --- ------- -----
Total lending assets and investments....... $12,780 100% $11,928 100%
======= === ======= =====
Funds employed (2)......................... $11,516 $10,673
======= =======
Average funds employed (2)................. $11,331 $10,081
======= =======
Total managed assets (3)................... $12,714 $11,800
======= =======
Average managed assets (3)................. $12,439 $10,687
======= =======
</TABLE>
(1) Includes $205 million and $198 million in investments in international
joint ventures at June 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
securitized or sold and currently managed by the Company. Managed assets
includes approximately $150 million from the 1997 equipment securitization,
in which the Company has not retained any credit risk, and $300 million of
loans previously sold which are fully guaranteed by the U.S. Government
through the Small Business Administration 7(a) loan program.
15
<PAGE>
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
June 30, December 31,
------------------ ----------------
1998 Percent 1997 Percent
------ ------- ------ -------
(dollars in millions)
<S> <C> <C> <C> <C>
Equipment Finance and Leasing.......... $1,453 28% $1,316 28%
Sales Finance.......................... 1,366 27 1,228 26
Business Credit........................ 1,063 20 1,025 22
Small Business Lending................. 760 15 766 16
Current Asset Management (1)........... 510 10 391 8
------ --- ------ -----
Total lending assets and investments. $5,152 100% $4,726 100%
====== === ====== =====
</TABLE>
(1) Reflects the sale of $550 million of factored accounts receivable during
1998 and $500 million of factored accounts receivable during 1997.
Growth in asset based lending assets and investments of $426 million during
the first six months was driven by strong new business volume in the Equipment
Finance and Leasing and Sales Finance groups, along with increased seasonal
borrowings under existing lines in Current Asset Management. The Company funded
approximately $1.4 billion and $1.3 billion of new asset based financings during
the first six months of 1998 and 1997, respectively. The Company achieved this
level of funding while continuing to maintain strong credit disciplines in its
asset based businesses. Small Business Lending assets declined from December 31,
1997 as new business volume was offset by $64 million in loan sales 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 $615 million
during the first six months of 1998 due to new business volume of over $1.2
billion which exceeded the prior year period by 61%. Asset growth due to this
new business volume was partially offset by syndications of $430 million during
the first six months of 1998. During the second quarter of 1998, Corporate
Finance made a 24% investment in a media lending company. As part of this
transaction, they also provided a loan of $98 million which is currently secured
by 32 individual loans to media companies with an average transaction size of
approximately $5.5 million. This is a strategic investment for Corporate Finance
which provides access to certain segments of the media communications industry.
Real Estate Finance experienced new business volume of approximately $1.1
billion for the first six months and $460 million for the second quarter of
1998, up 117% and 47%, respectively over the prior year periods. This new
business volume, mainly in the CMBS area, was 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. The Company intends to complete a $1 billion securitization of CMBS
receivables during the second half of the year.
The Pre-1990 Portfolio continued to decline during the quarter as lending
assets and investments decreased $94 million or 19% from December 31, 1997. The
Pre-1990 Portfolio represents only 3.1% of total lending assets and investments
at June 30, 1998.
16
<PAGE>
Total revenues include interest income, 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 Six Months Ended June 30,
------------------------------------
1998 Percent 1997 Percent
------- --------- ----- ---------
(dollars in millions)
<S> <C> <C> <C> <C>
Asset Based Finance.. $ 305 45% $ 240 41%
Corporate Finance.... 121 17 125 21
International Group.. 115 17 73 12
Real Estate Finance.. 115 17 127 22
Project Finance...... (1) - 9 2
Pre-1990 Portfolio... 27 4 13 2
----- --- ----- ---
Total revenues...... $ 682 100% $ 587 100%
===== === ===== ===
</TABLE>
Total revenues increased $95 million or 16% from the prior year principally
reflecting increases in interest income and fees and other income. Asset Based
Finance experienced a $45 million increase in interest income primarily
resulting from the $426 million increase in lending assets and investments from
December 31, 1997. International Group revenues grew by $42 million or 58% over
the first six months of 1997 primarily as the result of the consolidation of
Factofrance. Real Estate Finance revenues decreased primarily due to the
recognition of $24 million of securitization income on the securitization of
CMBS receivables during the second quarter of 1997. The increase in Pre-1990
Portfolio revenues reflects higher net investment gains in 1998.
17
<PAGE>
PORTFOLIO QUALITY
The credit quality of the portfolio continues to reflect the effectiveness
of the credit strategies, underwriting and portfolio management and disciplined
credit approval process. As of June 30, 1998, nonearning assets were at a 10
year low at $149 million or 1.3% of lending assets. In addition, the Company's
allowance for losses of receivables represented 188% of nonearning receivables
as of June 30, 1998. The following table presents certain information with
respect to the credit quality of the Company's portfolio.
<TABLE>
<CAPTION>
June 30, December 31,
------------ ------------
1998 1997
------------ ------------
(dollars in millions)
<S> <C> <C>
Lending Assets and Investments:
Receivables....................................................... $11,449 $10,722
Repossessed assets................................................ 2 14
------- -------
Total lending assets............................................ 11,451 10,736
Equity and real estate investments................................ 589 488
Debt securities................................................... 360 311
Operating leases.................................................. 175 195
Investments in international joint ventures....................... 205 198
------- -------
Total lending assets and investments............................ $12,780 $11,928
======= =======
Nonearning Assets:
Impaired receivables.............................................. $ 147 $ 141
Repossessed assets................................................ 2 14
------- -------
Total nonearning assets......................................... $ 149 $ 155
======= =======
Ratio of nonearning receivables to receivables.................... 1.3% 1.3%
======= =======
Ratio of total nonearning assets to total lending assets.......... 1.3% 1.4%
======= =======
Allowances for Losses:
Allowance for losses of receivables............................... $ 277 $ 261
======= =======
Ratio of allowance for losses of receivables to:
Receivables....................................................... 2.4% 2.4%
======= =======
Nonearning receivables............................................ 188% 185%
======= =======
Net writedowns (annualized)....................................... 8.6x 1.8x
======= =======
Delinquencies:
Earning loans delinquent 60 days or more.......................... $ 172 $ 151
======= =======
Ratio of earning loans delinquent 60 days or more to receivables.. 1.5% 1.4%
======= =======
For The Six Months
Ended June 30,
--------------
1998 1997
------- -------
Net writedowns of lending assets: (dollars in millions)
Net writedowns on receivables..................................... $ 16 $ 49
Net writedowns on repossessed assets.............................. - -
------- -------
Total net writedowns............................................ $ 16 $ 49
======= =======
Ratio of net writedowns to average lending assets (annualized).... 0.3% 1.1%
======= =======
</TABLE>
Nonearning Assets. The Company's level of nonearning assets totaled only $149
million or 1.3% of lending assets. Included in nonearning assets are repossessed
assets of $2 million at June 30, 1998 and $14 million at December 31, 1997.
18
<PAGE>
Allowance for Losses. The allowance for losses of receivables totaled $277
million or 2.4% of receivables at June 30, 1998, consistent with December 31,
1997. The ratio of allowance for losses of receivables to nonearning receivables
totaled 188% at June 30, 1998 and 185% at December 31, 1997.
Loan Modifications. Loans considered troubled debt restructures were $13
million at June 30, 1998, unchanged from December 31, 1997. The Company had $12
million of receivables at June 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 0.3% of average lending assets for the six
months ended June 30, 1998 as compared to 1.1% for the same period in the prior
year. Gross writedowns declined to $43 million from $59 million while recoveries
were $27 million as compared to $10 million in the first six months of 1998 and
1997, respectively. The recoveries related primarily to the pre-1990 portfolio.
LIQUIDITY AND CAPITAL RESOURCES
The following table presents information regarding the Company's capital
structure.
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
(in millions)
<S> <C> <C>
Commercial paper and short-term borrowings....................... $ 3,470 $ 3,432
Notes and debentures............................................. 6,359 6,004
------- -------
Total senior debt............................................... 9,829 9,436
Minority interest................................................ 7 87
Stockholders' equity............................................. 1,764 1,678
------- -------
Total capitalization............................................ $11,600 $11,201
======= =======
Leverage (net of short-term investments)......................... 5.5x 5.2x
Commercial paper and short-term borrowings to total senior debt.. 35% 36%
</TABLE>
During the first six months of 1998, the Company's major funding
requirements included $3.7 billion of long term loans and leases, $690 million
of short term loans and the retirement of $1.0 billion of senior notes. The
major sources of funding for these requirements were $171 million of cash flows
from operations, loan repayments and investment proceeds of $1.6 billion, the
securitization, syndication, participation or sale of $1.8 billion of loans and
investments and the issuance of $1.4 billion of senior notes.
The ratio of commercial paper and short-term borrowings to total senior
debt was 35% at June 30, 1998 and 36% at December 31, 1997. Leverage (net of
short-term investments) was 5.5x at June 30, 1998 and 5.2x at December 31, 1997.
The level of commercial paper and short-term borrowings continue to remain
within ranges targeted by the Company.
The Company has a $3.0 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 a facility expiring April 8, 2002. In
addition, at June 30, 1998 the Company had $668 million (U.S. dollar equivalent)
in committed foreign bank credit facilities for the consolidated international
subsidiaries, and $36 million available under the foreign currency revolving
credit facilities. Committed credit and sale facilities from unaffiliated
financial institutions represent 106% of outstanding commercial paper and short-
term borrowings at June 30, 1998.
Initial Public Offering
In May 1998, the Company issued 38,525,000 shares of Class A Common Stock
in an initial public offering. The net proceeds to the Company were $986
million, $450 million of which was used to repay a $450 million subordinated
note issued February 24, 1998 for a previously declared dividend to Fuji America
Holdings, Inc. ("FAHI"), a wholly owned subsidiary of The Fuji Bank, Limited,
and $533 million was paid as a cash dividend to FAHI. The 51,050,000 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 in the second quarter.
19
<PAGE>
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 common stock). After the offering and the issuance of shares to
management, there are 90,070,775 shares of Common Stock of the Company issued
and outstanding resulting in FAHI's ownership of 79% of the voting interest and
57% of the economic interest of the Company's issued and outstanding Common
Stock. Prior to May 1998, FAHI owned 100% of the Common Stock of the Company.
In May 1998, the Company purchased the 21% interest of 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 six 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 $4.6 billion during the first six months of 1998. In
addition, $2.6 billion of interest rate swaps were terminated or matured during
the six month period. At June 30, 1998, the Company held $5.1 billion in
interest rate swap agreements, $412 million in cross-currency interest rate swap
agreements and $3.1 billion of basis swap agreements.
As of June 30, 1998, the Company held $546 million of forward currency
exchange contracts which serve as hedges of translation of its investment in
international subsidiaries and joint ventures or effectively hedge the
translation of the related foreign currency income. The Company also held $114
million of options which 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.
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 June 15, 1999. The Company is assessing the impact that this
statement will have on its financial statements.
20
<PAGE>
OTHER DEVELOPMENTS
The Company recently retained Arthur Andersen's business consulting group
to work with the Company to identify and implement measures that will 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 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 taking
place during 1998 and 1999.
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.
21
<PAGE>
Part II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The Company has realigned its Board of Directors in anticipation of
the addition of two more independent directors. Effective July 17,
1998, the current members of the Company's Board of Directors are as
follows:
Richard Almeida Tetsuo Kumon
Yukihiko Chayama Dennis P. Lockhart
Tsutomu Hayano Masahiro Sawada
Soichi Hirabayashi Kenichiro Tanaka
Mark Kessel Frederick E. Wolfert
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(10.1) Eighth Amendment of Heller Financial, Inc. Executive Deferred
Compensation Plan
(10.2) Fifth Amendment of Heller Financial, Inc. Savings and Profit
Sharing 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 June 30, 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 21, 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.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this quarterly report to be signed on its behalf by
the undersigned thereunto duly authorized.
HELLER FINANCIAL, INC.
By: /s/ Lauralee E. Martin
------------------------------------------
Lauralee E. Martin
Executive Vice President and
Chief Financial Officer
By: /s/ Lawrence G. Hund
------------------------------------------
Lawrence G. Hund
Executive Vice President, Controller and
Chief Accounting Officer
Date: July 27, 1998
23
<PAGE>
EXHIBIT E
EIGHTH AMENDMENT
OF
HELLER FINANCIAL, INC.
EXECUTIVE DEFERRED COMPENSATION PLAN
------------------------------------
WHEREAS, Heller Financial, Inc. (the "Company") maintains the Heller
Financial, Inc. Executive Deferred Compensation Plan (the "Plan") for a select
group of its management and highly compensated employees; and
WHEREAS, the Plan has previously been amended and the Company has
determined that further amendment thereof is necessary and desirable;
NOW, THEREFORE, in exercise of the power reserved to the Company by Section
8 of the Plan and delegated to the undersigned officer by resolution of the
Board of Directors of the Company, the Plan, as previously amended, is further
amended in the following particulars:
1. By adding the following new sentence immediately after the first
sentence of Section 1.2 of the Plan, effective as of January 1, 1998:
"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."
2. By adding the following new paragraph at the end of Section 4.2 of the
Plan, effective as of April 1, 1998:
"Notwithstanding the foregoing provisions of this Section 4.2, 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 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."
* * *
<PAGE>
IN WITNESS WHEREOF, on behalf of the Company, the undersigned officer has
executed this amendment this 20th day of May, 1998
HELLER FINANCIAL, INC.
By: /s/ Peggi L. Sturm
------------------------------
Its: Vice President
-----------------------------
2
<PAGE>
EXHIBIT E
FIFTH AMENDMENT
OF
HELLER FINANCIAL, INC.
SAVINGS AND PROFIT SHARING PLAN
-------------------------------
WHEREAS, Heller Financial, Inc. (the "Company") maintains the Heller
Financial, Inc. Savings and Profit Sharing Plan, as amended and restated
effective as of January 1, 1989 (the "Plan") for the benefit of its eligible
employees and the eligible employees of its affiliates that adopt the Plan with
the Company's consent; and
WHEREAS, the Plan has previously been amended and further amendment thereof
now is considered desirable;
NOW, THEREFORE, in exercise of the power reserved to the Company by Section
11.2 of the Plan and delegated to the undersigned officer by resolution of the
Board of Directors of the Company, the Plan, as previously amended, is further
amended in the following particulars, effective as of April 30, 1998:
1. By adding the following new sentence to the end of Section 7.7(a):
"The Plan will permit investment in stock of the Company, and the Committee
will be permitted to establish as one of the Investment Funds a fund which
consists of Class A Common Stock, par value $0.25, of the Company (the
"Heller Stock Fund"). The Committee will be permitted to establish, and
then to amend or eliminate, rules limiting the frequency with which
Participants may elect into or out of the Heller Stock Fund, or limiting
the dollar figure or proportion of his or her aggregate or individual
Accounts which may be invested by a Participant in the Heller Stock Fund."
2. By substituting the following for Section 8.11 of the Plan:
"8.11 Form of Payment. Payments under the Plan will be made in cash or, at
the direction of the Participant or Beneficiary entitled to payment, in
shares of Class A Common Stock, par value $0.25, of the Company ("Company
Stock"), if and to the extent the Accounts to be distributed are invested
in Company Stock."
<PAGE>
IN WITNESS WHEREOF, the undersigned officer of Heller Financial, Inc. has
caused the foregoing amendment to be executed this 30th day of April, 1998.
HELLER FINANCIAL, INC.
By: /s/ Peggi L. Sturm
------------------------
Its: Vice President
------------------------
ATTEST
By:
------------------------
Its:
------------------------
2
<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 Six
Months Ended
June 30, 1998
-------------
<S> <C>
Net income before income taxes and minority interest............... $ 155
Add-Fixed charges
Interest and debt expense........................................ 302
One-third of rentals............................................. 5
-----
Total fixed charges......................................... 307
-----
Net income, as adjusted............................................ $ 462
-----
Ratio of earnings to fixed charges................................. 1.50x
=====
Preferred stock dividends on a pre-tax basis....................... 16
Total combined fixed charges and preferred stock dividends.. $ 323
-----
Ratio of earnings to combined fixed charges and
preferred stock dividends........................................ 1.43x
=====
</TABLE>
For purposes of computing the ratio of earnings to combined fixed charges
and preferred stock dividends, "earnings" includes income before income taxes,
the minority interest income and fixed charges. "Combined fixed charges and
preferred stock dividends" includes interest on all indebtedness, one third of
annual rentals (approximate portion representing interest) and preferred stock
dividends on a pre-tax basis.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND> This schedule contains summary financial information extracted from
The Heller Financial Inc. 10-Q and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 0
<INT-BEARING-DEPOSITS> 380
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 405
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 11,449
<ALLOWANCE> (277)
<TOTAL-ASSETS> 13,348
<DEPOSITS> 0
<SHORT-TERM> 3,470
<LIABILITIES-OTHER> 1,748
<LONG-TERM> 6,359
0
275
<COMMON> 1,456
<OTHER-SE> 33
<TOTAL-LIABILITIES-AND-EQUITY> 13,348
<INTEREST-LOAN> 506
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 506
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 302
<INTEREST-INCOME-NET> 204
<LOAN-LOSSES> 32
<SECURITIES-GAINS> 0<F1>
<EXPENSE-OTHER> 193
<INCOME-PRETAX> 155
<INCOME-PRE-EXTRAORDINARY> 155
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 99<F2>
<EPS-PRIMARY> 1.39
<EPS-DILUTED> 1.39
<YIELD-ACTUAL> 3.79
<LOANS-NON> 147
<LOANS-PAST> 89
<LOANS-TROUBLED> 13
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 261
<CHARGE-OFFS> 43
<RECOVERIES> 27
<ALLOWANCE-CLOSE> 277
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 277
<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 $53 million income tax provision and $3 million of
minority interest in international income.
</FN>
</TABLE>
