<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report for the period ended March 31, 1999 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.
38,822,641 shares of Class A Common Stock, $.25 par value, outstanding at
April 23, 1999.
51,050,000 shares of Class B Common Stock, $.25 par value, outstanding at
April 23, 1999.
================================================================================
<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 March 31, December 31,
1999 1998
----------- ------------
(unaudited)
<S> <C> <C>
Cash and cash equivalents............................................... $ 873 $ 529
Receivables (Note 3)
Commercial loans
Term loans............................................................ 3,327 3,233
Revolving loans....................................................... 1,922 1,832
Real estate loans....................................................... 1,731 1,718
Factored accounts receivable............................................ 2,496 2,543
Equipment loans and leases.............................................. 2,605 2,528
------- -------
Total receivables.................................................. 12,081 11,854
Less: Allowance for losses of receivables (Note 3)...................... 277 271
------- -------
Net receivables.................................................... 11,804 11,583
Equity and real estate investments...................................... 587 617
Debt securities......................................................... 456 400
Operating leases........................................................ 361 321
Investments in international joint ventures............................. 222 235
Other assets............................................................ 692 681
------- -------
Total assets....................................................... $14,995 $14,366
======= =======
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
Senior debt
Commercial paper and short-term borrowings............................. $ 3,885 $ 3,681
Notes and debentures (Note 4).......................................... 7,220 6,768
------- -------
Total senior debt.................................................. 11,105 10,449
Credit balances of factoring clients.................................... 1,360 1,441
Other payables and accruals............................................. 534 504
------- -------
Total liabilities.................................................. 12,999 12,394
Minority interest....................................................... 10 10
Stockholders' equity
Cumulative Perpetual Senior Preferred Stock, Series A................. 125 125
Noncumulative Perpetual Senior Preferred Stock, Series C.............. 150 150
Noncumulative Perpetual Senior Preferred Stock, Series D.............. 125 125
Class A Common Stock ($.25 Par Value; 500,000,000 shares authorized;
39,034,019 shares issued and 38,822,828 shares outstanding).......... 10 10
Class B Common Stock ($.25 Par Value; 300,000,000 shares authorized;
51,050,000 shares issued and outstanding)............................ 13 13
Additional paid in capital............................................ 1,436 1,435
Retained earnings..................................................... 153 111
Treasury stock (211,191 shares) (Note 6).............................. (6) (8)
Accumulated other comprehensive income................................ (20) 1
------- -------
Total stockholders' equity......................................... 1,986 1,962
------- -------
Total liabilities and stockholders' equity......................... $14,995 $14,366
======= =======
</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
Ended March 31,
---------------
1999 1998
------ ------
(unaudited)
<S> <C> <C>
Interest income.............................................................. $ 262 $ 254
Interest expense............................................................. 149 155
----- -----
Net interest income......................................................... 113 99
Fees and other income........................................................ 74 53
Factoring commissions........................................................ 28 27
Income of international joint ventures....................................... 8 7
----- -----
Operating revenues.......................................................... 223 186
Operating expenses........................................................... 108 94
Provision for losses......................................................... 29 15
----- -----
Income before income taxes and minority interest............................ 86 77
Income tax provision......................................................... 29 27
Minority interest............................................................ -- 2
----- -----
Net income.................................................................. $ 57 $ 48
===== =====
Dividends on preferred stock................................................ $ 7 $ 5
===== =====
Net income applicable to common stock....................................... $ 50 $ 43
===== =====
Basic net income applicable to common stock per share (Note 7).............. $0.56 $0.84
===== =====
Diluted net income applicable to common stock per share (Note 7)............ $0.55 $0.84
===== =====
Pro forma basic net income applicable to common stock per share (Note 7).... $0.56 $0.48
===== =====
Pro forma diluted net income applicable to common stock per share (Note 7).. $0.55 $0.48
===== =====
</TABLE>
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these statements.
3
<PAGE>
CONSOLIDATED CONDENSED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
(in millions)
(unaudited)
<TABLE>
<CAPTION>
Noncum.
Perpetual Perpetual Perpetual Accum.
Sr. Sr. Sr. Other Re-
Pref. Pref. Pref. Class A Class B Treasury Add'l Compre- tained Compre-
Stock Stock Stock Common Common Stock Paid In hensive Earn- hensive
Series A Series C Series D Stock Stock (Note 6) Capital Income ings Total Income
--------- --------- --------- ------- ------- -------- ------- ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1997...................... $ 125 $ 150 $ -- $ -- $ 13 $ -- $ 672 $ (12) $ 730 $1,678
Comprehensive Income:
Net income................. -- -- -- -- -- -- -- -- 48 48 48
Other comprehensive
income, net of tax:
Unrealized gain on
securities, net of tax
of $3................. -- -- -- -- -- -- -- -- -- 6 6
Foreign currency
translation
adjustments, net of
of tax of $0.5........ -- -- -- -- -- -- -- -- -- 1 1
------
Other comprehensive
income.................. -- -- -- -- -- -- -- 7 -- -- 7
------
Comprehensive income....... -- -- -- -- -- -- -- -- -- -- 55
======
Preferred stock dividends.. -- -- -- -- -- -- -- -- (5) (5)
Common stock dividends..... -- -- -- -- -- -- -- -- (465) (465)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
BALANCE AT MARCH 31, 1998.. $ 125 $ 150 $ -- $ -- $ 13 $ -- $ 672 $ (5) $ 308 $1,263
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
BALANCE AT DECEMBER 31,
1998...................... $ 125 $ 150 $ 125 $ 10 $ 13 $ (8) $1,435 $ 1 $ 111 $1,962
Comprehensive Income:
Net income............... -- -- -- -- -- -- -- -- 57 57 57
Other comprehensive
income, net of tax:
Unrealized gain on
securities, net of tax
of $(5)................. -- -- -- -- -- -- -- -- -- (9) (9)
Foreign currency
translation adjustments,
net of tax of $(6)...... -- -- -- -- -- -- -- -- -- (12) (12)
------
Other comprehensive
income.................. -- -- -- -- -- -- -- (21) -- -- (21)
------
Comprehensive income....... -- -- -- -- -- -- -- -- -- -- 36
======
Reissuance of Class A
Common Stock.............. -- -- -- -- -- 2 -- -- -- 2
Vesting of Restricted
Shares (Note 6)........... -- -- -- -- -- -- 1 -- -- 1
Preferred stock dividends.. -- -- -- -- -- -- -- -- (7) (7)
Common stock dividends..... -- -- -- -- -- -- -- -- (8) (8)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
BALANCE AT MARCH 31, 1999.. $ 125 $ 150 $ 125 $ 10 $ 13 $ (6) $1,436 $ (20) $ 153 $1,986
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
The accumulated other comprehensive income balance included $13 million and
$14 million of unrealized gains on securities available for sale at March 31,
1999 and 1998, respectively. Accumulated other comprehensive income also
included deferred foreign currency translation adjustments, net of tax, of $(33)
million and $(19) million at March 31, 1999 and 1998, respectively.
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 Three Months Ended
March 31,
----------------------------
1999 1998
--------------- -----------
OPERATING ACTIVITIES (unaudited)
<S> <C> <C>
Net income.................................................... $ 57 $ 48
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for losses......................................... 29 15
Amortization and depreciation................................ 7 5
Losses from equity investments............................... 8 7
Provision for deferred taxes................................. 10 1
Increase in accounts payable and accrued liabilities......... 38 2
Undistributed income of international joint ventures......... (4) (4)
(Decrease) increase in interest payable...................... (10) 7
Other........................................................ (10) 5
------- -------
Net cash provided by operating activities.................. 125 86
INVESTING ACTIVITIES
Longer-term loans funded...................................... (1,027) (1,446)
Collections of principal...................................... 771 801
Securitizations, participations, syndications and loan sales.. 230 1,299
Net increase in short-term loans and advances
to factoring clients......................................... (299) (616)
Investment in operating leases................................ (45) (10)
Investments in equity interests and other investments......... (150) (118)
Sales of investments and equipment on lease................... 97 63
Other......................................................... (13) 1
------- -------
Net cash used for investing activities..................... (436) (26)
FINANCING ACTIVITIES
Senior note issues............................................ 1,107 555
Retirement of notes and debentures............................ (653) (745)
Increase (decrease) in commercial paper
and other short-term borrowings.............................. 204 (159)
Net increase (decrease) in advances from affiliates........... 3 (8)
Repurchase of Class A Common Stock for executive
deferred compensation plan................................... 2 -
Cash dividends paid on preferred and common stock............. (15) (20)
Other......................................................... 7 2
------- -------
Net cash provided by (used for) financing activities....... 655 (375)
------- -------
Increase (decrease) in cash and cash equivalents................ 344 (315)
Cash and cash equivalents at the beginning of the period........ 529 821
------- -------
Cash and cash equivalents at the end of the period.............. $ 873 $ 506
======= =======
</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/A of Heller Financial, Inc. (including its consolidated
subsidiaries, Heller or the Company, which may be referred to as we, us or our)
for the year ended December 31, 1998. In management's opinion, all adjustments
considered necessary for a fair presentation are included in these financial
statements and were of a normal, recurring nature. Certain prior year amounts
have been reclassified to conform to the current year's presentation.
(2) Acquisition of Dealer Products Group
On November 30, 1998, we acquired, through our subsidiaries, the U.S.
assets of the Dealer Products Group of Dana Commercial Credit Corporation and
the stock of the Dealer Products Group's international subsidiaries
(collectively, Dealer Products Group).
The following table presents the unaudited pro forma combined income
statements of Heller and the Dealer Products Group for the three months ended
March 31, 1999 and 1998. The pro forma combined income statements are presented
as if the acquisition had been effective January 1, 1998. The combined
historical results of operations of Heller and the Dealer Products Group for
1999 and 1998 have been adjusted to reflect the amortization of goodwill and the
costs of financing for the transaction. We have presented the following
information for informational purposes only. It does not necessarily indicate
the future results of our operations or the results of our operations that would
have occurred had the acquisition been effective in the periods presented.
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
---------------
1999 1998
---- ----
(in millions)
<S> <C> <C>
Interest income......................................... $262 $273
Interest expense........................................ 149 166
---- ----
Net interest income................................... 113 107
Fees and other income................................... 74 56
Factoring commissions................................... 28 27
Income of international joint ventures.................. 8 7
---- ----
Operating revenues.................................... 223 197
Operating expenses...................................... 108 104
Provision for losses.................................... 29 17
---- ----
Income before income taxes and minority interest...... 86 76
Income tax provision.................................... 29 26
Minority interest....................................... -- 2
---- ----
Net income............................................ $57 $48
==== ====
</TABLE>
6
<PAGE>
(3) Impaired Receivables and Repossessed Assets
We do 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>
March 31, December 31,
1999 1998
--------- ------------
(in millions)
<S> <C> <C>
Impaired receivables...................................... $ 215 $ 208
Repossessed assets........................................ 4 3
----- -----
Total nonearning assets................................. $ 219 $ 211
===== =====
Ratio of total nonearning assets to total lending assets.. 1.8% 1.8%
===== =====
Ratio of allowance for losses of receivables to
nonearning impaired receivables......................... 129% 130%
===== =====
</TABLE>
Nonearning assets included $29 million at March 31, 1999 and $26 million at
December 31, 1998 for consolidated international subsidiaries.
The average investment in nonearning impaired receivables was $213 million
for the three months ended March 31, 1999 and $147 million for the three months
ended March 31, 1998.
Loan Modifications --
We had $13 million of loans that are considered troubled debt restructures
at March 31, 1999, a decrease of $1 million from December 31, 1998. At March 31,
1999 there were no loans that were restructured and returned to earning status.
Allowance for Losses --
The change in the allowance for losses of receivables during the three
month period included an additional provision of $29 million and gross
writedowns and recoveries of $27 million and $5 million, respectively. Impaired
receivables with identified reserve requirements were $133 million at March 31,
1999 and $136 million at December 31, 1998.
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
(in millions)
<S> <C> <C>
Identified reserve requirement for impaired receivables.. $ 45 $ 44
Additional allowance for losses of receivables........... 232 227
----- -----
Total allowance for losses of receivables............. $ 277 $ 271
===== =====
</TABLE>
7
<PAGE>
(4) Senior Debt - Notes and Debentures
We issued and retired the following notes and debentures during the three
months ended March 31, 1999 (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
January 12, 2001 to February 5, 2001............................. $ 265
Fixed rate medium-term notes with interest rates ranging from
5.48% to 6.00% due on various dates ranging from
January 16, 2001 to March 19, 2004............................... 842
---------
$1,107
=========
Retirements:
Variable rate medium-term notes due on various dates ranging from
January 7, 1999 to March 31, 1999................................ $ 323
Fixed rate medium-term notes with interest rates ranging from
5.25% to 6.50% due on various dates ranging from
` January 15, 1999 to April 2, 2002................................ 330
---------
$ 653
=========
</TABLE>
We have approximately $3.6 billion in available liquidity support under
three facilities. The longest facility is a 5-year agreement for $1.5 billion
which expires April 8, 2002. Our 364-day bank credit facilities will expire on
October 26, 1999 and April 4, 2000.
We have a factored accounts receivable sale facility of our domestic
accounts receivable which allows us to sell an undivided interest of up to $550
million in a designated pool of factored accounts receivable to five bank-
sponsored conduits, on a limited recourse basis. We sold $475 million of
receivables under this facility as of March 31, 1999.
We have an additional factored accounts receivable sale facility through
our wholly-owned subsidiary Factofrance. This facility allows Factofrance to
sell an undivided interest of up to 1 billion French francs in a designated pool
of its factored accounts receivable to one bank-sponsored conduit on a limited
recourse basis. As of March 31, 1999, approximately 1 billion French francs (or
$166 million) of receivables were sold under this facility.
We have a $250 million secured committed warehouse line available to
finance fixed rate commercial mortgage loans. The facility expires in June 1999.
As of March 31, 1999, we had not drawn any funds under this facility.
We have a 364-day facility, expiring December 7, 1999, which allows us to
sell up to $550 million of our equipment receivables to two bank-sponsored
conduits on a limited recourse basis. As of March 31, 1999, we have sold $393
million of our equipment receivables under this facility.
8
<PAGE>
We have a shelf registration statement, filed with the Securities and
Exchange Commission, permitting the offering of up to $5 billion in debt
securities, senior preferred stock and Class A Common Stock. As of March 31,
1999, there was $3.0 billion available under this shelf registration.
(5) Derivative Financial Instruments Used for Risk Management Purposes
We entered into $1.2 billion of interest rate swaps during the three months
ended March 31, 1999. During this period, $953 million of interest rate swaps
were terminated or matured. We utilize interest rate swaps to modify the
interest rate and currency characteristics of our debt and assets to control the
overall level of financial risk arising from our normal business operations.
These instruments had the effect of converting $325 million of fixed rate assets
to a variable rate and $837 million of fixed rate debt to a variable rate. At
March 31, 1999, we held $5.1 billion in interest rate swaps, $645 million in
cross-currency interest rate swap agreements and $2.2 billion of basis swap
agreements.
We held 10-year interest rate futures contracts with an equivalent notional
amount of $358 million at March 31, 1999. We use these instruments to hedge the
interest rate risk of a portion of our CMBS receivables portfolio.
We also periodically enter into forward contracts or purchase options. We
held $926 million of forward contracts at March 31, 1999. These instruments
serve as hedges of our investment in international subsidiaries and joint
ventures or effectively hedge the translation of the related foreign currency
income.
(6) Treasury Stock
We have an executive deferred compensation plan (the Plan), in which
certain of our employees may elect to defer a portion of their annual
compensation on a pre-tax basis. The amount deferred remains an asset of Heller
and is invested in several mutual funds and in Class A Common Stock of Heller.
Investments in our Class A Common Stock under this Plan are reported as treasury
stock and are included in the calculation of basic and diluted earnings per
share. At March 31, 1999, we held 193,383 shares of treasury stock through the
Plan.
9
<PAGE>
(7) Basic and Diluted Net Income Per Share and Pro Forma Net Income Per Share
The following table shows the calculation of net income applicable to
common stock per share on a basic and diluted basis for the periods indicated:
<TABLE>
<CAPTION>
Quarter Ended March 31,
-----------------------------------
Basic Diluted
----------------- ----------------
1999 1998 1999 1998
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income applicable to common stock
(in millions)......................... $ 50 $ 43 $ 50 $ 43
======= ======= ======= =======
Average equivalent shares of common
stock outstanding (in thousands)...... 90,084 51,050 90,084 51,050
Treasury stock........................ (7) -- -- --
Stock options......................... -- -- 7 --
------- ------- ------- -------
Total average equivalent shares....... 90,077 51,050 90,091 51,050
======= ======= ======= =======
Net income per share................... $ 0.56 $ 0.84 $ 0.55 $ 0.84
======= ======= ======= =======
</TABLE>
The table below represents the pro forma net income applicable to common
stock per share on a basic and diluted basis. Pro forma information adjusts for
the impact of our initial public offering (the Offering) of Class A Common Stock
that occurred in May 1998 and assumes that shares issued in conjunction with the
Offering have been outstanding since the beginning of 1998. 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
as of quarter end. 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 as of quarter end plus the dilutive effect
of stock options.
<TABLE>
<CAPTION>
Quarter Ended March 31,
-----------------------------------
Basic Diluted
----------------- ----------------
1999 1998 1999 1998
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income applicable to common stock
(in millions)......................... $ 50 $ 43 $ 50 $ 43
======= ======= ======= =======
Pro forma shares of common
stock outstanding (in thousands)...... 90,084 90,082 90,084 90,082
Treasury stock........................ (7) -- -- --
Stock options......................... -- -- 7 --
------- ------- ------- -------
Total pro forma shares................ 90,077 90,082 90,091 90,082
======= ======= ======= =======
Pro forma net income per share......... $ 0.56 $ 0.48 $ 0.55 $ 0.48
======= ======= ======= =======
</TABLE>
(8) Statement of Cash Flows
Noncash investing activities occurring during the three month period ended
March 31, 1999 included $1 million of receivables classified as repossessed
assets. We paid income taxes of $22 million and $19 million during the three
month period ended March 31, 1999 and 1998, respectively.
10
<PAGE>
(9) Operating Segments
The following table summarizes financial information concerning our reportable
segments:
<TABLE>
<CAPTION>
International
Domestic Factoring and
Commercial Asset Based Consolidated
Finance Finance Company
---------- ------------- ------------
<S> <C> <C> <C>
Total revenues:
March 31, 1999........... $313 $59 $372
March 31, 1998........... 285 56 341
Net income:
March 31, 1999........... $ 52 $ 5 $ 57
March 31, 1998........... 42 6 48
</TABLE>
(10) Subsequent Events
HealthCare Financial Acquisition --
On April 19, 1999 we reached a definitive agreement to acquire HealthCare
Financial Partners, Inc. (HCF). With assets of $533 million, HCF is a rapidly
growing commercial finance company exclusively focused on providing secured
financing to small- and mid-sized healthcare providers throughout the United
States. The acquisition price is $35 per share, subject to certain adjustments.
The total purchase price will equal approximately $483 million.
We have agreed to pay 41% of the purchase price in the form of our Class A
Common Stock and 59% in cash. The transaction will involve an issuance of common
shares by Heller. The final number of shares that Heller issues will be based on
the average closing price of our stock during a pre-closing period, subject to
both a minimum and maximum stock price. Our issuance of common stock will reduce
the ownership interest in Heller of our majority shareholder, The Fuji Bank,
Limited, from 57% to approximately 52%.
We anticipate closing on the transaction during the third quarter 1999,
subject to regulatory approval and approval by HCF shareholders. We will account
for the acquisition using the purchase method of accounting. Goodwill from the
acquisition will approximate $230 million, which we will amortize over 25 years.
Declaration of Dividends --
On April 23, 1999, we declared a quarterly dividend of $0.09 on each
outstanding share of our Class A Common Stock and Class B Common Stock, payable
on or before May 17, 1999 to the holders of record thereof on May 3, 1999. We
also declared quarterly dividends of $0.5078125, $1.67175 and $1.7375 on each
outstanding share of our Cumulative Perpetual Senior Preferred Stock, Series A,
Fixed Rate Noncumulative Perpetual Senior Preferred Stock, Series C and Fixed
Rate Noncumulative Perpetual Senior Preferred Stock, Series D, respectively,
payable on May 15, 1999 to the holders of record thereof on May 3, 1999.
11
<PAGE>
(11) Accounting Developments
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS No. 133), Accounting for Derivative
Instruments and Hedging Activities. This Statement establishes accounting and
reporting standards requiring all derivative instruments (including certain
derivative instruments embedded in other contracts) to be recorded in the
balance sheet as either an asset or liability measured at its fair value.
Changes in the fair value of the derivative are to be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows gains and losses on derivatives to offset related
results on the hedged items in the income statement and requires that a company
must document, designate, and assess the effectiveness of transactions that
receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning
after June 15, 1999. We are assessing the impact of this statement and will
adopt it in our 2000 interim financial statements.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview. Net income for the three months ended March 31, 1999 totaled $57
million compared to $48 million for the prior year, an increase of 19%. Net
income applicable to common stock was $50 million for the quarter ended March
31, 1999, an increase of 16% from $43 million for the quarter ended March 31,
1998. The growth in earnings was due to an increase of $37 million or 20% in
operating revenues, driven by growth in both net interest income and non-
interest income. Operating revenues as a percentage of average funds employed
(AFE) rose to 7.5% for the first quarter of 1999, an improvement from 6.7% for
the first quarter of 1998. Our results for the first quarter of 1999 include the
Dealer Products Group on a consolidated basis. This increased operating revenues
and operating expenses by $14 million and $11 million, respectively.
Operating Revenues. The following table summarizes our operating revenues for
the three months ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
-------------------------------------
1999 Percent 1998 Percent
Amount of AFE Amount of AFE
------ ------- ------ -------
(annualized) (annualized)
(dollars in millions)
<S> <C> <C> <C> <C>
Net interest income...................... $ 113 3.8% $ 99 3.6%
Non-interest income:
Fees and other income................... 74 2.5 53 1.9
Factoring commissions................... 28 0.9 27 1.0
Income of international joint ventures.. 8 0.3 7 0.2
----- --- ----- ---
Total operating revenues.............. $ 223 7.5% $ 186 6.7%
===== === ===== ===
</TABLE>
Net Interest Income: Net interest income increased by $14 million or 14% for the
first quarter of 1999. Net interest margin as a percentage of AFE increased to
3.8% at March 31, 1999 from 3.6% at March 31, 1998. This increase reflects the
impact of the higher yielding Dealer Products Group assets combined with a
reduced level of lower yielding CMBS receivables held in our portfolio during
the first quarter of 1999 versus 1998.
13
<PAGE>
Non-Interest Income: The following table summarizes our non-interest income for
the three months ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
For the Three Months
Ended March 31, Increase/(Decrease)
--------------------- ------------------
1999 1998 Amount Percent
---- ---- ------ -------
(dollars in millions)
<S> <C> <C> <C> <C>
Factoring commissions........................ $ 28 $ 27 $ 1 4%
Income of international joint ventures....... 8 7 1 14
Fees and other income:
Fee income and other (1).................... 41 25 16 64
Net investment gains........................ 33 17 16 94
Securitization income....................... - 11 (11) N/M
---- ---- ----
Total fees and other income............... $ 74 $ 53 $ 21 40%
==== ==== ====
Total non-interest income................. $110 $ 87 $ 23 26%
==== ==== ====
Non-interest income as a
percentage of AFE (annualized)............. 3.7% 3.1%
</TABLE>
(1) Fee income and other consists primarily of loan servicing income, late
fees, prepayment fees, early termination fees, other miscellaneous income
and equipment residual gains.
Factoring commissions increased $1 million or 4% during the first quarter
of 1999 compared with 1998 due to 19% growth in factoring volume relating to
Factofrance, partially offset by compression of factoring commission rates.
Income of international joint ventures increased $1 million or 14% for the
quarter ended March 31, 1999 primarily due to increases in income from our
European joint ventures offset with decreases in income from our Latin American
joint ventures.
Fees and other income totaled $74 million and increased $21 million, or 40%
for the first quarter of 1999 due to increases in net investment gains and fee
income which more than offset a reduction in securitization income. Fee income
and other totaled $41 million for the quarter compared to $25 million for the
same prior year period. This increase is a result of higher income on loan sales
in Small Business Finance and larger prepayment and termination fees in Leasing
Services, as compared with the prior year period. Net investment gains increased
to $33 million for the quarter ended March 31, 1999 compared to $17 million for
the same prior year period due to larger net gains on sales of several
investments and higher income from our limited partnership investments. No
securitization income was generated during the first quarter of 1999 as we did
not complete any securitization transactions.
14
<PAGE>
Operating Expenses. The following table summarizes our operating expenses for
the three months ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
For the Three Months
Ended March 31, Increase/(Decrease)
--------------------- -------------------
1999 1998 Amount Percent
---- ---- ------ -------
(dollars in millions)
<S> <C> <C> <C> <C>
Salaries and other compensation.............. $ 57 $ 57 $ -- N/M
General and administrative expenses.......... 51 37 14 38%
---- ---- ----
Total operating expenses $108 $ 94 $ 14 15
==== ==== ====
Total operating expenses as a
percentage of Average Managed Assets
(annualized).......................... 3.2% 3.2%
Ratio of operating expenses to operating
revenues................................. 48% 51%
</TABLE>
Operating expenses, excluding the impact of the acquisition of the Dealer
Products Group, increased by only $3 million, or 3% for the first quarter of
1999, as compared to the prior year period. General and administrative expenses,
excluding the Dealer Products Group, increased $7 million for the first quarter
of 1999 versus 1998. The higher level reflects increases in technology spending
including expenses for year 2000 compliance, space costs and certain
professional fees. Our efficiency ratio for the first quarter improved to 48%
compared to 51% during the first quarter of 1999 reflective of our focus on
higher revenues and controlled expense growth.
Allowance for Losses. The following table summarizes the changes in our
allowance for losses of receivables, including our provision for losses of
receivables and repossessed assets, for the three months ended March 31, 1999
and 1998.
<TABLE>
<CAPTION>
For the Three Months
Ended March 31, Increase/(Decrease)
----------------- -------------------
1999 1998 Amount Percent
-------- ------- -------- ----------
(dollars in millions)
<S> <C> <C> <C> <C>
Balance at beginning of period.... $ 271 $ 261 $ 10 4%
Provision for losses............. 29 15 14 93
Writedowns....................... (27) (20) (7) 35
Recoveries....................... 5 5 - N/M
Other............................ (1) - (1) N/M
----- ----- ----
Balance at end of period.......... $ 277 $ 261 $ 16 6%
===== ===== ====
Allowance as a % of receivables.. 2.3% 2.4%
</TABLE>
Our provision for losses increased $14 million, to $29 million, for the
first quarter of 1999 compared to the same prior year period due to an
assessment of our allowance in light of an increase in net writedowns and growth
in lending assets since the prior year end. Our portfolio demonstrated continued
strong credit performance with net writedowns totaling $22 million or 0.7% of
average lending assets which is consistent with our targeted range. At March 31,
1999 and at December 31, 1998 the allowance for losses of receivables
represented 2.3% of receivables.
15
<PAGE>
Income Taxes. Our effective tax rate decreased to 34% for the three months ended
March 31, 1999 from 35% for the same period in 1998. The effective rate for 1999
and 1998 remained below federal and state combined statutory rates due to the
effect of earnings from international joint ventures, the use of foreign tax
credits and a reduction in the state effective tax rate.
LENDING ASSETS AND INVESTMENTS
Lending assets and investments grew 2%, to $13.7 billion, since the prior
year end, primarily as a result of first quarter new business volume of $1.2
billion. Leasing Services and Small Business Finance experienced strong first
quarter growth in new business volume of 71% and 57%, respectively, compared to
prior year. The acquisition of the Dealer Products Group increased Leasing
Services new business volume by approximately $110 million during the first
quarter of 1999. Total new business volume decreased compared to the same prior
year period due to the anticipated lower volume of the CMBS product in Real
Estate Finance. First quarter new business volume was offset by portfolio
runoff, loan sales and syndications in excess of $800 million. The following
table presents our lending assets and investments by business category and asset
type as of March 31, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
Lending Assets and Investments as of
March 31, December 31,
------------------- -----------------
1999 Percent 1998 Percent
---- -------- ---- --------
By Business Category: (dollars in millions)
<S> <C> <C> <C> <C>
Domestic Commercial Finance Segment
Corporate Finance.................... $ 4,083 30% $ 3,784 28%
Leasing Services..................... 2,950 22 2,840 21
Real Estate Finance.................. 2,099 15 2,044 15
Small Business Finance............... 1,024 7 1,013 8
Commercial Services.................. 524 4 401 3
Other................................ 569 4 687 5
------- --- ------ ---
Total Domestic Commercial Finance
Segment.............................. 11,249 82 10,769 80
International Factoring and Asset
Based Finance Segment (1)............ 2,462 18 2,661 20
------- --- ------- ---
Total lending assets and investments.. $13,711 100% $13,430 100%
======= === ======= ===
By Asset Type:
Receivables............................ $12,081 88% $11,854 88%
Repossessed assets..................... 4 -- 3 --
------- --- ------- ---
Total lending assets.................. $12,085 88% $11,857 88%
Equity and real estate investments..... 587 4 617 5
Debt securities........................ 456 3 400 3
Operating leases....................... 361 3 321 2
International joint ventures........... 222 2 235 2
------- --- ------- -----
Total lending assets and investments.. $13,711 100% $13,430 100%
======= === ======= ===
Funds employed (2).................... $12,351 $11,989
======= =======
Average funds employed (2)............ $12,128 $11,814
======= =======
Total managed assets (3).............. $13,977 $13,664
======= =======
Average managed assets (3)............ $13,641 $13,007
======= =======
</TABLE>
16
<PAGE>
(1) Includes $218 million and $231 million of investments in international
joint ventures at March 31, 1999 and December 31, 1998, respectively, which
represents 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 that we currently manage.
Growth in Corporate Finance lending assets and investments of $299 million
during the quarter was driven by new business volume of over $500 million and
increased borrowings under existing lines of approximately $200 million. Asset
growth was partially offset by syndications and payoffs during the quarter.
Real Estate Finance lending assets and investments increased by $55 million
since 1998 due to new business volume of approximately $100 million. First
quarter Real Estate Finance new business volume was significantly reduced from
the same prior year period due to a decline in CMBS volume. This decline was the
result of a strategic reduction of origination activities within the CMBS market
in the first quarter of 1999 following the significant volatility experienced by
this market during the second half of 1998. We are continuing to provide
financing in the CMBS market and may sell or securitize existing and newly
originated CMBS assets during 1999 depending on market conditions.
Leasing Services lending assets and investments grew by $110 million during
the first quarter of 1999 due to strong new business volume of $435 million.
This exceeded the prior year new business volume by 71%. This increase was due
to the impact of the Dealer Products Group combined with strong growth in
Heller's existing equipment business. Excluding the Dealer Products Group,
Leasing Services new business volume increased 27% for the first quarter
compared to the same prior year period. Growth from new business volume was
partially offset by syndications and payoffs during the quarter.
Lending assets and investments of Small Business Finance increased from
1998 as new business volume of $140 million during the quarter was offset by
loan sales and payoffs of $120 million. Sales of guaranteed 7(a) loans during
the quarter totaled approximately $100 million generating income of $9
million.
Growth in Commercial Services lending assets and investments was due to new
business volume and increased seasonal borrowings under existing lines of
approximately $100 million during the quarter.
International Factoring and Asset Based Finance lending assets and
investments decreased approximately $200 million as a result of foreign currency
exchange rate movements during the first quarter of 1999.
At March 31, 1999, we had contractually committed to finance an amount in
excess of $2 billion to new and existing borrowers. Our obligation to fund
commitments is generally contingent upon the maintenance of specific credit
standards by our borrowers. Since we expect many of the commitments to remain
unused, the total commitment amounts do not necessarily
17
<PAGE>
represent future cash requirements. We do not have any significant commitments
to provide additional financing related to nonearning assets.
Revenues
Total revenues include:
. interest income;
. fees and other income from domestic and consolidated international
operations; and
. our share of the net income of our international joint ventures.
<TABLE>
<CAPTION>
Total Revenues
For the Three Months Ended March 31,
--------------------------------------
1999 Percent 1998 Percent
------ ---------- ------ ----------
(dollars in millions)
<S> <C> <C> <C> <C>
Domestic Commercial Finance Segment
Corporate Finance.................. $ 104 28% $ 89 26%
Leasing Services................... 75 20 52 15
Real Estate Finance................ 51 14 77 23
Small Business Finance............. 33 9 20 6
Commercial Services................ 24 6 28 8
Other.............................. 26 7 19 6
----- --- ----- ---
Total Domestic Commercial Finance
Segment............................ 313 84 285 84
International Factoring and Asset
Based Finance Segment.............. 59 16 56 16
----- --- ----- ---
Total revenues...................... $ 372 100% $ 341 100%
===== === ===== ===
</TABLE>
Total revenues increased $31 million or 9% from the prior year principally
reflecting increases in interest income and fees and other income. Corporate
Finance experienced a $15 million increase in revenues due to an increase in
interest income resulting from a higher level of AFE and higher income from
limited partnership investments. Leasing Services revenues increased $23 million
primarily as a result of the acquisition of the Dealer Products Group. Real
Estate Finance revenues decreased $26 million due to lower interest income
resulting from a reduced level of AFE in the first quarter 1999 versus 1998 and
income of $11 million recorded in the first quarter of 1998 on the
securitization of $1.1 billion of CMBS receivables. Small Business Finance
revenues increased primarily as a result of $9 million in gains on first quarter
loan sales of approximately $100 million.
18
<PAGE>
PORTFOLIO QUALITY
The credit quality of our portfolio continues to reflect the effectiveness
of our credit strategies, underwriting and portfolio management and disciplined
credit approval process. As of March 31, 1999, nonearning assets remained low at
$219 million or 1.8% of lending assets. In addition, our allowance for losses of
receivables was in excess of 100% of nonearning impaired receivables as of March
31, 1999. The following table presents certain information with respect to the
credit quality of our portfolio.
<TABLE>
<CAPTION>
March 31, December 31,
--------- ------------
1999 1998
------- -------
(dollars in millions)
<S> <C> <C>
Lending Assets and Investments:
Receivables....................................................................... $12,081 $11,854
Repossessed assets................................................................ 4 3
------- -------
Total lending assets............................................................ 12,085 11,857
Equity and real estate investments................................................ 587 617
Debt securities................................................................... 456 400
Operating leases.................................................................. 361 321
Investments in joint ventures..................................................... 222 235
------- -------
Total lending assets and investments............................................ $13,711 $13,430
======= =======
Nonearning Assets:
Impaired receivables.............................................................. $ 215 $ 208
Repossessed assets................................................................ 4 3
------- -------
Total nonearning assets......................................................... $ 219 $ 211
======= =======
Ratio of nonearning impaired receivables to receivables........................... 1.8% 1.8%
======= =======
Ratio of total nonearning assets to total lending assets.......................... 1.8% 1.8%
======= =======
Allowances for Losses:
Allowance for losses of receivables............................................... $ 277 $ 271
======= =======
Ratio of allowance for losses of receivables to:
Receivables....................................................................... 2.3% 2.3%
======= =======
Nonearning impaired receivables................................................... 129% 130%
======= =======
Net writedowns (annualized)....................................................... 3.1x 3.3x
======= =======
Delinquencies:
Earning loans delinquent 60 days or more.......................................... $ 134 $ 184
======= =======
Ratio of earning loans delinquent 60 days or more to receivables.................. 1.1% 1.6%
======= =======
For The Three Months
Ended March 31,
---------------------
1999 1998
------- -------
Net writedowns of lending assets:.................................................. (dollars in millions)
Total net writedowns.............................................................. $ 22 $ 15
======= =======
Ratio of net writedowns to average lending assets (annualized).................... 0.7% 0.6%
======= =======
</TABLE>
19
<PAGE>
Nonearning Assets. Our level of nonearning assets remained low at $219 million
or 1.8% of lending assets at March 31, 1999. We remain favorable to our targeted
range for nonearning assets of 2-4% of lending assets. Included in nonearning
assets are repossessed assets of $4 million at March 31, 1999 and $3 million at
December 31, 1998.
Allowance for Losses. The allowance for losses of receivables totaled $277
million or 2.3% of receivables at March 31, 1999, unchanged from December 31,
1998. The ratio of allowance for losses of receivables to nonearning impaired
receivables totaled 129% at March 31, 1999 and 130% at December 31, 1998.
Loan Modifications. We had $13 million of loans that are considered troubled
debt restructures at March 31, 1999, a decrease of $1 million from December 31,
1998. At March 31, 1999, there were no loans that were restructured and returned
to earning status.
Writedowns. Net writedowns were 0.7% of average lending assets for the three
months ended March 31, 1999 as compared to 0.6% for the same prior year period.
This is consistent with our stated writedown target. Gross writedowns increased
to $27 million from $20 million while recoveries were unchanged at $5 million in
the first quarter of 1999 and 1998, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The following table presents information regarding our capital structure:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- -------------
<S> <C> <C>
(in millions)
Commercial paper and short-term borrowings....................... $ 3,885 $ 3,681
Notes and debentures............................................. 7,220 6,768
------- -------
Total senior debt............................................... 11,105 10,449
Minority interest................................................ 10 10
Stockholders' equity............................................. 1,986 1,962
------- -------
Total capitalization............................................ $13,101 $12,421
======= =======
Leverage (net of short-term investments)......................... 5.3x 5.2x
Commercial paper and short-term borrowings to total senior debt.. 35% 35%
</TABLE>
During the first quarter of 1999, our major funding requirements included:
. $1.2 billion of longer-term loans, leases and investments funded;
. a net increase in short-term loans of $299 million;
. the retirement of $653 million of senior notes; and
. common and preferred dividends of $15 million.
Our major sources of funding these requirements included:
. cash flows from operations of $125 million;
. loan repayments and investment proceeds of $771 million;
20
<PAGE>
. the sale or syndication of $230 million of loans, investments and equipment
on lease;
. the issuance of $1.1 billion of senior notes; and
. the increase in short-term debt of $204 million.
Senior note issuances include $600 million relating to our global bond
offering that occurred in March 1999. This offering of notes has expanded our
international investor base thereby extending potential sources of liquidity.
Our ratio of commercial paper and short-term borrowings to total senior
debt was 35% at March 31, 1999 and at December 31, 1998. Leverage (based on
senior debt net of short-term investments) was 5.3x at March 31, 1999 and 5.2x
at December 31, 1998. The level of commercial paper and short-term borrowings
remains within our targeted range.
Our committed bank credit and asset sale facilities totaled approximately
$5.2 billion at March 31, 1999 and included $3.6 billion in available liquidity
support under three facilities. The longest of these facilities is a 5-year
agreement for $1.5 billion which expires April 8, 2002. Our 364-day bank credit
facilities will expire on October 26, 1999 and April 4, 2000. Also included in
our total committed facilities are foreign bank credit facilities of $994
million (U.S. dollar equivalent) for our international subsidiaries and $36
million available under foreign currency revolving credit facilities. Committed
credit and sale facilities from unaffiliated financial institutions represent
136% of outstanding commercial paper and short-term borrowings at March 31,
1999.
21
<PAGE>
Risk Management - Asset/Liability Management
We entered into derivatives during the first three months of 1999 to
accomplish our risk management objective of controlling the overall level of
financial risk arising from normal business operations. During the first quarter
of 1999, we entered into interest rate swap agreements with aggregate notional
amounts of approximately $1.2 billion. In addition, $953 million of interest
rate swaps were terminated or matured during the three month period. At March
31, 1999, we held $5.1 billion in interest rate swaps, $645 million in cross-
currency interest rate swap agreements and $2.2 billion of basis swap
agreements.
We held 10-year interest rate futures contracts with an equivalent notional
amount of $358 million at March 31, 1999. We use these instruments to hedge the
interest rate risk of a portion of our CMBS receivables portfolio.
As of March 31, 1999, we held $926 million of forward currency exchange
contracts. These instruments serve as hedges of our investment in international
subsidiaries and joint ventures or effectively hedge the translation of the
related foreign currency income.
Accounting Developments
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS No. 133), Accounting for Derivative
Instruments and Hedging Activities. This Statement establishes accounting and
reporting standards requiring all derivative instruments (including certain
derivative instruments embedded in other contracts) to be recorded in the
balance sheet as either an asset or liability measured at its fair value.
Changes in the fair value of the derivative are to be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows gains and losses on derivatives to offset related
results on the hedged items in the income statement and requires that a company
must document, designate, and assess the effectiveness of transactions that
receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning
after June 15, 1999. The Company is assessing the impact of this statement and
will adopt it in our 2000 interim financial statements.
Other Developments
HealthCare Financial Acquisition --
On April 19, 1999 we reached a definitive agreement to acquire HealthCare
Financial Partners, Inc. (HCF). With assets of $533 million, HCF is a rapidly
growing commercial finance company exclusively focused on providing secured
financing to small- and mid-sized healthcare providers throughout the United
States. The acquisition price is $35 per share, subject to certain adjustments.
The total purchase price will equal approximately $483 million.
We have agreed to pay 41% of the purchase price in the form of our Class A
Common Stock and 59% in cash. The transaction will involve an issuance of common
shares by Heller. The final number of shares that Heller issues will be based on
the average closing price of our stock during
22
<PAGE>
a pre-closing period, subject to both a minimum and maximum stock price. Our
issuance of common stock will reduce the ownership interest in Heller of our
majority shareholder, The Fuji Bank, Limited, from 57% to approximately 52%.
We anticipate closing on the transaction during the third quarter 1999,
subject to regulatory approval and approval by HCF shareholders. We will account
for the acquisition using the purchase method of accounting. Goodwill from the
acquisition will approximate $230 million, which we will amortize over 25 years.
Declaration of Dividends --
On April 23, 1999, we declared a quarterly dividend of $0.09 on each
outstanding share of our Class A Common Stock and Class B Common Stock, payable
on or before May 17, 1999 to the holders of record thereof on May 3, 1999. We
also declared quarterly dividends of $0.5078125, $1.67175 and $1.7375 on each
outstanding share of our Cumulative Perpetual Senior Preferred Stock, Series A,
Fixed Rate Noncumulative Perpetual Senior Preferred Stock, Series C and Fixed
Rate Noncumulative Perpetual Senior Preferred Stock, Series D, respectively,
payable on May 15, 1999 to the holders of record thereof on May 3, 1999.
Year 2000 Compliance
We have 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 was substantially completed in 1998 with respect to
information technology systems and 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 is scheduled for completion in 1999
for all other matters. With respect to the one remaining mission-
critical information technology system, certain program issues
necessitating additional testing arose during April 1999 and completion
is now scheduled for the third quarter rather than the second quarter of
1999; and
. validation, which is scheduled for completion on the final mission-
critical information technology system and certain information
technology infrastructure in the third quarter of 1999, will continue
throughout 1999 for all other matters. As part of the validation
process, we are also assessing the need for any re-verification of
client server hardware and software represented as compliant by the
vendor.
We have completed the assessment of year 2000 risk relating to the Dealer
Products Group leasing assets and subsidiaries acquired in late 1998. We have
engaged a third party to complete remediation and validation activities, which
are underway and scheduled for completion during 1999.
We have made, and will continue to make, certain investments in our
software applications and systems to ensure that our systems function properly
through and beyond the
23
<PAGE>
year 2000. We have (1) three loan processing systems, (2) a lease processing
system, (3) a factoring system, and (4) systems for general ledger processing,
payroll, accounts payable, fixed assets, treasury and other smaller
applications. We have established plans to modify, upgrade or replace each of
these systems for compliance and have established an overall plan to bring all
of these systems into compliance by the end of 1999.
We continue to address the impact of the year 2000 issue on our
consolidated international subsidiaries and our international joint venture
companies. As a result of the risk assessment substantially completed with
respect to these international companies in 1998, significant remediation
activity and additional readiness validation are underway for completion in
1999. During the first quarter of 1999, we engaged an independent consultant to
conduct site visits and a limited scope review of overall year 2000 preparedness
activities, including testing protocols and country risk, at certain of our
international companies. Reviews were completed for selected European companies
during the first quarter and will be completed for selected other international
companies during April 1999. With respect to the reviewed European companies, no
areas of material concern were reported.
In addition to information technology systems, we continue to assess and
monitor potential year 2000 impacts on our material vendors and borrowers, as
well as year 2000 issues relating to environmental factors such as facilities
and general utilities.
With respect to vendors, we have categorized vendors with reference to
materiality and availability of other sources for the provided services and
supplies. We are making inquiry of those vendors deemed material. 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 our underwriting and portfolio management activities in order
to evaluate exposure due to any lack of compliance on the part of borrowers. We
categorize prospective and existing borrowers by level of year 2000 risk, and
are underwriting new transactions and managing portfolio accounts accordingly.
Finally, we are incorporating year 2000 contingency planning into our
overall business resumption program in consideration of facilities and other
environmental factors. The planning component of this effort was completed
during the first quarter of 1999, with implementation to occur throughout the
year.
We have incurred approximately $12 million to date of expenses related to
the year 2000 issue and estimate that we will incur an additional amount of
approximately $4 million through the end of the project. We will expense
remediation, compliance, maintenance and modification costs as incurred.
We continue to bear some risk related to the year 2000 issue and could be
materially adversely affected if our own remediation and contingency planning
efforts fall behind schedule or if third parties with whom we have material
relationships (e.g., vendors, including those providing contingency plans or
outsourced technology services such as mainframe and
24
<PAGE>
application support, borrowers and power companies) do not appropriately address
their own year 2000 compliance issues.
25
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on April 23, 1999.
The following directors were re-elected for a one-year term, each with the
number of votes shown, to serve until the next annual meeting of stockholders or
until his successor is elected and shall have qualified.
<TABLE>
<CAPTION>
Director For Withheld
- -------- --- --------
<S> <C> <C>
Richard J. Almeida 186,455,941 617,505
Michael A. Conway 186,736,197 337,249
Tsutomu Hayano 186,453,041 620,405
Soichi Hirabayashi 186,406,741 666,705
Mark Kessel 186,451,246 622,200
Tetsuo Kumon 186,406,056 667,390
Dennis P. Lockhart 186,456,641 616,805
Frank S. Ptak 186,738,746 334,700
Masahiro Sawada 186,453,341 620,105
Kenichiro Tanaka 186,453,641 619,805
Frederick E. Wolfert 186,451,459 621,987
Terumasa Yamasaki 186,405,556 667,890
</TABLE>
In addition to electing the Board of Directors, the stockholders also
ratified the appointment of Arthur Andersen LLP as independent auditors for
1999, with 187,015,984 votes for, 49,150 votes against, and 8,312 votes
abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(10) First Amendment to the Company's Supplemental Executive Retirement
Plan
(12) Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends
(27) Financial Data Schedule
(b) Current Reports on Form 8-K:
26
<PAGE>
<TABLE>
<CAPTION>
Date of Report Item Description
- ----------------------- ------- --------------------------------------------------------------
<S> <C> <C>
January 20, 1999 5, 7 A report filing a press release announcing (i) earnings for
the year ended December 31, 1998, (ii) selection by the Board
of Directors of April 23, 1999 as the date for the Annual
Meeting of Stockholders and (iii) selection by the Board of
Directors of March 1, 1999 as the record date for voting at
the Annual Meeting of Stockholders.
January 20, 1999 5, 7 A report filing a press release announcing the declaration of
dividends on the Company's common and preferred stocks.
April 20, 1999 5, 7 A report filing a press release announcing the Company's
earnings for the quarter ended March 31, 1999 (as amended on
Form 8-K/A).
April 20, 1999 5, 7 A report filing a press release announcing the planned
acquisition of HealthCare Financial Partners, Inc.
April 22, 1999 5, 7 A report filing a press release announcing approval by the
Company's Board of Directors of the agreement to acquire
HealthCare Financial Partners, Inc.
April 23, 1999 5, 7 A report filing a press release announcing the declaration of
dividends on the Company's common and preferred stocks.
</TABLE>
27
<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: April 29, 1999
28
<PAGE>
FIRST AMENDMENT
OF
HELLER FINANCIAL, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
--------------------------------------
(As Amended and Restated Effective January 1, 1996)
WHEREAS, Heller Financial, Inc. (the "Company") maintains the Heller
Financial, Inc. Supplemental Executive Retirement Plan As Amended and Restated
Effective January 1, 1996 (the "Plan") for a select group of management and
highly compensated employees of the Company and of certain related companies;
and
WHEREAS, Section 5 of the Plan reserves to the Company the power to amend
or terminate the Plan, and it now is deemed desirable to amend the Plan;
NOW, THEREFORE, in exercise of the power delegated to the Compensation
Committee of the Board of Directors by the By-Laws of the Company and delegated
to the undersigned officer by resolution of the Benefits Committee of the
Company, to which the Compensation Committee has delegated its authority for
this purpose, the Plan is hereby amended, effective January 1, 1999 in the
following particulars:
1. By substituting the following for the first sentence of subsection 1.3
of the Plan:
"The Company and each other Heller Controlled Group Member that has been
designated by the Compensation Committee of the Board of Directors of the
Company, or its delegate, are referred to herein as the 'Employers.' Each
is individually an 'Employer.'"
2. By substituting the following for subsection 2.1 of the Plan:
"2.1. Eligibility. Each employee of an Employer will become a
Participant in this Plan on the earliest of the following dates:
<PAGE>
(a) the date that the benefits the employee would otherwise accrue in
the Retirement Plan are limited by operation of Code Section 415
or 401(a)(17);
(b) the date that the benefits the employee would otherwise accrue in
the Retirement Plan are limited because the employee's
Supplemental Compensation (as defined in subsection 2.2 below) is
not considered in determining benefits under the Retirement Plan;
and
(c) the effective date of any contract between the employee and an
Employer that provides for an Employment Contract Benefit (as
defined in subsection 2.2 below.
Notwithstanding the foregoing, an employee who becomes eligible to
participate in the Plan by virtue of paragraph (a) or (b) above, but who
does not participate in the Retirement Plan on the date described in
paragraph (a) or (b) will not become a Participant in this Plan until he
becomes a participant in the Retirement Plan."
3. By substituting the following for subsection 2.2 of the Plan:
"2.2. Supplemental Benefit. At a Participant's retirement or
earlier termination of employment with all Heller Controlled Group Members,
the Participant will be entitled to the "Supplemental Benefit" that has
accrued for him under the Plan. As of any given date, a Participant's
accrued Supplemental Benefit is the full amount of retirement benefit
produced for the Participant by applying the Retirement Plan pension
formula to the Participant on that date (the 'Full Benefit'), less the
maximum amount of retirement benefit that can be provided under the
Retirement Plan after applying the limitations imposed by Code Sections
401(a)(17) and 415, plus the Participant's Employment Contract Benefit, if
any.
"In determining the Full Benefit, the Participant's Supplemental
Compensation, if any, is treated as compensation considered under the
Retirement Plan. A Participant's 'Supplemental Compensation' for a plan
year is any base salary that is deferred that plan year by the Participant
under any nonqualified deferred compensation plan maintained by the
Employers. Also in determining a Participant's Full Benefit, only service
with an Employer while it is a Heller Controlled Group Member will be
considered. Notwithstanding the foregoing, service with an Employer before
the date the Employer first became a Heller Controlled Group Member and
service with a predecessor employer will be considered if:
(a) the service formed the basis of a benefit under an unfunded, non-
qualified retirement plan maintained by the Employer before it
first became a Heller Controlled Group member or maintained by
the predecessor employer (a 'prior plan');
2
<PAGE>
(b) the Company assumed liability for benefits under the prior plan
pursuant to the terms of an asset or stock purchase agreement;
and
(c) the service is not counted in calculating the Participant's
Employment Contract Benefit.
"An 'Employment Contract Benefit' is any amount to which the
Participant is entitled under an individual agreement with the Employer
that is designed to compensate the Participant for the loss of service
and/or earnings credit under one or more qualified or nonqualified
retirement plans of an unrelated employer, or for loss of service credit
under the Retirement Plan because of an absence from the employ of the
Heller Controlled Group Members.
"A Participant's accrued Supplemental Benefit will become
nonforfeitable on the same basis and at the same time as his accrued
benefit under the Retirement Plan becomes nonforfeitable, except if and to
the extent a Participant's Employment Contract Benefit provides otherwise."
4. By substituting "$100,000" for "$10,000" where the latter amount
appears in subsection 2.4.
5. By substituting the phrase "the Compensation Committee of the Board of
Directors of the Company, or its designee" for the phrase "the Company or its
designee" where the latter phrase appears in Section 4 of the Plan.
6. By redesignating Section 5 as Section 6.
7. By adding the following new Section 5 to the Plan:
"SECTION 5
---------
Employer Participation
----------------------
"5.1. Adoption of Plan. Any Heller Controlled Group Member may,
with the approval of the Administrator and under such terms and conditions
as the Administrator may prescribe, adopt the corresponding portions of the
Plan by resolution of its board of directors. The Administrator will amend
the Plan as necessary or desirable to reflect the adoption of the Plan by
an Employer, and the appearance of an Employer's name in Appendix A will be
conclusive proof that the Administrator has approved the Employer's
adoption of the Plan. An adopting Employer will not have the authority to
amend or terminate the Plan under Section 6.
3
<PAGE>
"5.2. Withdrawal from the Plan by Employer. Any Employer has
the right, at any time, upon the approval of and under any conditions
imposed by the Administrator, to withdraw from the Plan by delivering to
the Administrator written notice of its election to withdraw. Participants
who are employees of a withdrawing Employer will accrue no additional
benefits or, unless the Administrator otherwise provides, vesting service,
under this Plan. Benefits owing to a Participant on account of service
with a withdrawing Employer will continue to be the responsibility of the
withdrawing Employer."
8. By adding the phrase "or its designee" after the phrase "Board of
Directors of the Company" in Section 6, as renumbered by particular 6 above.
9. By adding the following new Appendix A to the Plan, immediately at the
end of the Plan.
"APPENDIX A
----------
Employers
---------
"The Heller Controlled Group Members (other than the Company) listed below
have adopted the Plan for their employees and, where noted, have withdrawn
from the Plan, effective as of the dates indicated.
"Employer Adoption Date Withdrawal Date
-------- ------------- ---------------
Heller Financial Leasing, Inc. January 1, 1999"
* * * * * *
4
<PAGE>
IN WITNESS WHEREOF, on behalf of the Company, the undersigned officer has
executed this amendment and consent this 28th day of April, 1999.
HELLER FINANCIAL, INC.
By:_________________________________
Nina B. Eidell
Executive Vice President
Chief Human Resources Officer
5
<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 Three
Months Ended
March 31, 1999
--------------
<S> <C>
Net income before income taxes and minority interest........... $ 86
Add-Fixed charges
Interest and debt expense........................................ 149
One-third of rentals............................................. 3
----
Total fixed charges......................................... 152
----
Net income, as adjusted............................................ $238
----
Ratio of earnings to fixed charges................................. 1.57x
====
Preferred stock dividends on a pre-tax basis....................... 10
Total combined fixed charges and preferred stock dividends.. $162
----
Ratio of earnings to combined fixed charges and
preferred stock dividends........................................ 1.47x
=====
</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 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. ANNUAL REPORT FORM 10K FOR THE PERIOD ENDING DECEMBER
31, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 0
<INT-BEARING-DEPOSITS> 873
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 519
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 12,081
<ALLOWANCE> (277)
<TOTAL-ASSETS> 14,995
<DEPOSITS> 0
<SHORT-TERM> 3,885
<LIABILITIES-OTHER> 1,894
<LONG-TERM> 7,220
<COMMON> 1,453
0
400
<OTHER-SE> 133
<TOTAL-LIABILITIES-AND-EQUITY> 14,995
<INTEREST-LOAN> 262
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 262
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 149
<INTEREST-INCOME-NET> 113
<LOAN-LOSSES> 29
<SECURITIES-GAINS> 0<F1>
<EXPENSE-OTHER> 108
<INCOME-PRETAX> 86
<INCOME-PRE-EXTRAORDINARY> 86
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 57<F2>
<EPS-PRIMARY> 0.56
<EPS-DILUTED> 0.55
<YIELD-ACTUAL> 3.85
<LOANS-NON> 215
<LOANS-PAST> 74
<LOANS-TROUBLED> 13
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 271
<CHARGE-OFFS> 27
<RECOVERIES> 5
<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 $29 million income tax provision.
</FN>
</TABLE>
