<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
[X] SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
OR
[_] 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)
36-1208070
Delaware (I.R.S. Employer Identification No.)
(State or other jurisdiction of
incorporation or organization)
500 West Monroe Street, Chicago, 60661
Illinois (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (312) 441-7000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of Each Class Name of Exchange on which Registered
- ------------------- ---------------------------------------
<S> <C>
Class A Common Stock New York Stock Exchange, Inc.
The Chicago Stock Exchange Incorporated
Cumulative Perpetual Senior Preferred
Stock, Series A New York Stock Exchange, Inc.
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
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. YesX No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of March 1, 1999, the aggregate market value of voting stock held by non-
affiliates of the registrant, based upon the closing sales price for the
registrant's Class A common stock, as reported on the New York Stock Exchange
was approximately $963,050,000.
Number of shares of Common Stock outstanding at March 1, 1999:
Class A Common Stock--38,852,546
Class B Common Stock--51,050,000
Documents incorporated by reference: Portions of the definitive Proxy
Statement prepared for the 1999 Annual Meeting of Stockholders to be filed no
later than April 1, 1999 are incorporated by reference into Part III of this
report.
Web site address is http://www.hellerfin.com
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item
No. Name of Item Page
---- ------------ ----
<C> <S> <C>
Part I
Item 1. Business........................................................ 4
General......................................................... 4
Domestic Commercial Finance..................................... 4
Corporate Finance............................................. 7
Real Estate Finance........................................... 9
Leasing Services.............................................. 11
Small Business Finance........................................ 14
Commercial Services........................................... 16
International Factoring and Asset Based Finance................. 17
Sales and Marketing............................................. 19
Competition..................................................... 20
Regulation...................................................... 21
Employees....................................................... 22
Risk Management................................................. 22
Credit Risk Management.......................................... 22
Asset/Liability Management...................................... 23
Interest Rate Risk Management................................... 24
Foreign Exchange Risk Management................................ 26
Liquidity Risk Management....................................... 29
Portfolio Quality............................................... 30
Item 2. Properties...................................................... 32
Item 3. Legal Proceedings............................................... 32
Item 4. Submission of Matters to a Vote of Security Holders............. 32
Part II
Market for Registrant's Common Equity and Related Stockholder
Item 5. Matters....................................................... 33
Item 6. Selected Financial Data......................................... 35
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 37
General......................................................... 37
Year Ended December 31, 1998 Compared to Year Ended December 31,
1997.......................................................... 39
Results of Operations........................................... 39
Lending Assets and Investments.................................. 43
Year Ended December 31, 1997 Compared to Year Ended December 31,
1996.......................................................... 45
Results of Operations........................................... 45
Lending Assets and Investments.................................. 49
Liquidity and Capital Resources................................. 50
Accounting Developments......................................... 52
Year 2000 Compliance............................................ 53
Special Note Regarding Forward-Looking Statements............... 54
Item 8. Financial Statements and Supplementary Data..................... 55
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................... 94
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Item No. Name of Item Page
-------- ------------ ----
<C> <S> <C>
Part III
Item 10. Directors and Executive Officers of the Registrant............. 95
Item 11. Executive Compensation......................................... 96
Item 12. Security Ownership of Certain Beneficial Owners and Management. 96
Item 13. Certain Relationships and Related Transactions................. 96
Part IV
Exhibits, Financial Statement Schedules and Reports on Form 8-
Item 14. K............................................................ 96
</TABLE>
3
<PAGE>
PART I
ITEM 1. BUSINESS
The following discussion contains certain "forward-looking statements" as
defined in the Securities Exchange Act of 1934 which are generally identified
by the words "anticipates", "believes", "estimates", "expects", "plans",
"intends" and similar expressions. Those statements are subject to certain
risks, uncertainties and contingencies which could cause our actual results,
performance or achievements to differ materially from those expressed in, or
implied by, such statements. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations--Special Note Regarding
Forward-Looking Statements."
General
Heller Financial, Inc. (including its consolidated subsidiaries, Heller or
the Company, which may be referred to as we, us or our) is a leading
diversified commercial financial services company. We provide a broad array of
financial products and services to mid-sized and small businesses in the United
States and selected international markets.
Primary Business Segments
We deliver our products and services principally through two business
segments:
. Domestic Commercial Finance; and
. International Factoring and Asset Based Finance.
Domestic Business
Our Domestic Commercial Finance segment is made up of five business units:
(1) Corporate Finance, providing collateralized cash flow and asset based
lending;
(2) Real Estate Finance, primarily providing secured real estate
financing;
(3) Leasing Services, providing debt and lease financing of small and
large ticket equipment sourced directly or through manufacturers,
distributors and dealers;
(4) Small Business Finance, providing financing to small businesses,
primarily under U.S. Small Business Administration (SBA) loan
programs; and
(5) Commercial Services, providing factoring and receivables management
services.
International Business
Our International Factoring and Asset Based Finance segment, known as
Heller International Group, provides factoring services and financings secured
primarily by receivables, inventory and equipment. It does so through wholly-
owned subsidiaries and joint ventures which provide financing to small and mid-
sized companies primarily in Europe, but also in Asia and Latin America.
Market Position
We concentrate primarily on senior secured lending, with 87% of lending
assets and investments at December 31, 1998 being made on that basis. Also, to
a more limited extent, we make subordinated loans and invest in select debt and
equity instruments.
4
<PAGE>
We believe that, as of December 31, 1998, we are the largest factoring
operation worldwide in terms of factoring volume. Our subsidiary, Factofrance-
Heller (Factofrance), is the largest factoring operation in France and our
Commercial Services unit is the fourth largest factoring operation in the
United States. We believe we are the third largest originator of U.S. SBA 7(a)
guaranteed small business loans (including leadership positions in California,
Texas, Florida and Illinois). We are among the largest lenders to private
equity-sponsored companies in the U.S. middle market. Additionally, we are a
recognized leader in real estate finance, vacation ownership lending, vendor
finance and middle-market equipment finance and leasing in the United States.
We have built our portfolio through:
. effective asset origination capabilities;
. effective portfolio management;
. disciplined underwriting and credit approval processes; and
. acquisitions, to a lesser extent.
Our business groups have the ability to manage asset, client and industry
concentrations and enhance profitability by distributing assets through
securitizations, syndications and loan sales.
Heller History and Recent Activities
Heller was founded in 1919. From our inception, we have primarily targeted
our commercial financing activities at mid-sized and small businesses in the
United States. Since 1964, we have also competed in selected international
markets through our consolidated subsidiaries and investments in international
joint ventures.
Heller was purchased by a subsidiary of The Fuji Bank, Limited (Fuji Bank)
in 1984. Fuji Bank owned 100% of Heller's common stock between that time and
April 1998. In May 1998, we issued 38,525,000 shares of Class A Common Stock in
an initial public offering (the IPO). The IPO reduced Fuji Bank's ownership,
through its direct subsidiary Fuji America Holdings, Inc. (FAHI), to 79% of the
voting interest and 57% of the economic interest of our issued common stock. In
May 1998, Heller increased its ownership of International Group to 100% from
79% by purchasing the 21% interest held by Fuji Bank.
From the time of Fuji Bank's purchase of Heller through 1990, the
substantial majority of our portfolio consisted of Corporate Finance and Real
Estate Finance assets. These assets collectively represented 76% of our lending
assets and investments at December 31, 1990. Since 1990, we have diversified
our portfolio. While continuing to build our Corporate Finance and Real Estate
Finance franchises, we also invested major resources in building other secured
lending businesses through start-ups of new business units, acquisitions, and
the expansion of smaller existing operations. Products included asset based
working capital and term financings secured by accounts receivable and
inventory and various types of equipment finance and leasing product offerings.
We further expanded our leasing operations by acquiring certain U.S. assets
of the Dealer Products Group of Dana Commercial Credit Corporation and the
stock of the Dealer Products Group's international subsidiaries (Dealer
Products Group).
In the past several years, we selectively expanded our overseas operations,
most significantly by completing the acquisition, in April 1997, of the
interest of our joint venture partner in Factofrance, the leading factoring
company in France.
5
<PAGE>
As the result of the above activities, we believe that we have built a
lending portfolio that is well diversified, has strong asset collateralization
and provides us with a diversified income stream.
Domestic Commercial Finance Restructuring
During the fourth quarter of 1998, we implemented a restructuring
initiative
designed to:
. increase operating revenues;
. improve operational efficiencies; and
. optimize return on stockholders' equity.
To achieve the goals of our restructuring initiative, we reorganized our
domestic operations into five business units by bringing together businesses
that either originate transactions in similar markets or have common operating
processes as follows:
. Corporate Finance combines the former Corporate Finance, Heller Business
Credit and Heller Commercial Funding groups;
. Real Estate Finance combines the former Real Estate Finance group and
our Vacation Ownership unit;
. Leasing Services combines the Commercial Equipment Finance and Vendor
Finance units, including the Dealer Products Group acquired at the end
of 1998;
. Our factoring group, formerly known as the Current Asset Management
Group, has been renamed Commercial Services;
. Our Small Business Lending group has been renamed Small Business
Finance.
We incurred a one time charge of $17 million in connection with the
restructuring, primarily related to severance benefits for terminated employees
and termination of office leases. We anticipate that the restructuring will
realize annual savings of more than $20 million beginning in 1999.
Summary 1998 Results
For the year ended December 31, 1998:
. Net income increased 22% to $193 million, from $158 million for the
prior year.
. Net income applicable to common stock was $172 million for the year
ended December 31, 1998, which represented an increase of 19% from $144
million for the prior year.
. New business volume increased 20% over the prior year, from $6.0 billion
to $7.2 billion.
. Total lending assets and investments increased to $13.4 billion, an
increase of $1.5 billion from the prior year.
. Common stockholders' equity increased to $1.6 billion.
. The strong credit quality of our portfolio is reflected in nonearning
assets of $211 million, or 1.8% of total lending assets at December 31,
1998. This is favorable to our targeted range for non earning assets of
2-4% of total lending assets.
6
<PAGE>
See Note 22, "Operating Segments," of the Consolidated Financial Statements
for disclosure regarding certain financial information with respect to each of
our business segments.
Domestic Commercial Finance Segment
Corporate Finance
Corporate Finance is a leading provider of secured financing solutions to
middle market oriented equity sponsors, intermediaries and enterprises.
Corporate Finance primarily offers:
. cash flow based lending;
. asset based lending; and
. makes equity investments on a more limited basis.
Through Corporate Finance, we provide cash flow lending primarily for
leveraged buyouts, acquisitions, recapitalizations, refinancings, expansion and
growth of publicly and privately held entities. These entities are in a wide
variety of industries, including manufacturing, services, metals, plastics,
consumer products, health care and defense. In almost all cases, these
transactions involve professional or private equity investors, which acquire
businesses for financial or strategic purposes.
We also provide secured term and revolving credit facilities with durations
of up to ten years. To a lesser extent, we provide unsecured or subordinated
financings and invest in private equity buy-out funds. From time to time, we
make modest non-voting equity investments in conjunction with senior debt
facilities, receive warrants or equity interests as a result of providing
financing, and make stand-alone equity co-investments, with known equity
sponsors. We also serve as co-lender or participant in larger senior secured
transactions originated by other lenders.
We provide asset based working capital and term financing to middle-market
enterprises for growth, refinancings, recapitalizations, acquisitions, seasonal
borrowing, and debtor-in-possession (DIP) and post-DIP transactions. We do this
through senior loans primarily secured by accounts receivable, inventory and,
to a lesser extent, machinery and equipment. Middle market enterprises we serve
through our asset based lending unit include manufacturers, retailers,
wholesalers, distributors and service firms. We typically provide financing as
agent (lead lender), but we also provide financing as a co-lender or a
participant in senior secured transactions agented by other asset-based
lenders.
We generate the majority of our new business through our relationships with
private equity sponsors, investment and commercial banks and a variety of
brokers and intermediaries. We have developed and maintain close relationships
with about 200 equity sponsors, many of whom have been our clients for ten or
more years and have financed several transactions with us.
Our portfolio has loans in a wide range of industries including industrial
machinery, business services, metals, chemicals/plastics, consumer products,
health care and automotive. The portfolio is diversified among approximately 30
industries with a concentration of 10% in the food and drug industry. No other
industry represented more than 10% of the portfolio.
7
<PAGE>
The following table gives information about Corporate Finance:
<TABLE>
<CAPTION>
As of, or For the Year Ended,
December 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(dollars in millions)
<S> <C> <C> <C>
New business volume........................ $ 2,663 $ 2,065 $ 1,496
Total lending assets and investments....... 3,784 3,066 2,890
Revenues................................... 391 361 318
Revenues as a percentage of total revenues. 27.8% 28.4% 32.3%
Ratio of net writedowns to average lending
assets.................................... 0.4 0.8 0.4
Ratio of nonearning assets to lending
assets.................................... 0.4 0.2 1.4
</TABLE>
The level of nonearning assets at December 31, 1998 of $13 million, or 0.4%
of Corporate Finance lending assets, indicates the high credit quality of the
portfolio. For the year ended December 31, 1998, Corporate Finance had:
. net writedowns of 0.4% of average lending assets versus 0.8% in 1997;
. total lending assets and investments of $3.8 billion, or 28% of the
Company's total lending assets and investments; and
. total revenues of $391 million, or 28% of the Company's total revenues.
We base our commitment to finance cash flow lending transactions on our
assessment of the borrower's ability to generate cash flows to repay the loan.
To do this, we consider, among other factors, the borrower's:
. equity sponsor;
. market position;
. ability to withstand competitive challenges; and
. relationships with clients and suppliers.
Cash flow based transactions are generally cross-collateralized and secured
by liens on the borrower's current and fixed assets and capital stock.
Asset based lending transactions concentrate on balancing collateral
values, cash flow and capital structure. We protect against deterioration of a
borrower's performance by using established advance rates against eligible
collateral and cross-collateralizing revolving credit facilities and term
loans. We also actively manage credit risk through portfolio diversification by
industry and individual client exposure.
We manage the Corporate Finance portfolio centrally to ensure consistent
application of credit policy and efficient documentation and approval of
transaction modifications.
Corporate Finance has an established syndication capability. This enables
us to commit to larger transactions while still managing the ultimate size of
our retained position and to generate additional income. In 1998, we acted as
agent for 52 syndicated transactions. We believe this level of agented
transactions makes us the fourth largest syndicator of private equity-sponsored
deals in the United States. In 1998, we syndicated a total of $1.2 billion in
funds. Although we can provide commitments of up to $200 million per
transaction, we generally syndicate our ultimate retained position to less than
$20 million. As of December 31, 1998, our average retained transaction size was
approximately $17 million in commitments and $9 million in fundings.
8
<PAGE>
During 1998, we made a 23% investment in a media lending company. As part
of this transaction, we have a loan with funds employed of $81 million
currently secured by 35 individual loans to media companies with an average
commitment size of approximately $6.7 million at December 31, 1998. This is a
strategic investment for us as it provides access to certain segments of the
media communications industry.
As of December 31, 1998, Corporate Finance had contractual commitments to
finance an additional $1.4 billion to new and existing borrowers, generally
contingent on their maintaining specific credit standards. Since we expect many
of these commitments to remain unused, the total commitment amounts do not
necessarily represent future cash requirements. We do not have any significant
commitments to provide additional financing related to nonearning assets.
Real Estate Finance
Real Estate Finance provides secured financing to owners, investors and
developers for the acquisition, refinancing and renovation of commercial income
producing properties in a wide range of property types and geographic areas. We
serve these markets by offering tailored senior secured debt and junior
participating structures and by originating fixed rate commercial mortgages
which we hold for ultimate securitization (CMBS). We believe we are the second
largest lender to the U.S. vacation ownership industry, providing timeshare
resort developers with full life-cycle financing secured by time share
receivables and available time share units.
Our transactions are secured by a variety of property types including:
. offices;
. apartments;
. senior housing;
. retail properties;
. industrial properties;
. manufactured housing communities;
. self storage facilities; and
. hotels and vacation ownership units.
Senior secured loan transactions range in size from $4 million to $30
million, with an average transaction size in 1998 of about $5 million. Typical
junior secured loan transactions range in size from $1 million to $12 million,
with an average transaction size in 1998 of about $3.5 million. Typical
vacation ownership transactions range in size from $5 million to $40 million,
with an average transaction size in 1998 of about $16 million.
Real Estate Finance has 11 offices throughout the United States. We
generate new business through our relationships with real estate brokers and
through direct calling on prospective borrowers. We also market our products
through the use of trade advertising, direct marketing, newsletters, and trade
show attendance and sponsorship.
9
<PAGE>
The following table gives information about Real Estate Finance:
<TABLE>
<CAPTION>
As of, or For the Year Ended,
December 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(dollars in millions)
<S> <C> <C> <C>
New business volume........................ $ 2,157 $ 1,667 $ 975
Total lending assets and investments....... 2,044 2,323 1,655
Revenues................................... 261 274 204
Revenues as a percentage of total revenues. 18.6% 21.6% 20.7%
Ratio of net writedowns to average lending
assets.................................... 2.6 -- --
Ratio of nonearning assets to lending
assets.................................... 0.5 0.3 0.2
</TABLE>
As of December 31, 1998, Real Estate Finance had total lending assets and
investments of $2.0 billion, or 15% of Heller's total lending assets and
investments. Of this amount:
. about $800 million represents CMBS receivables;
. about $400 million represents senior secured lending assets and
investments;
. about $300 million represents vacation ownership lending assets and
investments; and
. about $300 million represents junior secured lending assets and
investments.
Real Estate Finance new business volume for the year totaled $2.2 billion,
of which $1.7 billion related to CMBS receivables.
Net writedowns to average lending assets in 1998 of 2.6% reflect a $40
million writedown recorded on CMBS assets, which were subsequently securitized.
Excluding the $40 million writedown, the ratio of net writedowns to average
lending assets was 0.3% for Real Estate Finance during 1998.
Real Estate Finance's credit philosophy emphasizes selecting properties
that generate stable or increasing income cash flow streams, have strong asset
quality and proven sponsorship with defined business plans. We underwrite the
CMBS product according to rating agency guidelines and we make all CMBS loans
on a senior secured basis. Vacation Ownership's credit philosophy considers the
developer's business objectives and capital needs, the resort development,
clients' servicing capabilities and performance of receivables portfolio and
sponsorship support. Our credit philosophy for junior secured financings
considers the strength and track record of the property developer, the supply
and demand dynamics of the particular market and the competitive strengths of
the subject real estate.
These credit strategies have resulted in low levels of nonearning assets
for the past three years. Our lending and investment philosophy emphasizes
portfolio liquidity, relatively small individual transaction sizes, and
maintenance of a diverse portfolio in terms of geographic location and property
type.
Real Estate Finance's lending assets and investments were distributed as
follows:
Property Types Geographic Areas
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Southwest............. 21% 21%
California............ 19 26
Florida............... 12 10
Midwest............... 8 10
Southeast............. 8 3
West.................. 7 4
New England........... 6 5
Mid-Atlantic States... 4 6
New York.............. 3 4
Other................. 12 11
--- ---
100% 100%
=== ===
</TABLE>
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
General purpose office
buildings............ 15% 8%
Apartments............ 15 18
Vacation ownership
units................ 14 10
Retail properties..... 13 13
Senior housing........ 8 1
Manufactured housing.. 7 14
Hotels................ 6 5
Industrial properties. 5 7
Self storage
facilities........... 5 11
Loan Portfolios....... 2 3
Other................. 10 10
--- ---
100% 100%
=== ===
</TABLE>
10
<PAGE>
During 1998, we securitized over $2.0 billion of CMBS receivables in two
separate transactions. In the first quarter, we securitized $1.1 billion and
recognized an $11 million gain on the transaction. We did not retain any
residual risk in this transaction, as all of the securities were sold to third
parties on a non-recourse basis.
During the third quarter, the CMBS securitization market experienced
considerable volatility and we decided to retain CMBS receivables on our
balance sheet. In the fourth quarter, market conditions improved and we decided
to reclassify $900 million of CMBS receivables to "held for sale." This
reclassification at market value generated a writedown of $40 million through
our allowance for losses of receivables. We subsequently securitized $900
million of CMBS receivables, selling all of the unrated and "B" rated
securities. We continue to originate assets in the CMBS market but, due to
pricing and liquidity issues, we anticipate that in 1999, new business
originations will be lower than in 1998. Depending on market conditions, we may
sell or securitize a portion of our existing and newly originated CMBS assets
in 1999.
In addition to securitizations, we syndicate 50% to 75% of our junior
participation originations through arrangements with real estate funds
sponsored by two nationally known investment banking firms. The use of
syndications has enabled us to reduce our average individual retained position
in this portfolio to approximately $1 million.
At December 31, 1998, Real Estate Finance maintained contractual
commitments to finance an additional $71 million to new and existing borrowers,
generally contingent upon their maintaining specific credit standards. Since we
expect many of these commitments to remain unused, the total commitment amounts
do not necessarily represent future cash requirements. We do not have any
significant commitments to provide additional financing related to nonearning
assets.
Leasing Services
Leasing Services is made up of three distinct units:
(1) Global Vendor Finance, which provides financing programs for
manufacturers, vendors and dealers to finance sales of their products,
as well as financing options to independent leasing companies;
(2) Commercial Equipment Finance, which provides loans and lease financing
directly to leading middle market companies; and
(3) Capital Finance, which provides financing of commercial aircraft and
engines and plans to expand into other large ticket leasing and
structured finance segments including rail, marine and technology.
Global Vendor Finance. We formed Global Vendor Finance in 1998 by combining
our existing Vendor Finance unit with the Dealer Products Group's technology
leasing assets we acquired on November 30, 1998. Primary locations for vendor
leasing are the United States, United Kingdom and Canada with smaller
operations throughout Europe.
Global Vendor Finance provides customized sales financing programs that
enable vendors and manufacturers in commercial, industrial, medical and
information and technology markets to offer financing and leasing options to
their customers. The primary products we offer are true leases, loans and
conditional sales contracts. We also provide financing options to independent
leasing companies, including term financing, residual financing and private
securitization structures. The primary equipment types we finance are computer
equipment, software, machine tool equipment, plastics equipment, graphic arts
equipment and transportation equipment. Individual transaction sizes within
these programs range from $1,000 to $10 million and terms generally range from
24 months to eight years.
11
<PAGE>
In 1998, Global Vendor Finance generated approximately $800 million in new
business volume. This included one month of activity related to the Dealer
Products Group. New business volume for the Dealer Products Group was
approximately $360 million during 1998. We expect that, due to the Dealer
Products Group acquisition, Global Vendor Finance volume will increase in 1999.
Commercial Equipment Finance. Commercial Equipment Finance has broad,
national access to the equipment finance marketplace through 13 domestic
offices. We provide general equipment term loan and lease financings directly
to a diverse group of middle market companies. They use the financings for:
. expansions;
. acquisitions;
. turnkey land, building and equipment financing;
. remodeling;
. refinancing;
. replacement or modernization of equipment; and
. refinancing of existing equipment obligations.
We believe that our emphasis on direct origination provides us with a
competitive advantage of stronger customer relationships and enables us to
generate repeat business.
In addition to direct origination, we generate business through traditional
broker and other intermediary channels. Through our broad market access, we
also generate new business referrals for other business groups of the Company,
particularly Corporate Finance and Small Business Finance. Individual
transaction sizes range from $1 million to $40 million. A typical
borrower/lessee is a U.S. business with annual revenues of at least $35
million. Generally, the equipment serving as collateral for the financing is
essential to the operations of the borrower and the amount financed is
generally not a substantial part of the borrower's capital structure.
Commercial Equipment Finance generated new business volume of over $600 million
in 1998.
Capital Finance. We formed Capital Finance in an effort to expand into
other attractive large ticket leasing and structured finance markets in
addition to aircraft finance. The new group, which will include Aircraft
Finance as a significant operating unit, will focus its originations efforts in
large ticket markets and sectors such as:
. commercial aircraft;
. rail;
. intermodal container;
. inland/bluewater marine;
. media;
. technology infrastructure;
. telecommunications; and
. entertainment.
The Aircraft Finance unit within Capital Finance, a niche competitor in the
commercial aircraft and aircraft engine finance industries, will continue to
provide financing through operating leases and senior and junior secured loans
on both new and used equipment. Our
12
<PAGE>
clients are typically mid-tier foreign or domestic airlines. Typical
transaction sizes range from $3 million to $50 million. We have developed a
reputation for responsiveness on single investor transactions, which generally
involve one aircraft with lease terms of three to seven years. In addition, our
reliability and industry knowledge have made us a frequently desired
participant in larger financings by other aircraft lessors. With our industry
and equipment expertise, we are able to effectively shift our product offering
mix during various phases of the equipment cycle and to re-market off-lease
equipment.
Similar to our Aircraft Finance unit, the newly-formed Capital Finance
transactions in new markets will provide financing through:
. operating leases;
. acquisition of seasoned leveraged leases;
. residual participation; and
. other strategic partnerships or investments.
Typical transaction sizes range from $10 million to $50 million and our
intention is to retain between $10 million to $20 million. Capital Finance
generated new business volume of $230 million in 1998, all of which related to
Aircraft Finance.
The following table sets forth certain information regarding Leasing
Services:
<TABLE>
<CAPTION>
As of, or For the
Year Ended,
December 31,
---------------------
1998 1997 1996
------ ------ -----
(dollars in
millions)
<S> <C> <C> <C>
New business volume.................................. $1,634 $1,646 $ 917
Total lending assets and investments................. 2,840 2,314 1,933
Revenues............................................. 231 195 141
Revenues as a percentage of total revenues........... 16.4% 15.4% 14.3%
Ratio of net writedowns (recoveries) to average
lending assets...................................... 0.1 0.1 (0.2)
Ratio of nonearning assets to lending assets......... 1.0 0.7 0.5
</TABLE>
The ratio of net writedowns to average lending assets of 0.1% for 1998 and
1997, and the low ratio of nonearning assets to lending assets of 1.0% or lower
for each of the past three years, demonstrate the strong credit quality of the
Leasing Services portfolio.
Global Vendor Finance's approach to lending balances the strength of the
borrower, the value of the underlying collateral and the extent of recourse
provided by the vendor. Transactions are characterized by the high credit
quality performance of the portfolio as evidenced by lower levels of nonearning
assets and writedowns with equivalently lower yields on middle and large ticket
leasing transactions. Small ticket leasing transactions have higher margins but
also have correspondingly higher levels of writedowns and non-earning assets.
Commercial Equipment Finance's approach to lending concentrates on the cash
flow of the borrower, the importance and/or value of the equipment to the
borrower's overall operations and the relative strength of the borrower's
balance sheet and capital structure.
Capital Finance's credit approach focuses on the strength of the underlying
collateral and the creditworthiness of the underlying lessee.
13
<PAGE>
In all areas, Leasing Services assesses residual value risk and effectively
manages off-lease equipment exposures. Designated individuals in each equipment
unit establish all equipment residuals used in pricing lease transactions. They
continuously research secondary market values to establish current values,
estimate future values and mark industry trends.
Leasing Services distributes a portion of its assets through
securitizations and syndications. In 1998, we contributed $434 million of
equipment receivables to two bank-sponsored conduits and syndicated an
additional $172 million of assets. Through these capital markets capabilities,
we are able to provide broader market coverage and better service to clients,
while managing borrower and industry concentrations.
As of December 31, 1998, Leasing Services' lending assets and investments
totaled $2.8 billion, or 21% of Heller's total lending assets and investments.
The Leasing Services portfolio consisted of 32 industry classifications at
December 31, 1998. The computer industry represented 22% of Leasing Services'
total lending assets, while transportation services represented 11%. No other
industry represented more than 10% of total lending assets for Leasing Services
at December 31, 1998.
At December 31, 1998, Leasing Services maintained contractual commitments
to finance an additional $635 million to new and existing borrowers, generally
contingent upon their maintaining specific credit standards. Since we expect
many of these commitments to remain unused, the total commitment amounts do not
necessarily represent future cash requirements. We do not have any significant
commitments to provide additional financing related to nonearning assets.
Small Business Finance
Small Business Finance provides long-term financing to small businesses
primarily in the manufacturing, retail and service sectors for:
. facility purchases, construction or refinancing;
. business or equipment acquisition;
. working capital; and
. debt refinancing.
Our major product offerings are SBA 7(a) loans, which are guaranteed up to
80% by the SBA, and SBA 504 loans, which are senior to an accompanying SBA loan
and have an average loan to collateral value of 50%. We also originate
transactions without credit support from the SBA.
Small Business Finance is one of only fourteen non-banks the SBA licenses
to make SBA 7(a) loans. We are the third largest originator of such loans in
the United States. Our portfolio is 82% concentrated in California, Texas,
Florida and Illinois, and is geographically diversified within these states. We
have diversified our portfolio by industry type, with concentrations of 14% in
transportation services at December 31, 1998. No other industry represented
more than 10% of our portfolio.
Small Business Finance loans are generally for amounts up to $3 million,
have an average size of $400,000 and have a contractual maturity ranging from
five to 25 years. Our $1.0 billion in lending assets and investments as of
December 31, 1998, represented 8.0% of the Company's portfolio. At December 31,
1998, 82% of our portfolio was originated under SBA lending programs.
14
<PAGE>
The following table gives certain information regarding Small Business
Finance:
<TABLE>
<CAPTION>
As of, or For the Year Ended,
December 31,
--------------------------------
1998 1997 1996
---------- --------- ---------
(dollars in millions)
<S> <C> <C> <C>
New business volume....................... $ 547 $ 472 $ 394
Total lending assets and investments...... 1,013 766 403
Revenues.................................. 98 64 47
Revenues as a percentage of total
revenues................................. 7.0% 5.0% 4.8%
Ratio of net writedowns to average lending
assets................................... 0.4 0.3 0.3
Ratio of nonearning assets to lending
assets................................... 3.3 2.0 1.3
</TABLE>
Small Business Finance operates out of 31 offices in 17 states. Our
portfolio is managed on a centralized basis. We focus our marketing efforts on
developing relationships with third party intermediaries, such as real estate
brokers, mortgage brokers and business brokers. We originate additional
business through referrals from existing customers, franchisors, targeted
direct marketing and cross-referrals from Heller's other business units.
We maintain SBA Preferred Lender Program (PLP) status in over 30 states,
which enables us to approve SBA 7(a) loans under SBA-delegated approval
authority. We believe that Small Business Finance has maintained a position as
one of the nation's three largest originators of SBA 7(a) loans since 1995. We
are the leading originator of SBA 7(a) loans in Illinois, Texas and Florida and
the number one non-bank SBA lender in California.
We have standardized our underwriting and procedural guidelines to ensure a
consistent and efficient lending process. We base our credit decisions on the
analysis of a prospective borrower's cash flow, the use of independent
valuations for collateral and a review of management. Loans are generally
secured by real estate and equipment, with additional collateral in the form of
other business assets, personal residences and, in many instances, personal
guarantees.
Our Small Business Finance portfolio consists of approximately 3,400
individual loans, providing diversified risk. At December 31, 1998, nonearning
assets represented 3.3% of this portfolio. Of our nonearning assets,
approximately 70% were the guaranteed portions of SBA 7(a) loans which are held
until a liquidation is complete and the SBA repurchases the loan. Net
writedowns have remained at or below 0.4% of average lending assets for each of
the past three years.
We have developed and demonstrated the ability to sell both the guaranteed
and unguaranteed portions of SBA 7(a) loans in the secondary market. The
guaranteed portions of SBA 7(a) loans, which represented 43% of Small Business
Finance lending assets at December 31, 1998, can generally be sold and settled
at amounts in excess of book value and in less than 45 days. We sold $68
million in guaranteed SBA 7(a) loans in 1998. In addition, we securitized $96
million of the unguaranteed portion of SBA 7(a) loans during the second quarter
of 1998, demonstrating the liquidity of this product. As required by the SBA,
we retained an investment in this securitization of $14 million, all of which
are securities rated BB or higher.
At December 31, 1998, Small Business Finance maintained contractual
commitments to finance an additional $31 million to new and existing borrowers,
generally contingent upon their maintaining specific credit standards. We do
not have any significant commitments to provide additional financing related to
nonearning assets.
15
<PAGE>
Commercial Services
Commercial Services, formerly known as the Current Asset Management Group,
has been a leading provider of factoring services in the United States for over
50 years. We believe that Commercial Services is the fourth largest factor in
the United States in terms of volume, with factoring volume of over $7.8
billion in 1998, a 6% increase from the prior year.
We provide middle-market companies with:
. factoring;
. working capital and term loans;
. receivables management;
. import and export financing;
. credit protection; and
. credit facilities.
Working capital and term loans consist of advances against receivables,
inventory and equipment on a formula basis as well as seasonal over-advances.
As of December 31, 1998, the majority of our lending assets consisted of short-
term trade receivables from department and general merchandise retail stores.
We have also begun to service a broad range of additional markets such as golf,
temporary staffing services, seafood and housewares.
Clients use our factoring products and services to address a broad range of
needs, including:
. improving cash flow;
. mitigating the risk of bad debt charge-offs;
. increasing sales;
. improving management information; and
. converting the fixed cost of operating a credit and collection
department into a variable expense.
The following table gives certain information regarding Commercial
Services:
<TABLE>
<CAPTION>
As of, or For the
Year Ended, December
31,
----------------------
1998 1997 1996
------ ------ ------
(dollars in
millions)
<S> <C> <C> <C>
Factoring volume.................................... $7,802 $7,347 $6,933
Total lending assets and investments(1)............. 401 361 907
Revenues............................................ 117 113 107
Revenues as a percentage of total revenues.......... 8.3% 8.9% 10.9%
Ratio of client net writedowns to average lending
assets............................................. 1.3 0.3 0.3
Ratio of customer net writedowns to factoring
volume............................................. 0.1 0.1 0.1
Ratio of nonearning assets to lending assets........ 1.2 0.5 0.3
</TABLE>
- --------
(1) Reflects the sale of $475 million and $500 million of factored accounts
receivable during 1998 and 1997, respectively.
Commercial Services maintains two full service offices, in New York and
Glendale, California, and operates sales offices in Atlanta and Dallas. Through
our experienced sales force, we generate business through direct calling on
manufacturers. We also develop and maintain relationships with financial
intermediaries that provide financing advice to prospective clients. In
addition to direct sales efforts, we generate business through the programmatic
use of direct mail and advertising and through referrals from other Heller
16
<PAGE>
business groups. We believe that our focused sales efforts, market research
program, and advertising and marketing efforts have played a key role in the
growth of our domestic factoring operation.
We have developed proprietary information storage and retrieval systems,
such as electronic transmission of invoices and remittances, scanning
technology and electronic linkage with clients, that streamline the management
and processing of accounts receivable. They enable us to efficiently process
the high transaction volumes related to factoring invoices. We believe that the
investments in the technology associated with factoring represent a significant
entry barrier to new competitors.
We generally purchase the accounts receivable owed to our clients by their
customers, usually on a nonrecourse basis, and we may provide funding to our
clients as an advance against those receivables. We extend credit to these
clients based on our analysis of the customers' operating performance and
sources of short-term liquidity, such as borrowing facilities and trade
relationships. We also use technology to perform basic credit surveillance
routines electronically.
We have a factored accounts receivable facility which allows us to sell an
undivided interest of up to $550 million in a designated pool of factored
accounts receivable to five bank-supported conduits. At December 31, 1998, we
had sold $475 million of factored accounts receivable through this facility.
This facility provides us with an additional funding source at favorable market
rates.
At December 31, 1998, Commercial Services maintained contractual
commitments to finance an additional $65 million to new and existing borrowers,
generally contingent upon their maintaining specific credit standards. Since we
expect many of these commitments to remain unused, the total commitment amounts
do not necessarily represent future cash requirements. We do not have any
significant commitments to provide additional financing related to nonearning
assets.
International Factoring and Asset Based Financing
International Group, the Heller subsidiary that manages the International
Factoring and Asset Based Financing business, provides the following programs:
. factoring and receivables management services;
. asset based financing;
. acquisition financing;
. leasing and vendor financing; and
. trade financing.
International Group has a significant international presence in factoring
and asset based financing, primarily throughout Europe. We have had
subsidiaries and joint ventures in many international markets for more than 30
years. International Group currently consists of four consolidated subsidiaries
and joint ventures with operations in 16 countries in Europe, Asia/Pacific and
Latin America.
The largest of our consolidated subsidiaries is Factofrance, which is the
leading factoring company in France and the third largest factor in the world.
In 1998, Factofrance had factoring volume of nearly $11 billion. The largest of
our joint ventures is NMB-Heller Holding N.V., which has operations primarily
in Holland, the United Kingdom and Germany. NMB-Heller Holding N.V. accounted
for 56% of our investments in international joint ventures at December 31,
1998.
17
<PAGE>
We believe that our International Group subsidiaries and joint ventures
provide a solid base for consistent growth in international earnings. They also
provide us with the opportunity to meet the international financing needs of
Heller's domestic client base. At December 31, 1998, International Group had
total lending assets and investments of $2.7 billion, or 20% of Heller's total
lending assets and investments. In 1998, we had total revenues (including
Heller's share of income from international joint ventures) of $244 million, or
17% of Heller's total revenues.
The following table provides certain information regarding the
International Factoring and Asset Based Financing segment:
<TABLE>
<CAPTION>
As of, or For the
Year Ended,
December 31,
-----------------------
1998 1997 1996
------- ------ ----
(dollars in
millions)
<S> <C> <C> <C>
Lending assets and investments of consolidated
subsidiaries:
France............................................ $ 2,143 $1,850(1) $ --
Other Europe...................................... 19 10 --
Asia/Pacific...................................... 194 223 257
Latin America..................................... 74 80 80
------- ------ ----
2,430 2,163 337
Investments in international joint ventures:
Europe............................................ 194 160 238
Asia/Pacific...................................... 16 16 14
Latin America..................................... 21 22 20
------- ------ ----
231 198 272
------- ------ ----
Total lending assets and investments............ $ 2,661 $2,361 $609
======= ====== ====
Factoring volume of consolidated subsidiaries:
France............................................ $10,684 $6,238 $ --
Other Europe...................................... -- -- --
Asia/Pacific...................................... 573 280 --
Latin America..................................... 346 159 --
------- ------ ----
$11,603 $6,677 $ --
======= ====== ====
Revenues of consolidated subsidiaries:
France............................................ $ 183 $ 121(1) $ --
Other Europe...................................... 2 -- --
Asia/Pacific...................................... 21 25 26
Latin America..................................... 8 5 12
------- ------ ----
214 151 38
Income of international joint ventures:
Europe............................................ 30 32 42
Asia/Pacific...................................... -- 1 2
Latin America..................................... -- 3 --
------- ------ ----
30 36 44
------- ------ ----
Total international revenues.................... $ 244 $ 187 $ 82
======= ====== ====
Total international revenues as a percentage of
total revenues.................................... 17.3% 14.7% 8.3%
Ratio of net writedowns (recoveries) to average
lending assets.................................... 0.2 1.8 (0.1)
Ratio of nonearning assets to lending assets....... 1.1 0.9 8.2
</TABLE>
- --------
(1) Reflects the consolidation of Factofrance in April 1997 due to the
acquisition of the interest of International Group's joint venture partner,
which increased International Group's ownership of Factofrance from 48.8%
to 97.6%.
Our European investments in international joint ventures include our
investment in NMB-Heller Holding N.V. of $131 million and $107 million at
December 31, 1998 and 1997, respectively. NMB-Heller Holding N.V. had total
receivables of $2.8 billion and $2.2 billion, and revenues of $180 million and
$151 million at December 31, 1998 and 1997, respectively.
18
<PAGE>
We continue to develop our international operations through mergers, joint
ventures, and acquisitions. We have broad, worldwide access to mid-sized and
small businesses with operations in 20 countries outside the United States.
Each of our subsidiaries and joint ventures operates independently, with its
own well-developed methods of originating business. The majority of our
international joint ventures are self-financed. We manage our investments
through offices located in London, Singapore and Chicago. Each subsidiary and
joint venture has its own well-developed credit philosophy, risk management
policies and procedures and portfolio management processes. We monitor them
through participation on their boards of directors, credit committees and other
executive and administrative bodies.
Sales and Marketing
Heller originates transactions in the United States utilizing a dedicated
sales force of over 300 employees throughout our 52 domestic office locations.
We originate transactions internationally through a network of wholly-owned and
joint venture commercial finance companies in 20 countries outside the United
States. Our sales people have industry-specific experience that enables them to
effectively structure commercial finance transactions to companies in the
industries and markets we serve.
Our sales force originates business through a combination of:
. relationships with a wide variety of private equity investors, business
brokers, investment bankers, and various intermediaries and referral
sources;
. relationships with manufacturers, dealers, and distributors;
. direct calling on prospective borrowers; and
. relationships with financial institutions.
We have invested in expanding and broadening our market coverage in several
of our businesses, particularly Small Business Finance and Leasing Services. We
expect these investments to enhance our ability to generate new transactions
and revenue growth.
We design the structure of our sales force compensation to encourage:
. profitable new business development;
. client retention;
. credit quality;
. solid pricing margins; and
. cross-referral of business opportunities to other business groups.
We have developed a cross-referral program, "CrossLink," to compensate
sales force members and other employees for the generation of cross-referral
business volume. We expect that CrossLink will increase the volume of cross
referral business in 1999.
We also market our products and services through the use of:
. general market advertising;
. trade advertising;
. direct mail;
. a web site;
19
<PAGE>
. public relations;
. newsletters;
. trade show attendance and sponsorship;
. presenting educational seminars; and
. a variety of other market--and industry-specific events.
We maintain several proprietary databases for the purpose of generating
targeted, customized direct marketing campaigns and for tracking relationship
history with certain clients and prospects. We regularly conduct client
satisfaction surveys and other market research studies designed to assess our
competitive position and to identify unfulfilled needs of our clients and
prospects.
Competition
Heller's markets are highly fragmented and extremely competitive. They are
characterized by competitive factors that vary by product and geographic
region. Our competitors include:
. other commercial finance companies;
. national and regional banks and thrift institutions;
. investment banks;
. leasing companies;
. investment companies; and
. manufacturers and vendors.
Competition from both traditional competitors and new market entrants has
intensified in recent years as the result of an improving economy, growing
marketplace liquidity and an increasing recognition of the attractiveness of
the commercial finance markets. Also, the rapid expansion of the securitization
markets is dramatically reducing the difficulty of accessing capital, which
previously provided a significant barrier to entry for new competitors into
these markets. This is further intensifying competition in certain market
segments.
We compete primarily on the basis of pricing, terms, structure and service.
Our competitors often seek to compete aggressively on the basis of these
factors. We may lose market share to the extent we are unwilling to match our
competitors' pricing, terms or structure in order to maintain our spreads or to
maintain our credit discipline. To the extent that we match competitors'
pricing, terms or structure, we may experience decreased spreads and/or
increased risk of credit losses. Many of our competitors are large companies
that have substantial capital, technological and marketing resources. Some of
them are larger than we are and may have access to capital at a lower cost than
we do. Further, the size and access to capital of certain of our competitors
are being enhanced by the recent surge in consolidation activity in the
commercial and investment banking industries. Also, our competitors include
businesses that are not affiliated with bank holding companies and therefore
are not subject to the same extensive federal regulations that govern bank
holding companies and their subsidiaries. As a result, such non-banking
competitors may engage in certain activities in which we are currently
prohibited from engaging.
20
<PAGE>
Regulation
Bank Holding Company Act
Fuji Bank is a bank holding company within the meaning of the Bank Holding
Company Act of 1956 and is registered as such with the Board of Governors of
the Federal Reserve System. As a result, we are subject to the Bank Holding
Company Act and are subject to examination by the Federal Reserve.
In general, the Bank Holding Company Act limits the activities in which we
may engage to those the Federal Reserve has generally determined to be "so
closely related to banking . . . as to be a proper incident thereto." The Bank
Holding Company Act generally requires the approval of the Federal Reserve
before we may engage in such activities. To obtain the Federal Reserve's
approval, Fuji Bank must submit a notice that provides information both about
the proposed activity or acquisition and about the financial condition and
operations of Fuji Bank and Heller. The Bank Holding Company Act will continue
to apply to the Company for as long as Fuji Bank holds 25% or more of any class
of our voting stock or otherwise is deemed by the Federal Reserve to control
our management or operations. Our current business activities either constitute
permitted activities or have received the Federal Reserve's express authority.
Japanese Banking Law
Fuji Bank, as a Japanese bank, is also required to comply with the Japanese
Banking Law. During 1998, the Banking Law was amended. The Banking Law limits
the type of subsidiaries in which a Japanese bank may invest to those that
conduct "eligible businesses." A subsidiary is defined as an entity in which
there is ownership of more than 50% of the voting shares. Eligible businesses
generally include banks, securities firms, insurance companies, administrative
businesses and financial companies. Establishment of any subsidiary requires
the prior approval of the Financial Supervisory Agency, an agency of the Prime
Minister's Office. Non-eligible business investments are permitted if acquired
as collateral, although disposition of such businesses is required within one
year.
Heller intends to use its best efforts to cooperate with Fuji Bank in Fuji
Bank's compliance with the new statute, provided that such cooperation would
not, in the judgment of Heller's management, materially and adversely affect
Heller's business operations. We do not believe that our cooperation will have
a material adverse effect on our current business operations or on the
achievement of our intended business and financial goals.
Small Business Act
SBA loans that we make are governed by the Small Business Act and the Small
Business Investment Act of 1958, as amended, and may be subject to the same
regulations by certain states as are other commercial finance operations. The
federal statutes and regulations specify the types of loans and loan amounts
which are eligible for the SBA's guaranty as well as the servicing requirements
imposed on the lender to maintain SBA guarantees.
Other
Our operations are subject, in certain instances, to supervision and
regulation by state and federal governmental authorities. They may also be
subject to various laws and judicial and administrative decisions imposing
various requirements and restrictions, which, among other things:
. regulate credit granting activities;
. establish maximum interest rates, finance charges and other charges;
. require disclosures to customers;
21
<PAGE>
. govern secured transactions; and
. set collection, foreclosure, repossession and claims handling procedures
and other trade practices.
Although most states do not regulate commercial finance, certain states
impose limitations on interest rates and other charges and on certain
collection practices and creditor remedies. They may also require licensing of
lenders and financiers and adequate disclosure of certain contract terms. We
are also required to comply with certain provisions of the Equal Credit
Opportunity Act applicable to commercial loans. Additionally, we are subject to
regulation in those countries in which we have operations and in most cases
have been required to obtain central governmental approval before commencing
business.
In the judgment of management, existing statutes and regulations have not
had a material adverse effect on our business. However, it is not possible to
forecast the nature of future legislation, regulations, judicial decisions,
orders or interpretations, nor their impact upon our future business, financial
condition, results of operations or prospects.
Employees
As of December 31, 1998, Heller had 2,714 employees. We are not subject to
any collective bargaining agreements.
In January 1999, to more closely align the goals of Heller with those of
our employees, we awarded approximately 17,000 shares of our Class A Common
Stock and approximately 1.2 million stock options for the purchase of shares of
our Class A Common Stock to various employees throughout Heller.
Risk Management
Heller's business activities contain elements of risk. We consider the
principal types of risk to be:
. credit risk; and
. asset/liability risk (including our primary market risk exposures of
interest rate and foreign exchange risk as well as liquidity risk).
We consider the proper management of risk essential to conducting our
business and to maintaining profitability. Accordingly, we have designed our
risk management systems and procedures to identify and analyze our risks. We
have set appropriate policies and limits to continually monitor these risks and
limits by means of administrative and information systems and other policies
and programs.
Credit Risk Management
We manage credit risk through:
. underwriting procedures;
. centralized approval of individual transactions; and
. active portfolio and account management.
We have developed underwriting procedures for each business line that
enable us to assess a prospective borrower's ability to perform in accordance
with established loan terms. These procedures include:
. analyzing business or property cash flows and collateral values;
. performing financial sensitivity analyses; and
. assessing potential exit strategies.
22
<PAGE>
For transactions we originate with the intent of reducing our ultimate
retained asset size, we assign a risk rating prior to approval of the
underlying transaction that reflects our confidence level, prior to funding, in
syndicating the proposed transaction. A Senior Credit Officer who reports
directly to our Chief Credit Officer reviews and approves financing and
restructuring transactions that exceed designated amounts. Larger transactions
require approval of our Chief Credit Officer or of a centralized credit
committee comprised of our Chairman, Chief Operating Officer, Chief Credit
Officer and Chief Financial Officer. Our Chief Credit Officer and, in some
cases, our Chairman, conducts a quarterly portfolio review of each business
group's significant assets.
We manage our portfolio by monitoring transaction sizes as well as
diversification according to (1) industry, (2) geographic area, (3) property
type and (4) identity of borrower. Through these practices, management
identifies and limits exposure to unfavorable risks and seeks favorable
financing opportunities. We use (1) loan grading systems to monitor the
performance of loans by product category and (2) an overall risk classification
system to monitor the risk characteristics of the total portfolio. These
systems generally consider (1) debt service coverage, (2) the relationship of
the loan to underlying business or collateral value, (3) industry
characteristics, (4) principal and interest risk and (5) credit enhancements
such as guarantees, irrevocable letters of credit and recourse provisions.
When an account experiences financial difficulties, professionals who
specialize in managing workout situations are brought in to more closely
monitor the account and formulate strategies to optimize and accelerate the
resolution process. An independent loan review function performs reviews to
validate the loan grading of assets and provides its findings to senior
management and to our Board's Audit Committee. Our Internal Audit Department,
which is independent of operations, performs reviews of credit management and
operation processes and also reports its findings to senior management and our
Board's Audit Committee.
Asset/Liability Management
We actively measure and quantify (1) interest rate risk, (2) foreign
exchange risk and (3) liquidity risk, in each case resulting from normal
business operations and derivatives hedging activity. We use derivatives as an
integral part of our asset/liability management program. We use these
derivatives to:
. diversify sources of funding;
. alter interest rate exposure arising from mismatches between assets and
liabilities; and
. manage exposure to fluctuations in foreign exchange rates.
We are not an interest rate swap dealer nor are we a trader in derivatives.
We do not use derivative products for the purpose of generating earnings from
changes in market conditions.
Before entering into a derivative transaction, we determine that a high
correlation exists between the change in value of a hedged item and the value
of the derivative. When we execute each transaction, we designate the
derivative to specific assets, pools of assets or liabilities. The risk that a
derivative will become an ineffective hedge is generally limited to the
possibility that an asset or liability being hedged will prepay before the
related derivative matures. Accordingly, after the inception of a hedge
transaction, our asset/liability managers monitor the effectiveness of
derivatives through an ongoing review of the amounts and maturities of assets,
liabilities and swap positions. They report this information to our Financial
Risk Management Committee (the FRMC), whose members include our Chairman,
23
<PAGE>
Chief Operating Officer, Chief Credit Officer, Chief Financial Officer and
Treasurer. The FRMC determines the direction we will take with respect to our
financial risk position and regularly reviews interest rate sensitivity,
foreign exchange exposures, funding needs and liquidity. We regularly report
these positions and the related FRMC activities to the Board of Directors and
our Board's Executive Committee.
Interest Rate Risk Management. We regularly measure and quantify our
sensitivity to changes in interest rates in terms of our two primary risks of
potential loss, "basis risk" and "mismatch risk." Basis risk is the exposure
created from the use of different interest rate indices to reprice assets
versus liabilities, such as prime based assets funded with commercial paper
liabilities. Mismatch risk is the exposure created from the repricing or
maturity characteristics of on and off balance sheet assets versus the
repricing or maturity characteristics of on and off balance sheet liabilities.
We use various models to assess interest rate risk in terms of the
potential effect on net interest income, market value of net assets, and value
at risk in an effort to ensure that our exposure to any significant adverse
effects of changes in interest rates is limited to that approved by the Board
of Directors and the FRMC. The FRMC reviews the results of these models
monthly. Assuming our balance sheet were to remain constant and no actions were
taken to alter the existing interest rate sensitivity, when the month-end
difference between the repricing or maturing of assets and liabilities was at
its greatest during 1998, a hypothetical immediate 100 basis point change in
interest rates would have affected net interest income and net income by less
than 1.0% over a six month horizon.
Additionally, if our balance sheet were to remain constant and no actions
were taken to alter the existing prime/commercial paper exposure, when the net
notional exposure was at its greatest during 1998, a 30 basis point compression
in the existing basis would have altered net interest income and net income by
approximately 2.0% over a twelve month horizon.
Although we believe that this measure indicates our sensitivity to interest
rate changes, it does not adjust for potential changes in credit quality, size
and balance sheet composition and other business developments that could affect
net income. Accordingly, we can give no assurances that actual results would
not differ materially from the potential outcome simulated.
Interest rate swaps are our primary tool for financial risk management.
These instruments enable us to match more closely the interest rate and
maturity characteristics of our assets and liabilities. As such, we use
interest rate swaps to:
. change the characteristics of fixed rate debt to that of variable rate
debt;
. alter the characteristics of specific fixed rate asset pools to more
closely match the interest rate terms of the underlying financing; and
. modify the variable rate basis of a liability to more closely match the
variable rate basis used for variable rate receivables.
Heller's underlying business activities remain unchanged from 1997 and are
not expected to substantially change in 1999. Interest rate risk remains a
primary market risk exposure that we will continue to manage. We anticipate
utilizing instruments, in addition to interest rate swaps, to hedge interest
rate risk in 1999.
At December 31, 1998, we had $7.1 billion in notional amount of interest
rate swap and basis swap agreements with commercial banks and investment
banking firms.
24
<PAGE>
The following table provides information about certain of Heller's
financial instruments that are sensitive to changes in interest rates. For
receivables, investments and debt obligations, the table presents principal
cash flows and related weighted average interest rates by expected maturity
date at December 31, 1998. Weighted average variable rates provided in the
table, of which the majority are LIBOR based and to a lesser extent are based
on Prime, represent the interest rates in effect at December 31, 1998 and
assume that no changes in interest rates will occur over the remaining life of
the respective assets or liabilities. The information is reported in U.S.
dollar equivalents, which is our reporting currency.
<TABLE>
<CAPTION>
Expected Maturity Date
------------------------------------------------------------
Fair
1999 2000 2001 2002 2003 Thereafter Total value
------ ------ ----- ---- ---- ---------- ------ ------
Rate sensitive assets
- --------------------- (dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed interest rate
receivables*........... $1,328 $ 920 $ 435 $296 $176 $467 $3,622 $3,962
Average interest rate... 9.33% 9.09% 9.48% 9.33% 9.41% 9.39% 9.30%
Variable interest rate
receivables*........... $3,411 $1,037 $ 794 $797 $201 $551 $6,791 $6,755
Average interest rate... 8.11% 9.01% 8.89% 8.96% 9.23% 9.50% 8.58%
Fixed interest rate
investments............ $ 29 $ 93 $ 43 $ 3 $ 2 $132 $ 302 $ 314
Average interest rate... 13.81% 9.21% 9.03% 9.10% 9.10% 9.76% 9.87%
Variable interest rate
investments............ $ 45 $ 77 $ 61 $ 1 $ 1 $ 20 $ 205 $ 222
Average interest rate... 10.71% 10.69% 10.12% 7.39% 7.39% 8.20% 10.25%
<CAPTION>
Rate sensitive
liabilities
- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial paper and
short-term borrowings.. $3,681 -- -- -- -- -- $3,681 $3,681
Average interest rate... 5.20% -- -- -- -- -- 5.20%
Notes and debentures
Fixed rate............. $1,052 $1,336 $ 703 $542 $ 43 $210 $3,886 $3,896
Average interest rate.. 7.22% 5.46% 6.20% 6.60% 5.90% 6.94% 6.31%
Variable rate.......... $1,464 $1,127 $ 150 $ 45 $ 22 $ 71 $2,879 $2,879
Average interest rate.. 5.24% 5.47% 5.92% 5.45% 5.47% 4.00% 5.34%
</TABLE>
- --------
* net of credit balances of factoring clients
25
<PAGE>
The following table provides information about certain of Heller's
derivative financial instruments that are sensitive to changes in interest
rates. For interest rate swaps and basis swaps, the table presents notional
amounts and weighted average receive/pay rates by expected maturity date at
December 31, 1998. Notional amounts are used to calculate the contractual
payments to be exchanged under the contract. Weighted average variable rates
provided in the table, which are generally LIBOR based, represent the interest
rates in effect at December 31, 1998 and assume that no changes in interest
rates will occur over the remaining life of the respective swaps. The
information is reported in U.S. dollar equivalents, which is our reporting
currency.
<TABLE>
<CAPTION>
Expected Maturity Date
-----------------------------------------------------------
Fair
1999 2000 2001 2002 2003 Thereafter Total Value
------ ------ ----- ---- ---- ---------- ------ -----
Rate sensitive derivative
financial instruments
- ------------------------- (dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Rate Swap
Agreements and Basis
Swap Agreements
Pay a fixed rate/receive
a floating rate
Notional amount........ $ 45 $ 335 $ 39 $102 $100 $1,035 $1,656 $(66)
Weighted average
receive rate.......... 5.52% 5.32% 5.91% 5.65% 5.56% 5.52% 5.50%
Weighted average pay
rate.................. 5.47% 5.11% 6.19% 6.80% 5.81% 6.21% 5.98%
Pay a floating
rate/receive a fixed
rate
Notional amount........ $1,185 $1,169 $ 300 $ 45 $ 15 $ 250 $2,964 $ 42
Weighted average
receive rate.......... 6.63% 5.38% 5.94% 5.89% 5.76% 6.30% 6.02%
Weighted average pay
rate.................. 5.64% 5.51% 5.68% 5.86% 5.55% 5.68% 5.60%
Pay a floating
rate/receive a
different floating
rate:
Notional amount........ $1,255 $1,040 $ 125 $ 51 -- -- $2,471 $ (3)
Weighted average
receive rate.......... 5.56% 5.61% 11.62% 5.67% -- -- 5.89%
Weighted average pay
rate.................. 5.54% 5.60% 10.44% 5.44% -- -- 5.81%
------ ------ ----- ---- ---- ------ ------ ----
Total notional amount... $2,485 $2,544 $ 464 $198 $115 $1,285 $7,091 $(27)
====== ====== ===== ==== ==== ====== ====== ====
Total weighted average
rate on swaps:
Receive rate........... 6.08% 5.46% 7.50% 5.72% 5.59% 5.67% 5.86%
Pay rate............... 5.60% 5.51% 7.08% 6.27% 5.78% 6.11% 5.78%
</TABLE>
At December 31, 1998, we also have foreign currency interest rate swaps
that are sensitive to changes in interest rates. See "Foreign Exchange Risk
Management" for information on these instruments.
Foreign Exchange Risk Management. We invest in and operate commercial
finance companies throughout the world. Over the course of time, reported
results from our operations and investments in foreign countries may fluctuate
in response to exchange rate movements in the U.S. dollar. While our Western
European operations and investments represent our largest areas of activity,
reported results will be influenced to a lesser extent by the exchange rate
movements in the currencies of certain countries in Asia and Latin America
where our subsidiaries and investments are located.
In order to minimize the effect of fluctuations in foreign currency
exchange rates on our financial results, we periodically enter into forward
currency exchange contracts, cross currency swap agreements or purchase
currency options. These financial instruments serve as hedges of our foreign
investment in international subsidiaries and joint ventures or effectively
hedge the translation of the related foreign currency income. We held $820
million in notional amount of forward currency exchange contracts and $616
million in notional amount of cross currency swap agreements at December 31,
1998. Included in the cross currency interest rate swap agreements were $306
million used to hedge debt instruments issued in foreign currencies at December
31, 1998. Through these contracts, we effectively sell the local currency and
buy U.S. dollars. We also periodically enter into forward contracts to hedge
receivables denominated in foreign currencies or purchase foreign currencies in
the spot market to settle a foreign currency denominated liability.
26
<PAGE>
Heller's exposure to foreign exchange risk has increased somewhat since
1997 due to the Dealer Product's Group acquisition, as we now have operations
in countries for which we previously did not conduct business. Foreign exchange
risk remains a primary market risk exposure that we will continue to manage. We
have not altered the way in which we hedge our foreign exchange risk nor do we
anticipate any significant changes in 1999. Our implementation of Financial
Accounting Standard No. 133, "Accounting for Derivatives and Hedging
Activities," may however, impact our use of certain foreign currency hedging
instruments in 1999.
The following table provides information about certain of Heller's
financial instruments that are sensitive to changes in foreign exchange rates,
including assets and liabilities. The table presents principal cash flows and
related weighted average interest rates by expected maturity date at December
31, 1998 for these instruments. Weighted average interest rates provided in the
table represent the interest rates in effect at December 31, 1998 and assume
that no changes in variable interest rates will occur over the remaining life
of the respective assets or liabilities. The information is reported in U.S.
dollar equivalents, which is our reporting currency.
<TABLE>
<CAPTION>
Expected Maturity Date
-------------------------------------------------------------
Fair
1999 2000 2001 2002 2003 Thereafter Total Value
------ ----- ----- ----- ----- ---------- ------ ------
(dollars in millions)
Foreign Currency
Sensitive Assets
- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Australian Dollar
assets*................ $ 77 $ 6 $ 5 $ 2 $ 1 -- $ 91 $ 89
Average interest rate... 10.15% 10.15% 10.15% 10.15% 10.15% -- 10.15%
British Pound assets.... $ 103 $ 73 $ 38 $ 17 $ 8 $ 6 $ 245 $ 245
Average interest rate... 14.50% 14.50% 14.50% 14.50% 14.50% 14.50% 14.50%
Canadian Dollar assets.. $ 20 $ 14 $ 7 $ 3 $ 2 -- $ 46 $ 46
Average interest rate... 9.00% 8.00% 7.50% 7.00% 6.00% -- 8.00%
French Franc assets*.... $1,208 -- -- -- -- -- $1,208 $1,195
Average interest rate... 4.76% -- -- -- -- -- 4.76%
German Mark assets...... $ 3 $ 3 $ 2 $ 1 -- $ 1 $ 10 $ 10
Average interest rate... 14.28% 14.28% 14.28% 14.28% -- 14.28% 14.28%
Mexican Peso assets*.... $ 20 -- -- -- -- -- $ 20 $ 18
Average interest rate... 37.88% -- -- -- -- -- 37.88%
Singapore Dollar
assets*................ $ 52 $ 11 $ 4 $ 1 -- -- $ 68 $ 65
Average interest rate... 9.89% 9.50% 9.50% 9.50% -- -- 9.82%
Swiss Franc assets...... $ 10 $ 7 $ 3 $ 1 -- $ 2 $ 23 $ 23
Average interest rate... 10.32% 10.32% 10.32% 10.32% -- 10.32% 10.32%
<CAPTION>
Foreign Currency
Sensitive Liabilities
- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Australian Dollar
liabilities............ $ 69 -- -- -- -- -- $ 69 $ 69
Average interest rate... 6.12% -- -- -- -- -- 6.12%
French Franc
liabilities............ $1,169 -- -- $ 26 $ 72 -- $1,267 $1,267
Average interest rate... 3.57% -- -- 5.25% 4.00% -- 3.63%
Mexican Peso
liabilities............ $ 30 -- -- -- -- -- $ 30 $ 30
Average interest rate... 24.88% -- -- -- -- -- 24.88%
Singapore Dollar
liabilities............ $ 35 -- -- -- -- -- $ 35 $ 35
Average interest rate... 7.80% -- -- -- -- -- 7.80%
</TABLE>
- --------
*net of credit balances of factoring clients
The following table provides information about Heller's forward currency
exchange contracts which are sensitive to changes in foreign exchange rates.
The table presents notional amounts and related weighted average exchange rates
at December 31, 1998 for
27
<PAGE>
these instruments. Weighted average exchange rates provided in the table,
represent the contract rates in effect at December 31, 1998. The forward
currency exchange contracts listed below all mature during 1999. The
information is reported in U.S. dollar equivalents, which is our reporting
currency.
<TABLE>
<CAPTION>
Average
Notional Exchange Fair
Amount Rate Value
-------- -------- -----
(dollars in millions)
Foreign Currency Sensitive Derivatives
--------------------------------------
<S> <C> <C> <C>
Forward Contracts to sell Foreign Currencies for
USD
Australian Dollars.............................. $ 26 0.622 $0.37
Belgium Francs.................................. 17 34.280 (0.04)
British Pounds.................................. 40 1.656 (0.01)
Canadian Dollars................................ 16 1.550 (0.18)
Danish Krona.................................... 14 6.346 0.03
Dutch Guilders.................................. 261 1.868 0.08
French Francs................................... 343 5.555 1.06
German Marks.................................... 6 1.629 (0.01)
Mexican Pesos................................... 11 10.125 (0.20)
Portuguese Escudos.............................. 15 170.523 (0.04)
Singapore Dollars............................... 38 1.642 0.15
Spanish Pesetas................................. 11 141.314 0.03
Swiss Francs.................................... 22 1.293 0.34
---- -----
Total.......................................... $820 $1.58
==== =====
</TABLE>
The following table provides information about Heller's cross currency
swaps that are sensitive to changes in foreign exchange rates. The table
presents notional amounts and weighted average receive/pay rates by expected
maturity date at December 31, 1998. Notional amounts are used to calculate the
contractual payments to be exchanged under the contract. Weighted average
floating rates provided in the table are based on the rates
in effect at December 31, 1998 and assume that no changes in rates will occur
over the remaining life of the respective currency swaps. The information is
reported in U.S. dollar equivalents, which is our reporting currency.
<TABLE>
<CAPTION>
Expected Maturity Date
----------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total FairValue
----- ----- ----- ---- ---- ---------- ----- ---------
(dollars in millions)
Foreign Currency
Sensitive Derivatives
- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Currency Swap Agreements
Payment of British
Pounds
Notional amount........ $ 83 $ 50 $ 25 -- -- -- $ 158 $--
Pay fixed British Pound
rate.................. 5.68% 5.67% 5.77% -- -- -- 5.69%
Receive floating US
rate.................. 6.05% 6.05% 6.05% -- -- -- 6.05%
Payment of Canadian
Dollars
Notional amount........ $ 16 $ 10 $ 3 -- -- $ 17 $ 46 $--
Pay fixed Canadian
Dollar rate........... 5.69% 5.54% 5.63% -- -- 7.04% 6.15%
Receive floating US
rate.................. 6.06% 6.06% 6.06% -- -- 7.06% 6.42%
Payment of French Francs
Notional amount........ $ 106 -- -- -- -- -- $ 106 $ 2
Pay fixed French Franc
rate.................. 3.88% -- -- -- -- -- 3.88%
Receive fixed US rate.. 6.62% -- -- -- -- -- 6.62%
Receipt of Japanese Yen
Notional amount........ -- $ 306 -- -- -- -- $ 306 $(31)
Receive fixed Japanese
Yen rate.............. -- 3.26% -- -- -- -- 3.26%
Pay floating US rate... -- 6.32% -- -- -- -- 6.32%
----- ----
Total.................. $ 616 $(29)
===== ====
</TABLE>
28
<PAGE>
Liquidity Risk Management. We manage liquidity risk primarily by:
(1) monitoring the relative maturities of assets and liabilities;
(2) borrowing funds through the U.S. and international money and
capital markets and bank credit markets; and
(3) ensuring the availability of substantial sources of liquidity such
as unused committed bank lines.
We use cash to fund asset growth and to meet debt obligations and other
commitments on a timely and cost-effective basis. Our primary sources of funds
are:
(1) commercial paper borrowings;
(2) issuances of medium-term notes and other term debt securities; and
(3) the syndication, securitization or sale of certain lending assets.
At December 31, 1998, commercial paper borrowings were $3.7 billion and
amounts due on term debt within one year were $2.5 billion. If we are unable to
access such markets at acceptable terms, we could draw on our bank credit and
asset sale facilities and use cash flow from operations and portfolio
liquidations to satisfy our liquidity needs. At December 31, 1998, we had
committed liquidity support through our bank credit and asset sale facilities
totaling $5.1 billion. Our bank facilities include two 364-day facilities
expiring in April 1999 and October 1999 (both of which we intend to renew),
representing, on a consolidated basis, 142% of outstanding commercial paper and
short-term borrowings. We believe that such credit lines should provide us with
sufficient liquidity under foreseeable conditions. See also "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" for further information concerning
our liquidity.
29
<PAGE>
Portfolio Quality
The high credit quality of our portfolio in 1998 reflected the
effectiveness of our credit strategies, underwriting and portfolio management
and disciplined credit approval process. As of December 31, 1998, nonearning
assets were $211 million, or 1.8% of lending assets, versus $155 million, or
1.4% of lending assets, at the end of 1997. We remain favorable to our stated
target range for nonearning assets of 2-4% of lending assets. In addition, our
allowance for losses of receivables was in excess of 100% of nonearning
impaired receivables as of December 31, 1998 and 1997. The following table
presents information about the credit quality of our portfolio:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997 1996
------- ------- ------
(in millions)
<S> <C> <C> <C>
Lending Assets and Investments:
Receivables..................................... $11,854 $10,722 $8,529
Repossessed assets.............................. 3 14 14
------- ------- ------
Total lending assets.......................... 11,857 10,736 8,543
Equity and real estate investments.............. 617 488 419
Debt securities................................. 400 311 251
Operating leases................................ 321 195 135
Investments in international joint ventures..... 235 198 272
------- ------- ------
Total lending assets and investments.......... $13,430 $11,928 $9,620
======= ======= ======
<CAPTION>
December 31,
------------------------
1998 1997 1996
------- ------- ------
(dollars in millions)
<S> <C> <C> <C>
Nonearning Assets:
Impaired receivables............................ $ 208 $ 141 $ 264
Repossessed assets.............................. 3 14 14
------- ------- ------
Total nonearning assets....................... $ 211 $ 155 $ 278
======= ======= ======
Ratio of nonearning impaired receivables to
receivables.................................... 1.8% 1.3% 3.1%
Ratio of total nonearning assets to total
lending assets................................. 1.8% 1.4% 3.3%
Allowances for Losses:
Allowance for losses of receivables............. $ 271 $ 261 $ 225
Ratio of allowance for losses of receivables to
receivables.................................... 2.3% 2.4% 2.6%
Ratio of allowances for losses of receivables
to net writedowns.............................. 3.3x 1.8x 2.1x
Ratio of allowance for losses of receivables to
nonearning impaired receivables................ 130.3% 185.1% 85.2%
Delinquencies:
Earning loans delinquent 60 days or more........ $ 184 $ 151 $ 143
Ratio of earning loans delinquent 60 days or
more to
receivables.................................... 1.6% 1.4% 1.7%
<CAPTION>
For the Year Ended
December 31,
------------------------
1998 1997 1996
------- ------- ------
(dollars in millions)
<S> <C> <C> <C>
Net Writedowns of Lending Assets:
Net writedowns on receivables................... $ 81 $ 139 $ 104
Net writedowns on repossessed assets............ -- 7 4
------- ------- ------
Total net writedowns.......................... $ 81 $ 146 $ 108
======= ======= ======
Ratio of net writedowns to average lending
assets......................................... 0.7% 1.5% 1.3%
</TABLE>
Nonearning Assets. We classify receivables as nonearning when we have
significant doubt about the ability of the debtor to meet current contractual
terms. This may be evidenced by (1) loan delinquency, (2) reduction of cash
flows, (3) deterioration in the loan to value relationship and (4) other
relevant considerations. The table below shows nonearning assets by business
line in 1998, 1997 and 1996:
30
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------
1998 1997 1996
-------------- -------------- --------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Domestic Commercial Finance
Corporate Finance............ $ 13 6% $ 7 5% $ 40 14%
Real Estate Finance.......... 8 4 5 3 3 1
Leasing Services............. 25 12 14 9 9 3
Small Business Finance....... 33 16 16 10 5 2
Commercial Services.......... 5 2 2 1 3 1
Other........................ 101 48 92 59 193 70
---- --- ---- --- ---- ---
Total Domestic Commercial
Finance...................... 185 88 136 87 253 91
International Factoring and
Asset Based Finance.......... 26 12 19 13 25 9
---- --- ---- --- ---- ---
Nonearning assets............ $211 100% $155 100% $278 100%
==== === ==== === ==== ===
</TABLE>
The increase in Leasing Services' nonearning assets is a result of our
acquisition of the Dealer Products Group. The increase in Small Business
Finance's nonearning assets is primarily due to growth in its portfolio.
Approximately 70% of those nonearning assets are guaranteed by the SBA under
its 7(a) loan program. Other nonearning assets consist of transactions for
business activities we are no longer pursuing.
Allowance for Losses. The allowance for losses of receivables is a general
reserve available to absorb losses in the entire portfolio. We establish this
allowance through direct charges to income. Losses are charged to the allowance
when we deem all or a portion of a receivable uncollectible. We review the
allowance periodically and we adjust it when appropriate given (1) the size and
loss experience of the overall portfolio, (2) the effect of current economic
conditions and (3) the collectibility and workout potential of identified risk
and nonearning accounts. For repossessed assets, if the fair value declines
after the time of repossession, we record a writedown to reflect this reduction
in value.
The allowance for losses of receivables totaled $271 million, or 2.3% of
receivables, at December 31, 1998 versus $261 million, or 2.4% of receivables,
at December 31, 1997. The decrease as a percentage of receivables is consistent
with the strong credit performance of our portfolio. The ratio of allowance for
losses of receivables to nonearning impaired receivables exceeded 100% both at
December 31, 1998 and 1997.
Delinquent Earning Accounts and Loan Modifications. Earning accounts
greater than 60 days past due totaled $184 million, or 1.6% of receivables at
December 31, 1998 compared to 1.4% at December 31, 1997. A portion of this
increase was due to the acquisition of the Dealer Products Group. The level of
delinquent earning accounts changes between periods based on the timing of
payments and the effects of changes in general economic conditions on our
borrowers. Troubled debt restructurings were $14 million at December 31, 1998
versus $13 million at December 31, 1997.
We had $11 million of receivables at December 31, 1998 that we restructured
at market rates of interest, written down from the original loan balance and
returned to earning status. We expect to fully recover the recorded investment
of these receivables.
31
<PAGE>
Writedowns. Net writedowns, shown below for the years ended December 31,
1998, 1997 and 1996, decreased in 1998 due to lower writedowns and higher
recoveries in the Other category compared to 1997. This category represents
transactions for business activities we are no longer pursuing.
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------
1998 1997 1996
-------------- -------------- --------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Net Writedowns of Lending
Assets:
Domestic Commercial Finance
Corporate Finance........... $14 17% $ 25 17% $ 13 12%
Real Estate Finance........ 45 55 1 1 1 1
Leasing Services........... 3 4 1 1 (3) (3)
Small Business Finance..... 3 4 2 1 1 1
Commercial Services........ 13 16 8 5 9 8
Other...................... (2) (2) 87 60 87 81
--- --- ---- --- ---- ---
Total Domestic Commercial
Finance..................... 76 94 124 85 108 100
International Factoring and
Asset Based Finance......... 5 6 22 15 -- --
--- --- ---- --- ---- ---
Total net writedowns..... $81 100% $146 100% $108 100%
=== === ==== === ==== ===
</TABLE>
Net writedowns for 1998 totaled $81 million or 0.7% of average lending
assets, compared to $146 million or 1.5% for the same period in 1997. Gross
writedowns totaled $145 million for 1998, compared to $169 million in the prior
year, while gross recoveries totaled $64 million in 1998 compared to $23
million in 1997. The increase in Real Estate Finance net writedowns during 1998
was the result of the $40 million writedown on CMBS assets recorded in the
fourth quarter. Excluding this writedown, Real Estate Finance net writedowns
were $5 million, or 0.3% of Real Estate Finance average lending assets during
1998.
During 1998, we recorded net recoveries of $2 million on our Other
portfolio, as compared with net writedowns of $87 million in 1997. This is the
result of recording higher levels of recoveries on Real Estate Finance and
Corporate Finance transactions originated before 1990 under different
underwriting criteria. The decrease in International net writedowns in 1998 was
due to higher levels of writedowns recorded in 1997 in conjunction with our
Mexican subsidiary.
ITEM 2. PROPERTIES
We lease office space for our corporate headquarters at 500 West Monroe
Street, Chicago, Illinois 60661. We lease other offices throughout the United
States, Canada, Europe, Asia/Pacific and Latin America. For information
concerning our lease obligations, see Note 10 to the Consolidated Financial
Statements. We own an office building used by Leasing Services in the United
Kingdom.
ITEM 3. LEGAL PROCEEDINGS
We are a party to a number of legal proceedings as plaintiff and defendant,
all arising in the ordinary course of our business. We believe that the
amounts, if any, which we may ultimately pay regarding these matters will not
have a material adverse effect on our business, financial condition or results
of operations. However, we have no assurance that an unfavorable decision in
any such legal proceeding would not have a material adverse effect.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of Heller in
the fourth quarter of 1998.
32
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Heller's Class A Common Stock has traded on the New York and Chicago Stock
Exchanges, under the symbol HF, since our initial public offering in May 1998.
The following tables summarize the high and low market prices as reported on
the New York Stock Exchange Composite Tape for the periods indicated and the
cash dividends declared during 1998 and 1997:
<TABLE>
<CAPTION>
Sales Price
Range of
Common Stock
1998
-------------
High Low
------ ------
<S> <C> <C>
Quarters:
First..................................................... N/A N/A
Second.................................................... $30.82 $26.50
Third..................................................... $30.75 $19.75
Fourth.................................................... $29.13 $17.00
</TABLE>
<TABLE>
<CAPTION>
Dividends
Declared on
Common
Stock
(dollars in
millions)
-----------
1998 1997
------ ----
<S> <C> <C>
Quarters:
First........................................................ $ 465 $14
Second....................................................... 533 14
Third........................................................ -- 14
Fourth....................................................... 8 27
------ ---
Total dividends paid....................................... $1,006 $69
====== ===
</TABLE>
In 1998, we declared and paid cash dividends of over $1 billion on our
Common Stock. These dividends included $998 million paid on the Common Stock
owned by FAHI, both before and after the IPO. This amount included a $450
million dividend paid in February 1998 in the form of a subordinated note,
which we subsequently repaid, and cash dividends in the first and second
quarters of $15 million and $533 million, respectively.
In the fourth quarter we paid cash dividends of $8 million, or $0.09 per
share, ratably on our Class A and Class B Common Stock. In 1997, we paid
dividends of $69 million on our Common Stock to Heller International
Corporation (HIC). Of the dividends paid in 1997, we paid $43 million in cash
and $26 million in preferred stock issued by International Group.
During the first quarter of 1999, we declared and paid dividends ratably on
our Class A and Class B Common Stock of $0.09 per share.
We are prohibited from paying dividends on Common Stock unless:
(1) we have paid all declared dividends on all of our outstanding shares
of Preferred Stock, Series C and Series D; and
(2) we have paid all full cumulative dividends on all outstanding shares
of our Cumulative Perpetual Senior Preferred Stock, Series A.
All such preferred stock dividends have been paid to date.
33
<PAGE>
Effective January 1998, we exchanged our 6.687% Fixed Rated Noncumulative
Perpetual Senior Preferred Stock, Series C, for all formerly outstanding 6.687%
Noncumulative Perpetual Senior Preferred Stock, Series B. Our issuance of the
Series C Preferred Stock was registered under the Securities Act of 1933, as
amended. All 1,500,000 shares of Series C Preferred Stock are currently
outstanding.
At December 31, 1998, we had outstanding borrowings under our domestic and
foreign commercial paper programs of approximately $2.7 billion. Under these
programs, we issue, from time to time, notes with a maturity of nine months or
less, primarily to institutional investors. These notes are exempt from the
registration requirements of the Securities Act of 1933 under Section 3(a)(3)
of that Act.
As of March 1, 1999, there were approximately 220 holders of record of
Heller's Class A Common Stock, one of which represents approximately 8,000
beneficial holders. FAHI is the sole record holder of Heller's Class B Common
Stock. The closing price of the Class A Common Stock on March 1, 1999 was
$24.69.
34
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The results of our operations and balance sheet data for each of the years
in the three-year period ended December 31, 1998 and as of December 31, 1998
and 1997, respectively, were derived from the audited Consolidated Financial
Statements of Heller, and the notes thereto, which appear elsewhere in this
Form 10-K. The results of operations and balance sheet data for each of the
years in the two-year period ended December 31, 1995 and as of December 31,
1996, 1995 and 1994, respectively, except 1994 net income applicable to common
stock, were derived from audited consolidated financial statements of Heller,
and the notes thereto, which are not presented herein. The data presented below
should be read in conjunction with "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements, and the notes thereto, appearing elsewhere in this Form
10-K.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1998(1)(2) 1997(2) 1996 1995 1994
---------- ------- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C> <C>
Results of Operations:
Interest income.............................. $1,047 $924 $807 $851 $702
Interest expense............................. 624 516 452 464 336
------ ---- ---- ---- ----
Net interest income......................... 423 408 355 387 366
Fees and other income........................ 206 206 79 148 117
Factoring commissions........................ 124 104 55 50 53
Income of international joint ventures....... 30 36 44 35 21
------ ---- ---- ---- ----
Operating revenues.......................... 783 754 533 620 557
Operating expenses........................... 399 357 247 216 195
Provision for losses......................... 77 164 103 223 188
Restructuring charge......................... 17 -- -- -- --
------ ---- ---- ---- ----
Income before income taxes and minority
interest................................... 290 233 183 181 174
Income tax provision......................... 93 66 43 49 51
Minority interest............................ 4 9 7 7 5
------ ---- ---- ---- ----
Net income.................................. $ 193 $158 $133 $125 $118
====== ==== ==== ==== ====
Dividends on preferred stock................ $ 21 $ 14 $ 10 $ 10 $ 10
====== ==== ==== ==== ====
Net income applicable to common stock....... $ 172 $144 $123 $115 $108
====== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1998(1)(2) 1997(2) 1996 1995 1994
---------- ------- ------ ------ ------
(in millions)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Receivables....................... $11,854 $10,722 $8,529 $8,085 $7,616
Allowance for losses of
receivables...................... (271) (261) (225) (229) (231)
Equity and real estate
investments...................... 617 488 419 428 399
Debt securities................... 400 311 251 152 69
Operating leases.................. 321 195 135 113 166
Investment in international joint
ventures......................... 235 198 272 233 174
Total assets..................... 14,366 12,861 9,926 9,638 8,476
======= ======= ====== ====== ======
Commercial paper and short-term
borrowings....................... 3,681 3,432 2,745 2,223 2,451
Long-term debt.................... 6,768 6,004 4,761 5,145 3,930
------- ------- ------ ------ ------
Total debt....................... $10,449 $ 9,436 $7,506 $7,368 $6,381
======= ======= ====== ====== ======
Total liabilities................ $12,394 $11,096 $8,402 $8,208 $7,107
Preferred stock................... 400 275 125 125 125
Common equity..................... 1,562 1,403 1,342 1,259 1,205
------- ------- ------ ------ ------
Total stockholders' equity....... $ 1,962 $ 1,678 $1,467 $1,384 $1,330
======= ======= ====== ====== ======
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
As of, or For the Year Ended, December
31,
------------------------------------------
1998(1)(2) 1997(2) 1996 1995 1994
---------- ------- ------ ------ ------
(dollars in millions)
<S> <C> <C> <C> <C> <C>
Selected Data and Ratios:
Profitability
Net interest income as a
percentage of AFE(3)............ 3.6% 4.0% 4.1% 4.6% 4.7%
Non-interest operating revenues
as a percentage of AFE(3)....... 3.0 3.5 2.0 2.7 2.5
Operating revenues as a
percentage of AFE(3)............ 6.6 7.5 6.1 7.3 7.2
Return on average common
stockholders' equity(4)......... 12.4 10.5 9.4 9.3 9.2
Return on AFE(3)................. 1.6 1.6 1.5 1.5 1.5
Ratio of earnings to combined
fixed charges and preferred
stock dividends(5).............. 1.39x 1.39x 1.36x 1.34x 1.45x
Salaries and general operating
expenses as a percentage of
AFE(3).......................... 3.4% 3.5% 2.8% 2.6% 2.5%
Ratio of operating expenses to
operating revenues.............. 51.0 47.3 46.3 34.8 35.0
Common dividend payout ratio(6).. 13.4 47.7 47.2 47.0 20.4
Credit Quality
Ratio of earning loans delinquent
60 days or more to receivables.. 1.6% 1.4% 1.7% 1.4% 1.4%
Ratio of net writedowns to
average lending assets.......... 0.7 1.5 1.3 2.9 2.4
Ratio of total nonearning assets
to total lending assets......... 1.8 1.4 3.3 3.6 4.0
Ratio of allowance for losses of
receivables to receivables...... 2.3 2.4 2.6 2.8 3.0
Ratio of allowance for losses of
receivables to net writedowns... 3.3x 1.8x 2.lx 1.0x 1.3x
Ratio of allowance for losses of
receivables to nonearning
impaired receivables............ 130.2% 185.1% 85.2% 87.7% 81.3%
Leverage
Ratio of debt (net of short-term
investments) to total
stockholders' equity............ 5.2x 5.2x 5.0x 5.0x 4.7x
Ratio of commercial paper and
short-term borrowings to total
debt............................ 35.2% 36.4% 36.6% 30.2% 38.4%
Other
Total lending assets and
investments(7).................. $13,430 $11,928 $9,620 $9,039 $8,443
Funds employed(3)................ 11,989 10,673 9,030 8,542 7,991
Average funds employed(3)........ 11,814 10,081 8,727 8,466 7,785
Total managed assets(8).......... 13,664 11,800 9,574 9,137 8,414
Average managed assets(8)........ 13,007 10,687 9,356 8,776 7,918
Number of employees.............. 2,714 2,339 1,527 1,487 1,404
Number of office locations....... 76 63 52 36 33
</TABLE>
- --------
(1) The financial data presented for 1998 reflects our purchase of the domestic
technology leasing assets of the Dealer Products Group and the stock of the
Dealer Products Group's international subsidiaries in November 1998. As a
result of this purchase, we consolidated the acquired assets and
international subsidiaries of the Dealer Products Group as of the date of
acquisition. Goodwill related to this acquisition totaled $187 million and
is subject to any purchase price adjustments to be finalized in 1999. The
consolidation of the Dealer Products Group assets and subsidiaries resulted
in an increase of approximately $625 million in total assets and
approximately 400 additional employees as of December 31, 1998 as compared
to December 31, 1997. This acquisition had a minimal favorable impact on
our 1998 net income, as our 1998 results include only one month of Dealer
Products Group operations.
(2)The financial data presented for 1998 and 1997 reflects our purchase
(through our subsidiary, International Group) of our joint venture
partner's interest in Factofrance in April 1997 for $174 million. As a
result of this purchase, Factofrance was reported on a consolidated basis
with Heller as of the date of acquisition. The premium related to this
purchase was allocated as follows: $78 million to goodwill and $18 million
to a noncompetition agreement. Our consolidation of Factofrance resulted in
increases of $2 billion, $94 million, $59 million and 570 in total assets,
operating revenues, operating expenses and number of employees,
respectively, during 1997 as compared to 1996.
(3)Funds employed include lending assets and investments, less credit balances
of our factoring clients. We believe that funds employed are indicative of
the dollar amount which we have loaned to our borrowers. Average funds
employed (AFE) reflect the average of lending assets and investments, less
credit balances of our factoring clients.
36
<PAGE>
(4)Return on average common stockholders' equity is computed as net income less
preferred stock dividends paid divided by average total stockholders'
equity net of preferred stock.
(5)The ratio of earnings to combined fixed charges and preferred stock
dividends is calculated by dividing (i) income before income taxes,
minority interest and fixed charges by (ii) fixed charges plus preferred
stock dividends.
(6)Common dividend payout ratio is computed as common dividends paid, divided
by net income applicable to common stock. The 1998 common dividend payout
ratio excludes the $983 million dividends paid on the Common Stock owned by
FAHI.
(7)Total lending assets and investments consist of receivables, repossessed
assets, equity and real estate investments, operating leases, debt
securities and investments in international joint ventures.
(8)Total managed assets include funds employed, plus receivables previously
securitized or sold and currently managed by Heller.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Selected Financial Data and Consolidated Financial Statements, including
the notes thereto, appearing elsewhere in this Form 10-K. The following
discussion and analysis contains certain "forward-looking statements" as
defined in the Securities Exchange Act of 1934, which are generally identified
by the words "anticipates", "believes", "estimates", "expects", "plans",
"intends" and similar expressions. These statements are subject to certain
risks, uncertainties and contingencies, which could cause our actual results,
performance or achievements to differ materially from those expressed in, or
implied by, such statements. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations--Special Note Regarding
Forward-Looking Statements".
General
Heller is in the commercial finance business, providing primarily
collateralized financing and leasing products and related services to mid-sized
and small businesses in the United States and selected international markets.
The sources of our operating revenues can be classified in two broad
categories:
. net interest income; and
. non-interest income.
Net interest income represents the total interest income we earn,
principally through our financing and leasing activities, less the total
interest expense we pay on our interest bearing liabilities, which largely
relate to the funding of these financing and leasing activities.
Non-interest income consists of:
. factoring commissions;
. income from investments in international joint ventures; and
. fees and other income.
Fees include:
. loan servicing income;
37
<PAGE>
. late fees;
. structuring fees;
. syndication fees; and
. prepayment fees.
Other income includes:
. real estate participation income;
. gains from sales of investments and from sales and securitizations of
lending assets; and
. equipment residual gains.
Our primary expenses, other than interest expense, are operating expenses,
including employee compensation and general and administrative expenses, and
provisions for credit losses.
In May 1998, we issued 38,525,000 shares of Class A Common Stock in the
IPO. We received net proceeds of $986 million, of which (1) $450 million was
used to repay our indebtedness consisting of a subordinated note to Fuji
America Holdings issued February 24, 1998 for a previously declared dividend,
and (2) $533 million was paid as a cash dividend to Fuji America Holdings. In
addition, we issued 505,912 shares of restricted Class A Common Stock to our
management during 1998. Before May 1998, Fuji America Holdings owned 100% of
our outstanding Common Stock. After the IPO and the issuance of shares to
management, 90,080,912 shares of common stock of Heller were outstanding,
resulting in Fuji America Holdings owning 79% of the voting interest and 57% of
the economic interest in our Common Stock.
In May 1998, we purchased the 21% interest held by Fuji Bank in
International Group for total cash consideration of approximately $83 million.
The Company financed this acquisition by issuing senior debt. See "Item 13.
Certain Relationships and Related Transactions--Purchase of Interest in
International Group from Fuji Bank".
On November 30, 1998, we acquired 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 (Dealer Products Group) for
approximately $775 million. This amount, which included the assumption and
repayment of approximately $260 million of foreign debt, is subject to any
purchase price adjustments to be finalized in 1999. The U.S. and international
divisions of the Dealer Products Group provide customized leasing and financing
to commercial enterprises primarily for the acquisition of computer and
telecommunications equipment. The consolidation of the Dealer Products Group
assets and subsidiaries resulted in an increase of approximately $625 million
in total assets and approximately 400 additional employees as of December 31,
1998 as compared to December 31, 1997. This acquisition had a minimal favorable
impact on our 1998 net income, as the 1998 results include only one month of
Dealer Products Group operations.
During 1998, we reorganized our Domestic Commercial Finance segment into
five business units designed to improve our operating efficiency, both by
generating additional revenues and by reducing the costs of doing business--See
"Item 1. Business". In conjunction with this initiative, we incurred a one time
restructuring charge of $17 million during the fourth quarter of 1998. The
majority of this cost related to severance benefits
38
<PAGE>
associated with the approximate 15% reduction in our domestic workforce. The
charge also included costs related to leases on offices we will no longer
occupy and the write down of leasehold improvements related to these offices.
We expect the reorganization to reduce future costs by more than $20 million on
an annual basis.
Our results of operations may vary significantly from quarter to quarter
based upon the timing of certain events, such as securitizations and net
investment gains. See Note 23 to the Consolidated Financial Statements.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Results of Operations
Overview. For the year ended December 31, 1998:
. Net income totaled $193 million compared with $158 million for the prior
year, an increase of 22%. This represents our sixth consecutive year of
record net income.
. Net income applicable to common stock was $172 million for the year
ended December 31, 1998. This represents an increase of 19% from $144
million for the prior year and reflects an increase of $29 million in
operating revenues, due to growth in both net interest income and non-
interest income, coupled with a decrease in the provision for losses of
$87 million, or 53% from December 31, 1997.
. Earnings were reduced by a one time charge of $17 million, relating to
our restructuring initiative, which was recorded in the fourth quarter.
. The increase in net interest income, as compared to the prior year, is
due to growth in lending assets and investments. See "--Operating
Revenues--Net Interest Income."
. The decrease in provision for losses is due to a significant increase in
recoveries coupled with a decrease in writedowns. Our allowance for
losses of receivables at year end was in excess of 100% of nonearning
impaired receivables.
. New business lending volume totaled a record $7.2 billion, an increase
of 20% over the prior year. This increase was the result of our
significant investment in building leadership positions in our
businesses and in expanding market coverage.
. Our factoring volume totaled $19.4 billion in 1998, an increase of 21%
from the prior year, due to significant growth of Factofrance.
Operating Revenues. The following table shows our operating revenues for
the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
For the Year Ended December
31,
-----------------------------
1998 1997
-------------- --------------
Percent Percent
Amount of AFE Amount of AFE
------ ------- ------ -------
(dollars in millions)
<S> <C> <C> <C> <C>
Net interest income........................ $423 3.6% $408 4.0%
Non-interest income:
Fees and other income..................... 206 1.7 206 2.1
Factoring commissions..................... 124 1.0 104 1.0
Income of international joint ventures.... 30 0.3 36 0.4
---- --- ---- ---
Total operating revenues................ $783 6.6% $754 7.5%
==== === ==== ===
</TABLE>
39
<PAGE>
Net Interest Income. The following table shows our net interest income for
the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
For the Year
Ended
December 31, Increase/(Decrease)
--------------- ---------------------
1998 1997 Amount Percent
------- ------ --------- ----------
(dollars in millions)
<S> <C> <C> <C> <C>
Interest income.................. $ 1,047 $ 924 $ 123 13.3%
Interest expense................. 624 516 108 20.9
------- ----- ---------
Net interest income............. $ 423 $ 408 $ 15 3.7
======= ===== =========
Net interest income as a
percentage of AFE.............. 3.6% 4.0%
</TABLE>
Net interest income totaled $423 million for the year ended December 31,
1998, an increase of $15 million, or 4%, from the comparable prior year period.
This increase was driven by strong growth in lending assets and investments
offset by tightening net interest margins.
Average funds employed totaled $11.8 billion for 1998, up 17% from $10.1
billion in 1997 due to record new business lending volume of $7.2 billion
during the year.
Net interest income as a percentage of AFE decreased to 3.6% at December
31, 1998 from 4.0% at December 31, 1997. This decline reflects the competitive
pricing pressures in certain product groups and the impact of the CMBS product,
which carries a significantly lower net interest margin than other receivables.
The lower yielding CMBS portfolio decreased our total net interest margin by
approximately 0.30% for the twelve months ended December 31, 1998. Total net
interest margin for 1998 was also reduced by 0.05% as a result of interest
expense recorded on the $450 million note related to the Fuji America Holdings
dividend paid in February 1998.
Interest rates we charge vary depending on:
. risks and maturities of loans;
. competition;
. our current costs of borrowing;
. state usury laws; and
. other governmental regulations.
Our portfolio of receivables earns interest at both variable and fixed
rates. The variable rates float in accordance with various agreed upon
reference rates, including LIBOR, the Prime Rate and corporate based lending
rates.
We use interest rate swaps as an important tool for financial risk
management. They enable us to match more closely the interest rate and maturity
characteristics of our assets and liabilities. As such, we use interest rate
swaps to:
. change the characteristics of fixed rate debt to that of variable rate
liabilities;
. alter the characteristics of specific fixed rate asset pools to more
closely match the interest terms of the underlying financing; and
. modify the variable rate basis of a liability to more closely match the
variable rate basis used for variable rate receivables.
40
<PAGE>
The following table shows a comparative analysis of the year-end principal
outstanding and average interest rates we paid on our debt as of December 31,
1998 and 1997, before and after giving effect to interest rate swaps:
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------
1998 1997
--------------------- ---------------------
Year-end Before After Year-end Before After
balance swaps swaps balance swaps swaps
-------- ------ ----- -------- ------ -----
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Commercial paper--domestic
and foreign............... $2,692 5.52% N/A $2,560 5.71% N/A
Fixed rate debt............ 3,886 6.31 6.17% 3,951 6.90 6.67%
Variable rate debt......... 2,879 5.34 5.59 2,051 5.44 6.01
------ ------
Total...................... $9,457 5.79 5.92 $8,562 6.19 6.44
====== ======
</TABLE>
Non-Interest Income. The following table shows our non-interest income for
the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
For the Year
Ended
December 31, Increase/(Decrease)
-------------- ----------------------
1998 1997 Amount Percent
------ ------ --------- ----------
(dollars in millions)
<S> <C> <C> <C> <C>
Factoring commissions........... $ 124 $ 104 $ 20 19.2%
Income of international joint
ventures....................... 30 36 (6) (16.7)
Fees and other income:
Fee income and other(1)........ 130 111 19 17.1
Net investment gains........... 59 69 (10) (14.5)
Securitization gains........... 17 26 (9) (34.6)
------ ------ ---------
Total fees and other income.. $ 206 $ 206 $ -- --
------ ------ ---------
Total non-interest income.. $ 360 $ 346 $ 14 4.0
====== ====== =========
Non-interest income as a
percentage of AFE.............. 3.1% 3.5%
</TABLE>
- --------
(1) Fee income and other consists primarily of loan servicing income, late
fees, prepayment fees, other miscellaneous fees and equipment residual
gains.
Our non-interest income is composed of:
. factoring commissions;
. income of international joint ventures; and
. fees and other income.
Factoring commissions increased $20 million, or 19%, in 1998 versus 1997
due to significant growth in international factoring volume and the
consolidation of Factofrance for the full year of 1998 versus nine months in
1997, offset by some compression in factoring commission rates. Our total 1998
factoring volume, adjusted for the impact of the Factofrance consolidation for
twelve months in 1998 versus nine months in 1997, increased 21% from the prior
year, including a significant increase in factoring volume recorded by
Factofrance of 34%.
Income of international joint ventures represents our share of the annual
earnings or losses of joint ventures. The $6 million decrease in income from
international joint ventures in 1998 versus 1997 was due primarily to the
consolidation of Factofrance as described above.
41
<PAGE>
Fees and other income totaled $206 million for 1998, unchanged from the
prior year. An increase in fee income and other was offset by decreases in net
investment gains and lower securitization income. Fee income and other
increased $19 million, or 17% as compared to the prior year as we recognized
increased prepayment income, fees on available lines of credit, as well as
increased income on asset sales of Real Estate Finance and Small Business
Finance as compared to the prior year. Net investment gains decreased $10
million, or 14% due to lower gains on real estate investments. Net investment
gains are generated primarily from investment activity of Corporate Finance and
junior participating lending activity of Real Estate Finance.
During 1998, we generated $17 million of securitization gains, a decrease
of $9 million from the prior year. Securitization gains in 1998 resulted from
two CMBS securitizations totaling $2 billion, a $96 million securitization of
the unguaranteed portion of SBA 7(a) loans and a $434 million sale of equipment
receivables to a conduit. The lower level of securitization gains in 1998 is
due to lower income realization on the CMBS securitizations. We did not retain
any interest in the first CMBS transaction completed in the first quarter of
1998 totaling $1.1 billion. In the second CMBS securitization completed in the
fourth quarter of 1998, we sold all of the unrated and "B" rated securities to
third parties on a non-recourse basis. We retained an interest in the SBA
securitization, as required by the SBA, and an interest in the equipment sales
transaction.
Operating Expenses. The following table shows our operating expenses for
the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
For the
Year Ended
December 31, Increase/(Decrease)
-------------- ----------------------
1998 1997 Amount Percent
------ ------ --------- ----------
(dollars in millions)
<S> <C> <C> <C> <C>
Salaries and other
compensation.................. $ 227 $ 214 $ 13 6.1%
General and administrative
expenses...................... 172 143 29 20.3
------ ------ ---------
Total......................... $ 399 $ 357 $ 42 11.8
====== ====== =========
Operating expenses as a
percentage of AFE............. 3.4% 3.5%
</TABLE>
Operating expenses, excluding the impact of the Factofrance consolidation,
increased by $21 million, or 6%, in 1998, as compared to 1997. This increase is
primarily due to investment in lower risk businesses, increased information
technology expenses including amounts associated with year 2000 compliance
efforts and investment in our national brand building marketing campaign
(Straight Talk, Smart Deals). See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations--Year 2000 Compliance."
Operating expenses as a percentage of average funds employed decreased to
3.4% as of December 31, 1998 from 3.5% at December 31, 1997 which is reflective
of our focus on improving operating efficiency.
In conjunction with our restructuring initiative, which resulted in a one-
time charge of $17 million, we expect annual savings in operating expenses in
excess of $20 million beginning in 1999.
42
<PAGE>
Allowance for Losses. The following table shows the changes in our
allowance for losses of receivables, including our provision for losses of
receivables and repossessed assets, for the years ended December 31, 1998 and
1997:
<TABLE>
<CAPTION>
For the
Year Ended
December 31, Increase/(Decrease)
-------------- ----------------------
1998 1997 Amount Percent
------ ------ --------- ----------
(dollars in millions)
<S> <C> <C> <C> <C>
Balance at the beginning of the
year.......................... $ 261 $ 225 $ 36 16.0%
Provision for losses.......... 77 164 (87) (53.0)
Writedowns.................... (145) (169) 24 14.2
Recoveries.................... 64 23 41 178.3
Factofrance consolidation..... -- 18 (18) N/M
Dealer Products Group
acquisition ................. 18 -- 18 N/M
Transfers and other........... (4) -- (4) N/M
------ ------ ---------
Balance at the end of the year. $ 271 $ 261 $ 10 3.8%
====== ====== =========
</TABLE>
The provision for losses decreased to $77 million in 1998 from $164 million
in 1997. This decrease reflects the continued strong asset quality of our
portfolio coupled with higher levels of recoveries and lower levels of
writedowns. Net writedowns for 1998 totaled $81 million or 0.7% of average
lending assets, compared to $146 million or 1.5% for the same period in 1997.
Excluding a $40 million writedown of CMBS receivables, net writedowns were $41
million or 0.4% of average lending assets for the year.
Net writedowns for 1998 were within our stated writedown target of 0.75% of
average lending assets. Gross writedowns totaled $145 million for 1998 versus
$169 million for 1997, while recoveries totaled $64 million in 1998 versus $23
million for 1997. The increase in recoveries for 1998 related primarily to
Corporate Finance and Real Estate Finance assets that were originated prior to
1990 under different underwriting criteria.
As of December 31, 1998, the ratio of our allowance for losses of
receivables to receivables was 2.3%, compared to 2.4% as of December 31, 1997.
The decrease in this ratio reflected the continued improvement of the credit
quality of our portfolio. We intend to continue to systematically evaluate the
appropriateness of the allowance for losses of receivables and to adjust the
allowance to reflect any changes in the credit quality of our portfolio.
Income Taxes. Our effective income tax rate was 32% for 1998 and 28% for
1997, in each case below the statutory rate due to:
. the use of foreign tax credits;
. the effect of earnings from international joint ventures; and
. certain favorable tax issue resolutions.
Lending Assets and Investments
Total lending assets and investments increased $1.5 billion, or 13%, during
1998 due to record new business originations of $7.2 billion and an approximate
$625 million increase in assets from the Dealer Products Group acquisition,
offset by $6.4 billion of paydowns, loan sales, syndications and
securitizations. During 1998, new business volume represented a 20% increase
over 1997, as we realized the benefit of the market positions held by Corporate
Finance, Real Estate Finance and Small Business Finance.
43
<PAGE>
The following table presents our lending assets and investments by business
line and asset type as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1998 1997
--------------- ---------------
Amount Percent Amount Percent
------- ------- ------- -------
(dollars in millions)
<S> <C> <C> <C> <C>
By Business Category:
Domestic Commercial Finance
Corporate Finance....................... $ 3,784 28% $ 3,066 26%
Real Estate Finance..................... 2,044 15 2,323 20
Leasing Services........................ 2,840 21 2,314 19
Small Business Finance.................. 1,013 8 766 6
Commercial Services..................... 401 3 361 3
Other................................... 687 5 737 6
------- --- ------- ---
Total Domestic Commercial Finance........ 10,769 80 9,567 80
International Factoring and Asset Based
Finance(1).............................. 2,661 20 2,361 20
------- --- ------- ---
Total lending assets and investments.. $13,430 100% $11,928 100%
======= === ======= ===
By Asset Type:
Receivables............................. $11,854 88% $10,722 90%
Repossessed assets...................... 3 -- 14 --
------- --- ------- ---
Total lending assets.................. 11,857 88 10,736 90
Equity and real estate investments...... 617 5 488 4
Debt securities......................... 400 3 311 3
Operating leases........................ 321 2 195 1
International joint ventures............ 235 2 198 2
------- --- ------- ---
Total lending assets and investments.. $13,430 100% $11,928 100%
======= === ======= ===
Total managed assets.................. $13,664 $11,800
Average managed assets................ 13,007 10,687
Funds employed........................ 11,989 10,673
Average funds employed................ 11,814 10,081
</TABLE>
- --------
(1) Includes $231 million in investments in international joint ventures,
representing 2% of total lending assets and investments in 1998, and $198
million in investments in international joint ventures, representing 2% of
total lending assets and investments, in 1997.
As of December 31, 1998, our domestic commercial finance portfolio remained
well diversified between Corporate Finance, Leasing Services, and Real Estate
Finance:
. Corporate Finance increased its lending assets and investments to $3.8
billion as a result of $2.7 billion in new business volume, which was
partially offset by loan syndications and runoff in the portfolio.
. Leasing Services grew to $2.8 billion, or 21% of our total lending assets and
investments, at December 31, 1998, primarily due to the Dealer Products Group
acquisition of approximately $625 million in assets offset by the December
1998 equipment sale of $434 million in receivables.
. Real Estate Finance decreased to 15% of our total lending assets and
investments as of December 31, 1998 versus 20% at December 31, 1997 as new
business volume of $2.2 billion was offset by payoffs and CMBS
securitizations totaling $2 billion.
44
<PAGE>
Concentrations of lending assets of 5% or more at December 31, 1998 and
1997, based on the standard industrial classifications of the borrowers, were
as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
-------------- --------------
Amount Percent Amount Percent
------ ------- ------ -------
(dollars in millions)
<S> <C> <C> <C> <C>
Department and general merchandise retail
stores .................................. $935 8% $511 5%
Computers ................................ 811 7 164 2
General industrial machines .............. 732 6 637 6
Automotive ............................... 667 6 714 7
Transportation ........................... 666 6 294 3
Food, grocery and miscellaneous retail ... 650 5 603 6
</TABLE>
With respect to the above table:
. The department and general merchandise retail stores category is
primarily comprised of factored accounts receivable, which represent
short-term trade receivables from numerous customers.
. The computers category consists of software/hardware distributors and
manufacturers, plastic component manufacturers and disk drive designers.
. The general industrial machines classification is distributed among
machinery used for many different industrial applications.
. The automotive category is primarily comprised of auto parts
distributors and wholesalers, resale and leasing services in the
automotive and aircraft industries and maintenance services for
automotive and aircraft parts.
. A majority of the lending assets in the transportation category arise
from chartered aircraft services and transportation services for
freight, cargo and other various packages.
. The majority of lending assets in the food, grocery and miscellaneous
retail category are revolving and term facilities with borrowers that
are primarily in the business of manufacturing and retailing of food
products.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Results of Operations
Overview. During and for the year ended December 31, 1997:
. We continued our significant investment in building leadership positions
in our businesses and in expanding market coverage, as demonstrated by
record new business volume of $6 billion for the year.
. Credit quality of our portfolio was strengthened due to the continued
growth of transactions secured by real estate, receivables, inventory and
equipment as well as the substantial reduction in our portfolio of
Corporate Finance and Real Estate Finance transactions originated prior
to 1990 under different underwriting criteria.
. Our net income totaled $158 million compared with $133 million for the
prior year, an increase of 19%. This represented our fifth consecutive
year of record net income.
. Net income applicable to common stock was $144 million, which represented
an increase of 17% from $123 million for the prior year. This reflected
an increase of $221 million, or 41%, in operating revenues, due to growth
in both net interest income and non-interest income. Of the increase in
operating revenues, $94 million, or 43%, related to the consolidation of
Factofrance.
45
<PAGE>
. Operating revenues as a percentage of AFE rose to 7.5% in 1997 from 6.1%
in 1996. See "--Operating Revenues--Non-Interest Income."
. New business lending volume totaled a record $6.0 billion, an increase of
47% over the prior year. Our factoring volume totaled $14.1 billion in
1997, a $7.1 billion increase from the prior year, primarily due to the
consolidation of Factofrance.
. The credit quality of our portfolio was demonstrated by the low level of
nonearning assets, which totaled $155 million, or 1.4% of lending assets,
at December 31, 1997. In addition, our allowance for losses of
receivables at year end was significantly in excess of 100% of nonearning
impaired receivables.
. Our portfolio of Corporate Finance and Real Estate Finance assets
originated prior to 1990 under different underwriting criteria was
substantially reduced during 1997 and, as of December 31, 1997,
represented only 4% of total lending assets and investments.
Operating Revenues. The following table sets forth our operating revenues
for the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
For the Year Ended December
31,
-----------------------------
1997 1996
-------------- --------------
Percent Percent
Amount of AFE Amount of AFE
------ ------- ------ -------
(dollars in millions)
<S> <C> <C> <C> <C>
Net interest income........................ $408 4.0% $355 4.1%
Non-interest income:
Fees and other income..................... 206 2.1 79 0.9
Factoring commissions..................... 104 1.0 55 0.6
Income of international joint ventures.... 36 0.4 44 0.5
---- --- ---- ---
Total operating revenues................... $754 7.5% $533 6.1%
==== === ==== ===
</TABLE>
Excluding the impact of the consolidation of Factofrance, operating
revenues increased by 24% in 1997 from the prior year.
Net Interest Income. The following table shows our net interest income for
the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
For the
Year Ended
December
31, Increase/(Decrease)
------------ ---------------------
1997 l996 Amount Percent
----- ----- --------- ----------
(dollars in millions)
<S> <C> <C> <C> <C>
Interest income.................... $ 924 $ 807 $ 117 14.5%
Interest expense................... 516 452 64 14.2
----- ----- ---------
Net interest income............... $ 408 $ 355 $ 53 14.9
===== ===== =========
Net interest income as a
percentage of AFE................ 4.0% 4.1%
</TABLE>
Net interest income totaled $408 million for the year ended December 31,
1997, an increase of $53 million, or 15%, from the comparable prior year
period. This increase reflected growth in lending assets and investments and
the consolidation of Factofrance, which contributed $28 million to this
increase.
Net interest margin as a percentage of AFE decreased to 4.0% at December
31, 1997 from 4.1% at December 31, 1996. This decline reflected the continued
growth of our lower risk, but lower yielding, transactions secured by
receivables, inventory and equipment, competitive pricing pressures in certain
product groups and higher originations of CMBS receivables, which carry a lower
yield than other Heller products.
46
<PAGE>
The following table presents a comparative analysis of the year-end
principal outstanding and average interest rates we paid on our debt as of
December 31, 1997 and 1996, before and after giving effect to interest rate
swaps:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1997 1996
--------------------- ---------------------
Year-end Before After Year-end Before After
balance swaps swaps balance swaps swaps
-------- ------ ----- -------- ------ -----
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Commercial paper--domestic
and foreign.............. $2,560 5.71% N/A $2,576 5.63% N/A
Fixed rate debt........... 3,951 6.90 6.67% 2,905 7.02 6.62%
Variable rate debt........ 2,051 5.44 6.01 1,859 4.85 5.78
------ ------
Total.................... $8,562 6.19 6.44 $7,340 5.98 6.29
====== ======
</TABLE>
Non-Interest Income. The following table shows our non-interest income for
the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
For the
Year Ended
December 31, Increase/(Decrease)
-------------- ----------------------
1997 1996 Amount Percent
------ ------ --------- ----------
(dollars in millions)
<S> <C> <C> <C> <C>
Factoring commissions........... $ 104 $ 55 $ 49 89.1%
Income of international joint
ventures....................... 36 44 (8) (18.2)
Fees and other income:
Fee income and other(1)........ 111 76 35 46.1
Net investment gains........... 69 3 66 N/M
Securitization gains........... 26 -- 26 --
------ ------ ---------
Total fees and other income.. $ 206 $ 79 $ 127 160.8%
------ ------ ---------
Total non-interest income.. $ 346 $ 178 $ 168 94.4
====== ====== =========
Non-interest income as a
percentage of AFE.............. 3.5% 2.0%
</TABLE>
- --------
(1) Fee income and other consists primarily of loan servicing income, late
fees, prepayment fees, other miscellaneous income and equipment residual
gains.
Factoring commissions increased $49 million, or 89%, and income from
international joint ventures decreased $8 million, or 18% from 1997 to 1996 due
primarily to the consolidation of Factofrance for the last nine months of 1997.
As a result of this consolidation, we believe Heller became the largest factor
in the world.
Fees and other income totaled $206 million for 1997, an increase of $127
million from the prior year, due to increases in net investment gains,
securitization gains and fee income and other. Fee income and other increased
due to $20 million from the consolidation of Factofrance, and a $10 million
gain resulting from the termination of our agreement with a mortgage broker.
Net investment gains increased $66 million during 1997 due to a lower level
of losses and writedowns in 1997, as compared to 1996. Gross investment gains
were $119 million and $106 million, while losses and writedowns on investments
were $50 million and $103 million, in 1997 and 1996, respectively. Losses and
writedowns on equity investments were higher in 1996 primarily due to
writedowns during the year totaling $53 million on one Corporate Finance
transaction originated prior to 1990 under different underwriting criteria.
During 1997, we generated $26 million of securitization gains, primarily
through a CMBS securitization in the second quarter. We did not retain any
residual risk in this securitization transaction, as all of the securities were
sold to third parties on a nonrecourse basis.
47
<PAGE>
Operating Expenses. The following table shows our operating expenses for
the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
For the Year Ended
December 31, Increase/(Decrease)
-------------------- ---------------------
1997 1996 Amount Percent
--------- --------- --------- ----------
(dollars in millions)
<S> <C> <C> <C> <C>
Salaries and other
compensation.............. $ 214 $ 154 $ 60 39.0%
General and administrative
expenses.................. 143 93 50 53.8
--------- --------- ---------
Total..................... $ 357 $ 247 $ 110 44.5
========= ========= =========
Operating expenses as a
percentage of AFE......... 3.5% 2.8%
</TABLE>
Operating expenses, excluding the impact of the Factofrance consolidation,
increased by $51 million, or 21%, in 1997, as compared to 1996. This increase
was primarily due to our continued investment in developing leadership
positions for our asset based businesses and expansion of loan origination and
portfolio management resources in our CMBS loan area, the opening of 11 new
offices, increased investment in technology and higher costs associated with
record new business originations.
Allowance for Losses. The following table presents the changes in our
allowance for losses of receivables, including our provision for losses of
receivables and repossessed assets, for the years ended December 31, 1997 and
1996:
<TABLE>
<CAPTION>
For the Year Ended
December 31, Increase/(Decrease)
-------------------- ----------------------
1997 1996 Amount Percent
--------- --------- --------- ----------
(dollars in millions)
<S> <C> <C> <C> <C>
Balance at the beginning
of the year............ $ 225 $ 231 $ (6) (2.6)%
Provision for losses... 164 103 61 59.2
Writedowns............. (169) (163) (6) (3.7)
Recoveries............. 23 55 32 (58.2)
Factofrance
consolidation......... 18 -- 18 N/M
Transfers and other.... -- (1) 1 N/M
--------- --------- --------
Balance at the end of
the year............... $ 261 $ 225 $ 36 16.0%
========= ========= ========
</TABLE>
The provision for losses increased to $164 million in 1997 from $103
million in 1996. This increase primarily resulted from provisions due to growth
in lending assets, combined with lower levels of recoveries in 1997.
Gross writedowns were slightly higher than the prior year at $169 million
for 1997 versus $163 million for 1996, while recoveries totaled $23 million in
1997 versus $55 million for 1996. Net writedowns, excluding those on the
Corporate Finance and Real Estate Finance portfolio originated prior to 1990
under different underwriting criteria, totaled $62 million, or 0.6% of total
average lending assets, in 1997 versus $41 million, or 0.5% of total average
lending assets, in 1996.
As of December 31, 1997, the ratio of our allowance for losses of
receivables to receivables was 2.4%, compared to 2.6% as of December 31, 1996.
The decrease in this ratio reflected the continued improvement of the credit
quality of our portfolio.
Income Taxes. Our effective income tax rate was 28% for 1997 and 23% for
1996, in each case below the statutory rate due to:
. the effect of earnings from international joint ventures;
. the use of foreign tax credits; and
. favorable tax issue resolutions.
48
<PAGE>
Lending Assets and Investments
Total lending assets and investments increased $2.3 billion, or 24%, during
1997. This reflected:
. record new business originations of $6.0 billion;
. a $1.5 billion increase from the consolidation of Factofrance; and
. $5.3 billion of paydowns, loan sales, syndications and securitizations.
During 1997, new business volume represented a 47% increase over 1996, as
we realized the benefit of the market positions held by Leasing Services, Small
Business Finance, Corporate Finance and Real Estate Finance. In addition, we
liquidated 50% of the remaining portion of the Corporate Finance and Real
Estate Finance portfolio originated under different underwriting criteria prior
to 1990, which as of December 31, 1997 represented 4% of total lending assets
and investments and is included as part of "Other" lending assets and
investments in the table below.
The following table presents our lending assets and investments by business
line and asset type as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1996
--------------- --------------
Amount Percent Amount Percent
------- ------- ------ -------
(dollars in millions)
<S> <C> <C> <C> <C>
By Business Category:
Domestic Commercial Finance
Corporate Finance........................ $ 3,066 26% $2,890 30%
Real Estate Finance...................... 2,323 20 1,655 17
Leasing Services......................... 2,314 19 1,933 20
Commercial Services...................... 361 3 907 10
Small Business Finance................... 766 6 403 4
Other.................................... 737 6 1,223 13
------- --- ------ ---
Total Domestic Commercial Finance......... 9,567 80 9,011 94
International Factoring and Asset Based
Finance (1)(2)........................... 2,361 20 609 6
------- --- ------ ---
Total lending assets and investments... $11,928 100% $9,620 100%
======= === ====== ===
By Asset Type:
Receivables.............................. $10,722 90% $8,529 89%
Repossessed assets....................... 14 -- 14 --
------- --- ------ ---
Total lending assets................... 10,736 90 8,543 89
Equity and real estate investments........ 488 4 419 4
Debt securities........................... 311 3 251 3
Operating leases.......................... 195 1 135 1
International joint ventures.............. 198 2 272 3
------- --- ------ ---
Total lending assets and investments... $11,928 100% $9,620 100%
======= === ====== ===
Total managed assets................... $11,800 $9,574
Average managed assets................. 10,687 9,356
Funds employed......................... 10,673 9,030
Average funds employed................. 10,081 8,727
</TABLE>
- --------
(1) Includes $198 million in investments in international joint ventures,
representing 2% of total lending assets and investments, in 1997, and $272
million in investments in international joint ventures, representing 3% of
total lending assets and investments, in 1996.
(2) Reflects the consolidation of Factofrance in April 1997.
49
<PAGE>
Our portfolio was concentrated in senior secured lending, as 89% of the
portfolio was originated on a senior secured basis. During 1997:
. Real Estate Finance grew to $2.3 billion in lending assets and
investments at December 31, 1997, as originations of CMBS receivables
totaled $1.1 billion versus $500 million in 1996.
. Leasing Services experienced new business originations of $1.6 billion
or 79% higher than 1996 which was partially offset by a $267 million
equipment securitization and syndications of $138 million of
receivables.
. Corporate Finance generated new business volume of over $2.0 billion in
1997 which was partially offset by syndications and runoff in the
portfolio.
. The decrease in the lending assets and investments for Commercial
Services is due to the sale of $500 million of factored accounts
receivable.
Our investment in international joint ventures increased due to the impact
of undistributed income and an investment made in a factoring company in Chile.
Concentrations of lending assets of 5% or more at December 31, 1997 and
1996, based on the standard industrial classifications of the borrowers, were
as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
-------------- --------------
Amount Percent Amount Percent
------ ------- ------ -------
(dollars in millions)
<S> <C> <C> <C> <C>
General industrial machines................ $637 6% $500 6%
Food, grocery and other miscellaneous
retail.................................... 603 6 669 8
Business services.......................... 556 5 435 5
Department and general merchandise retail
stores.................................... 511 5 987 12
</TABLE>
With respect to the above table:
. The general industrial machines classification is distributed among
machinery used for many different industrial applications.
. The majority of lending assets in the food, grocery and miscellaneous
retail category are revolving and term facilities with borrowers that
are primarily in the business of manufacturing and retailing of food
products.
. The business services category is primarily comprised of computer and
data processing services, credit reporting and collection and
miscellaneous business services.
. The department and general merchandise retail stores category is
primarily comprised of factored accounts receivable, which represent
short-term trade receivables from numerous customers.
. The reduction in department and general merchandise retail stores
lending assets in 1997 reflected the sale of $500 million of factored
accounts receivable under a $550 million factored accounts receivable
facility.
Liquidity and Capital Resources
We manage liquidity to fund asset growth and meet debt obligations
primarily by:
.monitoring the relative maturities of assets and liabilities; and
. borrowing funds through the U.S. and international money and capital
markets and bank credit markets.
50
<PAGE>
Our primary sources of funds are:
.commercial paper borrowings;
.issuances of medium-term notes and other debt securities; and
.the securitizations, syndications and sales of lending assets.
During 1998, our major funding requirements included:
.$7.2 billion of longer-term loans, leases and investments funded;
.$874 million of short-term loans funded;
.the retirement of $2.0 billion of senior notes;
.the Dealer Products Group acquisition for $775 million; and
.common and preferred dividends of over $1 billion.
Our major sources of funding these requirements, other than $360 million of
cash flows from operations, included:
. loan repayments and investment proceeds of $3.2 billion;
. the sale, securitization or syndication of $4.1 billion of loans and
investments;
. the issuance of $2.8 billion of senior notes;
. the increase in short-term debt of $249 million;
. the net proceeds from the IPO of $986 million;
. the net proceeds of $122 million from the issuance of Series D Preferred
Stock; and
. a reduction of $292 million in the cash balance from the high level at
the beginning of the year.
While our portfolio demonstrated increasing liquidity in both its longer
term loans and in the increased proportion of factored receivables and
revolving loans, we continued to maintain a conservative funding posture, with
commercial paper and short-term borrowings amounting to 35% of total debt at
December 31, 1998 compared to 36% at the end of 1997.
As of December 31, 1998:
. Our committed bank credit and asset sale facilities totaled $5.1 billion
and represented 142% of our outstanding commercial paper and short-term
borrowings.
. Committed bank credit and asset sale facilities in the United States
also were well in excess of 100% of U.S. commercial paper borrowings at
December 31, 1998.
. We had approximately $3.7 billion in available liquidity support under
three agreements, the longest of which is a 5-year facility expiring
April 8, 2002. The total committed credit and asset sale facilities
include $414 million of additional alternative liquidity which is
available by discounting eligible French receivables with the French
Central Bank since Factofrance is a registered financial institution in
France. In addition, the consolidated international subsidiaries are
funded primarily through short-term money market and bank borrowings,
which are supported by $920 million of committed foreign bank credit
facilities in local currencies.
Our factored accounts receivable facility allows us to sell an undivided
interest of up to $550 million in a designated pool of factored accounts
receivable to five bank-supported
51
<PAGE>
conduits on a limited recourse basis. As part of our array of financing
options, we utilized this facility during the year so that, as of December 31,
1998, we had sold $475 million of factored accounts receivable.
Through our wholly-owned subsidiary, Factofrance, we have an additional
factored accounts receivable sale facility. This facility allows us to sell an
undivided interest of up to 1 billion French francs in a designated pool of our
factored accounts receivable to one bank-sponsored conduit on a limited
recourse basis. As of December 31, 1998, approximately 1 billion French francs
(or $188 million) of receivables were sold under this facility.
In July 1998, we filed with the Securities and Exchange Commission a shelf
registration statement covering the sale of up to $5 billion in debt
securities, senior preferred stock and Class A Common Stock. As of December 31,
1998, $4.2 billion was available under this shelf registration.
In December 1998, we established a 364-day asset backed sale facility 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 December 31, 1998, $434
million of equipment receivables were sold under this facility.
In December 1998, we also established a $250 million committed warehouse
line, which expires in June 1999, to finance CMBS. As of December 31, 1998, we
had not borrowed under this facility.
In December 1998, we issued $125 million of Senior Preferred Stock, Series
D at a purchase price of $100 per share. We used the net proceeds from the sale
for general corporate purposes.
In addition to these alternate sources of liquidity, we have access to $500
million of additional liquidity support under the Keep Well Agreement between
Heller and Fuji Bank. This agreement, which cannot be terminated by either
party prior to December 31, 2002, also provides that Fuji Bank will maintain
our net worth at an amount equal to $500 million. Fuji Bank has never been
required to make any capital contribution or advance any funds to us under the
Keep Well Agreement.
Our ratio of debt (net of short-term investments) to total stockholders'
equity remained conservative relative to commercial finance industry peers at
5.2 times at December 31, 1998 and December 31, 1997. Leverage and the level of
commercial paper and short-term borrowings continued to remain within ranges we
have targeted to maintain a strong financial position.
Accounting Developments
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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 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 its 2000 interim financial statements.
52
<PAGE>
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, will be completed for that system in
the second quarter of 1999, and is scheduled for completion in 1999 for
all other matters; and
. validation, which is scheduled for completion on the final mission-
critical information technology system and certain information
technology infrastructure in the second quarter of 1999, and will
continue throughout 1999 for all other matters. 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 in 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 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.
In addition to information technology systems, we are assessing 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.
53
<PAGE>
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 is scheduled for
completion in the first quarter of 1999, with implementation to occur
throughout the year.
We have incurred approximately $10 million to date of expenses related to
the year 2000 issue and estimate that we will incur an additional amount of
approximately $6 million through the end of 1999. 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 application support,
borrowers and power companies) do not appropriately address their own year 2000
compliance issues.
Special Note Regarding Forward-Looking Statements
This Form 10-K contains, and the documents incorporated by reference herein
contain, certain "forward-looking statements" (as defined in the Securities
Exchange Act of 1934) that are based on the beliefs of our management, as well
as assumptions made by, and information currently available to, our 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 our current views and are subject to certain risks,
uncertainties and contingencies which could cause our 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:
. the success or failure of our efforts to implement our business
strategy;
. effects of economic conditions in the real estate markets, the capital
markets or certain other markets or industries we serve and the
performance of borrowers;
. changes in the volume and mix of earning assets, the level of interest
rates earned on those assets, the volume of interest-bearing liabilities
and the level of interest rates paid on those interest-bearing
liabilities;
. currency exchange rate fluctuations, economic conditions and competition
in international markets, and other international factors;
. actions of our competitors and our ability to respond to such actions;
. the cost of our capital, which depends in part on our portfolio quality,
ratings, prospects and outlook and general market conditions;
. the adequacy of our allowance for losses of receivables;
. our ability to attract and retain qualified and experienced management,
sales and credit personnel; and
. changes in governmental regulations, tax rates and similar matters.
We assume no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise.
54
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HELLER FINANCIAL, INC. AND SUBSIDIARIES
MANAGEMENT REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING
The management of Heller Financial, Inc. and its subsidiaries (the
"Company") is responsible for the preparation, integrity and objectivity of
the accompanying consolidated financial statements. The statements were
prepared in accordance with generally accepted accounting principles
reflecting, where applicable, management's best estimates and judgments. The
other financial information in the December 31, 1998 annual report filed on
Form 10-K is consistent with that contained in the consolidated financial
statements.
The Company's consolidated financial statements have been audited by Arthur
Andersen LLP, independent public accountants. Arthur Andersen LLP is engaged
to audit the consolidated financial statements and conducts such tests and
related procedures as it deems necessary in conformity with generally accepted
auditing standards. The opinion of the independent auditors, based upon their
audits of the consolidated financial statements, is contained in this Form 10-
K. Management has made available to Arthur Andersen LLP all the Company's
financial records and related data, as well as the minutes of the
stockholders' and directors' meetings.
Management is responsible for establishing and maintaining a system of
internal accounting controls and procedures to provide reasonable assurance
that assets are safeguarded and that transactions are authorized, recorded and
reported properly. The internal accounting control system is augmented by a
program of internal audits and appropriate reviews by management, written
policies and guidelines and careful selection and training of qualified
personnel. Management considers the internal auditors' and Arthur Andersen
LLP's recommendations concerning the Company's system of internal accounting
controls and takes action in a cost effective manner to appropriately respond
to these recommendations. Management believes that the Company's internal
accounting controls provide reasonable assurance that assets are safeguarded
against material loss from unauthorized use or disposition and that the
financial records are reliable for preparing financial statements and other
data and for maintaining accountability of assets.
Management also recognizes its responsibility for fostering a strong ethical
climate so that the Company's affairs are conducted according to high
standards of personal and corporate conduct. This responsibility is
characterized and reflected in the Company's code of ethical business
practices, which is publicized throughout the Company. The code of ethical
business practices addresses, among other things, the need for open
communication within the Company, potential conflicts of interest, compliance
with all domestic and foreign laws, including those relating to financial
disclosure, and the confidentiality of proprietary information.
Richard J. Almeida
Chairman and Chief Executive Officer
Lauralee E. Martin
Executive Vice President and Chief
Financial Officer
Lawrence G. Hund
Executive Vice President and
Controller
55
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Heller Financial, Inc.:
We have audited the accompanying consolidated balance sheets of HELLER
FINANCIAL, INC. (a Delaware corporation) AND SUBSIDIARIES as of December 31,
1998 and 1997, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Heller Financial, Inc. and
Subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Chicago, Illinois
January 18, 1999
(Except with respect to Note 25, as to
which the date is February 15, 1999)
56
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------
1998 1997
------- -------
(in millions)
<S> <C> <C>
ASSETS
------
Cash and cash equivalents.................................... $ 529 $ 821
Receivables (Note 5)
Commercial loans
Term loans............................................... 3,233 2,597
Revolving loans.......................................... 1,832 1,674
Real estate loans.......................................... 1,718 2,238
Factored accounts receivable............................... 2,543 2,223
Equipment loans and leases................................. 2,528 1,990
------- -------
Total receivables........................................ 11,854 10,722
Less: Allowance for losses of receivables (Note 5)......... 271 261
------- -------
Net receivables.......................................... 11,583 10,461
Equity and real estate investments (Note 6).................. 617 488
Debt securities (Note 6)..................................... 400 311
Operating leases (Note 6).................................... 321 195
Investments in international joint ventures (Note 6)......... 235 198
Other assets (Note 6)........................................ 681 387
------- -------
Total assets............................................. $14,366 $12,861
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Senior debt (Note 7)
Commercial paper and short-term borrowings................. $ 3,681 $ 3,432
Notes and debentures....................................... 6,768 6,004
------- -------
Total debt............................................... 10,449 9,436
Credit balances of factoring clients......................... 1,441 1,255
Other payables and accruals.................................. 504 405
------- -------
Total liabilities........................................ 12,394 11,096
Minority interest............................................ 10 87
Stockholders' equity (Notes 11 and 12)
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 --
Class A Common Stock ($.25 par; 500,000,000 shares
authorized; 39,030,912 shares issued and 38,738,091 shares
outstanding) (Notes 2 and 13)............................. 10 --
Class B Common Stock ($.25 par; 300,000,000 shares
authorized; 51,050,000 shares issued and outstanding)
(Note 2).................................................. 13 13
Additional paid in capital................................. 1,435 672
Retained earnings.......................................... 111 730
Treasury stock (292,821 shares) (Note 13).................. (8) --
Accumulated other comprehensive income..................... 1 (12)
------- -------
Total stockholders' equity............................... 1,962 1,678
------- -------
Total liabilities and stockholders' equity............... $14,366 $12,861
======= =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
57
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Year Ended
December 31,
------------------
1998 1997 1996
------ ----- -----
(in millions)
<S> <C> <C> <C>
Interest income............................................. $1,047 $ 924 $ 807
Interest expense............................................ 624 516 452
------ ----- -----
Net interest income....................................... 423 408 355
Fees and other income (Note 14)............................. 206 206 79
Factoring commissions....................................... 124 104 55
Income of international joint ventures...................... 30 36 44
------ ----- -----
Operating revenues........................................ 783 754 533
Operating expenses (Note 15)................................ 399 357 247
Provision for losses (Note 5)............................... 77 164 103
Restructuring charge (Note 16).............................. 17 -- --
------ ----- -----
Income before taxes and minority interest................. 290 233 183
Income tax provision (Note 18).............................. 93 66 43
Minority interest........................................... 4 9 7
------ ----- -----
Net income................................................ $ 193 $ 158 $ 133
====== ===== =====
Dividends on preferred stock.............................. $ 21 $ 14 $ 10
====== ===== =====
Net income applicable to common stock..................... $ 172 $ 144 $ 123
====== ===== =====
Basic and diluted net income applicable to common stock
per share (Note 19)...................................... $ 2.23 $2.82 $2.41
====== ===== =====
Pro forma basic net income applicable to common stock per
share (Note 19).......................................... $ 1.92 $1.60
====== =====
Pro forma diluted net income applicable to common stock
per share (Note 19)...................................... $ 1.91 $1.60
====== =====
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
58
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended
December 31,
----------------------
1998 1997 1996
------ ------ ------
(in millions)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................ $ 193 $ 158 $ 133
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses.................................. 77 164 103
Losses from equity investments........................ 33 50 103
Amortization and depreciation......................... 25 23 14
Provision for deferred tax asset (benefit)............ 33 (19) 12
Increase (decrease) in accounts payable and accrued
liabilities.......................................... 2 29 (1)
Undistributed income of international joint ventures.. (20) (19) (38)
Increase (decrease) in interest payable............... 21 11 (11)
Other................................................. (4) 9 (36)
------ ------ ------
Net cash provided by operating activities............ 360 406 279
INVESTING ACTIVITIES
Increase in longer-term loans
Due to acquisition of Dealer Products Group........... (579) -- --
Due to fundings....................................... (6,486) (5,311) (3,372)
Collections of principal.............................. 2,810 2,904 2,521
Loan sales, securitizations and syndications.......... 4,068 2,238 757
Net increase in short-term loans and advances to
factoring clients
Due to consolidation of Factofrance................... -- (1,018) --
Other................................................. (874) (526) (427)
Investment in operating leases
Due to acquisition of Dealer Products Group........... (35) -- --
Other................................................. (170) (119) (33)
Investment in equity interests and other investments.. (536) (369) (272)
Dealer Products Group goodwill........................ (187) -- --
Sales of investments and equipment on lease........... 362 365 168
Factofrance goodwill and noncompetition agreement..... -- (96) --
Other................................................. (54) 26 3
------ ------ ------
Net cash used for investing activities............... (1,681) (1,906) (655)
FINANCING ACTIVITIES
Senior note issues.................................... 2,780 2,599 976
Retirement of notes and debentures.................... (2,020) (1,411) (1,358)
Increase (decrease) in commercial paper and other
short-term borrowings
Due to consolidation of Factofrance................... -- 966 --
Other................................................. 249 (279) 522
Net proceeds from preferred stock issuance............ 122 147 --
Net proceeds from common stock issuance............... 991 -- --
Repurchase of Class A Common Stock (Note 13).......... (8) -- --
Net (increase) decrease in advances to affiliates..... (32) 49 5
Dividends paid on preferred and common stock.......... (1,027) (57) (68)
Other................................................. (26) 11 (4)
------ ------ ------
Net cash provided by financing activities............ 1,029 2,025 73
Increase (decrease) in cash and cash equivalents....... (292) 525 (303)
Cash and cash equivalents at the beginning of the year. 821 296 599
------ ------ ------
Cash and cash equivalents at the end of the year....... $ 529 $ 821 $ 296
====== ====== ======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
59
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Noncum.
Perp. Sr. Perpetual Accum.
Perpetual Pref. Sr. Pref. Class A Class B Other
Sr. Pref. Stock Stock Common Common Treasury Add'l Compre- Compre-
Stock Series Series D Stock Stock Stock Paid In hensive Retained hensive
Series A B/C (Note 11) (Note 2) (Note 2) (Note 13) Capital Income Earnings Total Income
--------- --------- --------- -------- -------- --------- ------- ------- -------- ------ -------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31,
1995............. $125 -- -- -- $13 -- $ 675 $(19) $590 $1,384
Comprehensive
Income:
Net income........ -- -- -- -- -- -- -- -- 133 133 $133
Other
comprehensive
income, net of
tax:
Unrealized gain
on securities,
net of tax of
$6.............. -- -- -- -- -- -- -- -- -- 18 18
----
Other
comprehensive
income.......... -- -- -- -- -- -- -- 18 -- -- 18
----
Comprehensive
income........... -- -- -- -- -- -- -- -- -- -- $151
====
Preferred stock
dividends (Notes
11 and 12)....... -- -- -- -- -- -- -- -- (10) (10)
Common stock
dividends (Note
12).............. -- -- -- -- -- -- -- -- (58) (58)
---- ---- ---- --- --- --- ------ ---- ---- ------
BALANCE AT
DECEMBER 31,
1996............. $125 -- -- -- $13 -- $ 675 $ (1) $655 $1,467
Comprehensive
Income:
Net income........ -- -- -- -- -- -- -- -- 158 158 $158
Other
comprehensive
income, net of
tax:
Unrealized gain
on securities,
net of tax of $
(2)............. -- -- -- -- -- -- -- -- -- (5) (5)
Foreign currency
translation
adjustments, net
of tax of $ (2). -- -- -- -- -- -- -- -- -- (6) (6)
----
Other
comprehensive
income.......... -- -- -- -- -- -- -- (11) -- -- (11)
----
Comprehensive
income........... -- -- -- -- -- -- -- -- -- -- $147
====
Issuance of
Noncumulative
Perpetual Senior
Preferred Stock,
Series B......... -- 150 -- -- -- -- (3) -- -- 147
Preferred stock
dividends (Notes
11 and 12)....... -- -- -- -- -- -- -- -- (14) (14)
Common stock
dividends (Note
12).............. -- -- -- -- -- -- -- -- (69) (69)
---- ---- ---- --- --- --- ------ ---- ---- ------
BALANCE AT
DECEMBER 31,
1997............. $125 $150 -- -- $13 -- $ 672 $(12) $730 $1,678
Comprehensive
Income:
Net income........ -- -- -- -- -- -- -- -- 193 193 $193
Other
comprehensive
income, net of
tax:
Unrealized gain
on securities,
net of tax of
$7.............. -- -- -- -- -- -- -- -- -- 14 14
Foreign currency
translation
adjustments, net
of tax of $ (1). -- -- -- -- -- -- -- -- -- (1) (1)
----
Other
comprehensive
income.......... -- -- -- -- -- -- -- 13 -- -- 13
----
Comprehensive
income........... -- -- -- -- -- -- -- -- -- -- $206
====
Issuance of
Noncumulative
Perpetual Senior
Preferred Stock,
Series D......... -- -- 125 -- -- -- (3) -- -- 122
Issuance of Class
A Common Stock
(Note 2)......... -- -- -- 10 -- -- 981 -- -- 991
Repurchase of
Class A Common
Stock (Note 13).. -- -- -- -- -- (8) -- -- -- (8)
Preferred stock
dividends (Notes
11 and 12)....... -- -- -- -- -- -- -- -- (21) (21)
Common stock
dividends (Notes
2 and 12)........ -- -- -- -- -- -- (215) -- (791) (1,006)
---- ---- ---- --- --- --- ------ ---- ---- ------
BALANCE AT
DECEMBER 31,
1998............. $125 $150 $125 $10 $13 $(8) $1,435 $ 1 $111 $1,962
==== ==== ==== === === === ====== ==== ==== ======
</TABLE>
The accumulated other comprehensive income balance included $22 million, $8
million and $13 million of unrealized gains on securities available for sale
at December 31, 1998, 1997 and 1996, respectively. Accumulated other
comprehensive income also included deferred foreign currency translation
adjustments, net of tax, of $(21) million, $(20) million and $(14) million at
December 31, 1998, 1997 and 1996, respectively.
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
60
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Description of the Reporting Entity--
Heller Financial, Inc. and its subsidiaries (the "Company") are engaged
principally in furnishing commercial finance services to businesses in the
United States and investing in and operating commercial finance companies
throughout the world. The Company provides its products and services to mid-
sized and small businesses principally through two business segments, namely
Domestic Commercial Finance and International Factoring and Asset Based
Finance. The Domestic Commercial Finance segment is comprised of five business
units: (i) Heller Corporate Finance ("Corporate Finance"), (ii) Heller Real
Estate Financial Services ("Real Estate Finance"), (iii) Heller Leasing
Services ("Leasing Services"), (iv) Heller Small Business Finance ("Small
Business Finance"), and (v) Heller Commercial Services ("Commercial
Services"). The International Factoring and Asset Based segment, managed by
Heller International Group, Inc. ("International Group"), provides
international factoring and asset based financing to medium size and small
companies.
Prior to 1998, all of the common stock of the Company was owned by Heller
International Corporation ("HIC"), a wholly-owned subsidiary of The Fuji Bank,
Limited ("Fuji Bank"), of Tokyo, Japan. In addition, Fuji Bank directly owned
21% of the outstanding shares of International Group, a consolidated
subsidiary, through which the Company holds its international operations. The
remaining 79% of the outstanding shares of International Group were owned by
the Company.
Effective January 1998, Fuji Bank formed Fuji America Holdings, Inc.
("FAHI"), to combine Fuji Bank's United States non-bank operations under one
holding company and transferred ownership of the Company from HIC to FAHI.
In May 1998, the Company issued 38,525,000 shares of Class A Common Stock in
an initial public offering (the "Offering") and 505,912 shares of restricted
Class A Common Stock were issued to management of the Company during 1998.
After the Offering and the issuance of shares to management, there were
90,080,912 shares of common stock of the Company issued resulting in FAHI's
ownership of 79% of the voting interest and 57% of the economic interest of
the Company's issued common stock. See Note 2 "Initial Public Offering" for
more details. In May 1998, the Company also purchased the 21% interest held by
Fuji Bank in International Group and now owns 100% of International Group.
Basis of Presentation--
The accompanying consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries. All significant inter-company
accounts and transactions have been eliminated in consolidation. Investments
in affiliated companies owned 50% or less are accounted for by the equity
method. Certain temporary interests are included in investments and carried at
cost.
Use of Estimates--
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents--
Cash and cash equivalents consist of cash deposits maintained in banks and
short-term debt securities with original maturities of less than 60 days.
61
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Receivables--
Receivables are presented net of unearned income which generally includes
deferred loan origination and commitment fees, direct loan origination costs
and other amounts attributed to the fair value of equity interests and other
investments received in connection with certain financings. These amounts are
amortized to interest income using the effective interest method over the life
of the related loan, lease or commitment period.
The Company originates certain loans which may be syndicated or portions
sold to participants to manage borrower, industry or product concentrations.
These receivables are also presented net of unearned income. In the event the
Company sells a portion of a loan that it had originated, any deferred fees or
discounts relating to the portion of the loan sold are recognized in interest
income. For loan sales that qualify as participations, income is recognized
when the participation is complete.
Income recognition is reviewed on an account by account basis. Collateral is
evaluated regularly, primarily by assessing the related current and future
cash flow streams of the estimated value of the equipment, or by assessing the
value of the property underlying the receivable. Loans are classified as
nonearning and all interest and unearned income amortization is suspended when
there is significant doubt as to the ability of the debtor to meet current
contractual terms. Numerous factors including loan covenant defaults,
deteriorating loan-to-value relationships, delinquencies greater than 90 days,
the sale of major income generating assets or other major operational or
organizational changes may lead to income suspension. An account taken
nonearning may be restored to earning status either when all delinquent
principal and interest have been paid under the original contractual terms or
the account has been restructured and has demonstrated both the capacity to
service the amended terms of the debt and has adequate loan to value coverage.
Allowance for Losses--
The allowance for losses of receivables is established through direct
charges to income. Losses are charged to the allowance when all or a portion
of a receivable is deemed impaired and uncollectible as determined by account
management procedures. These procedures include assessing how the borrower is
affected by economic and market conditions, evaluating operating performance
and reviewing loan-to-value relationships. Impaired receivables are measured
based on the present value of expected future cash flows discounted at the
receivable's effective interest rate, at the observable market price of the
receivable or at the fair value of the collateral if the receivable is
collateral dependent. When the recorded balance of an impaired receivable
exceeds the relevant measure of value, impairment is recorded through an
increase in the provision for losses.
Management evaluates the allowance for losses on a quarterly basis.
Nonearning assets and loans with certain loan grading characteristics are
reviewed to determine if there is a potential risk of loss under varying
scenarios of performance. The estimates of potential loss for these individual
loans are aggregated and added to a general allowance requirement, which
reflects the Company's estimates of inherent losses within its lending
portfolio based on general economic factors, related industry performance,
historical losses and other judgmental factors. This total allowance
requirement is then compared to the existing allowance for losses and
adjustments are made, if necessary.
Securitized Receivables--
Certain commercial mortgage, equipment and small business loans and leases
have been securitized and sold to investors. In the securitization process,
loans are originated and sold to trusts which, in turn, issue asset-backed
securities to investors. Upon the sale of the loans in a securitization, a
gain is recognized for the difference between the allocated carrying value of
the receivables and the fair value of the securities sold, in accordance with
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing
62
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of Financial Assets and Extinguishment of Liabilities" ("SFAS 125"). If the
Company does not retain any interest in the transaction and sells all of the
securities to third party investors on a nonrecourse basis, the gain recorded
equals the proceeds on the transaction less the carrying value of the
securities sold. If the Company retains any of the securities, then the gain
on sale is reduced by any reserve established for estimated future losses.
Retained securities are recorded at estimated fair market value based on
estimated future cash flows discounted at a market rate of interest and
adjusted for recourse reserves and certain other expenses at the time of the
transaction and are classified as debt securities available for sale. The gain
recognized is recorded in fees and other income. In general, the Company does
not establish servicing assets or liabilities because in securitization
transactions to date, the servicing fees earned are considered consistent with
market rates. Discounts and deferred fees attributed to the loans sold are
accelerated into income.
According to SFAS 125, as amended by Statement of Financial Accounting
Standards No. 127, "Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125," collectively referred to as SFAS 125, after a
transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered and derecognizes liabilities when
extinguished. This Statement provides standards for distinguishing transfers
of financial assets that are sales from transfers that are secured borrowings.
Securitizations of finance receivables are accounted for as sales when legal
and effective control over the related receivables is surrendered. Servicing
assets or liabilities are recognized when the servicing rights are retained by
the seller and when servicing fees vary from market rates.
Investments in Joint Ventures--
Investments in unconsolidated joint ventures represent investments in
companies with operations in 16 foreign countries. The Company accounts for
its investments in joint ventures under the equity method of accounting. Under
this method, the Company recognizes its share of the earnings or losses of the
joint venture in the period in which they are earned by the joint venture.
These amounts are recorded as income of international joint ventures in the
consolidated statements of income. Dividends received from joint ventures
reduce the carrying amount of the investment.
Investments--
Equity interests and investments--Investments in warrants, certain common
and preferred stocks and certain equity investments, which are not subject to
the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," are
carried at cost. The valuation of all of these investments is periodically
reviewed and the investment balance is written down to reflect declines in
value determined to be other than temporary. Gains or losses recognized upon
sale or write-down of these investments are recorded as a component of fees
and other income. Certain other equity investments in limited partnership
funds are accounted for under the equity method of accounting in accordance
with Accounting Principles Board Opinion No. 18, "The Equity Method of
Accounting for Investments in Common Stock."
Equipment on lease--Aircraft and equipment under operating lease are
recorded at cost and depreciated over their estimated useful lives using the
straight line method for financial reporting purposes and accelerated methods
for tax purposes. Rental revenue is reported over the lease term as it is
earned according to the provisions of the lease.
Available for sale and held to maturity securities--Investments designated
as available for sale securities are carried at fair value using the specific
identification method with unrealized gains or losses included in
stockholders' equity, net of related taxes. Securities that are held to
maturity are recorded at amortized cost.
63
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Available for sale and held to maturity securities may be written down to fair
value to reflect declines in value determined to be other than temporary. The
amount of any writedown is included in fees and other income.
Real Estate Investments--The Company provides financing through certain real
estate loan arrangements that are recorded as acquisition, development and
construction investment transactions by the Company. Income is generally
recognized only to the extent that cash received exceeds the investment
carrying amount.
Other Assets--
Repossessed Assets--Assets which have been legally acquired in satisfaction
of receivables are carried at fair value less selling costs and are included
in other assets. After repossession, operating costs are expensed and cash
receipts are applied to reduce the asset balance.
Goodwill--The excess of the cost of an acquisition of an entity over the
book value of the acquired entity's net assets is recorded as goodwill and
amortized on a straight line basis over the expected beneficial period of the
acquisition not to exceed 25 years.
Income Taxes--
The Company and its wholly-owned domestic subsidiaries were included in the
consolidated United States federal income tax return of HIC through 1997 and
in the consolidated United States federal income tax return of FAHI from
January 1998 through the date of the Offering. Subsequent to the Offering, the
Company files its own United States federal income tax return. The Company
records future tax benefits as soon as it is more likely than not that such
benefits will be realized.
International Group filed a separate United States federal income tax return
through April 1998. Subsequent to that date, International Group is included
in the consolidated United States federal income tax return of the Company.
Derivative Financial Instruments--
Derivatives are used as an integral part of asset/liability management to
reduce the overall level of financial risk arising from normal business
operations. These derivatives are used to lower funding costs, diversify
sources of funding, alter interest rate exposure arising from mismatches
between assets and liabilities and to reduce the Company's exposure to foreign
currency fluctuations. The Company is not a trader in derivative securities,
nor has it used speculative derivative products for the purpose of generating
earnings from changes in market conditions.
Before entering into a derivative transaction, management determines that a
high correlation exists between the change in value of the hedged item and the
value of the derivative. At the inception of each transaction, management
designates the derivative to specific assets, pools of assets or liabilities.
The risk that a derivative will become an ineffective hedge is generally
limited to the possibility that an asset or liability being hedged will prepay
or be repaid early, before the related derivative matures. Accordingly, after
inception of a hedge, asset/liability managers monitor its effectiveness
through an ongoing review of the amounts and maturities of assets, liabilities
and derivative positions. This information is reported to the Company's
Financial Risk Management Committee ("FRMC") whose members include the
Company's Chairman, Chief Financial Officer and Treasurer. The FRMC determines
the direction the Company will take with respect to its financial risk
position and regularly reviews interest rate sensitivity, foreign exchange
exposure, funding needs and liquidity. These positions of the Company and the
related activities of the FRMC are reported regularly to the Executive
Committee of the Board of Directors and to the Board of Directors.
64
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company enters into interest rate swap agreements in order to modify the
interest characteristics of its outstanding assets and liabilities for the
purpose of limiting exposure to changes in interest rates. The interest rate
swap agreements are designated as hedges of their underlying assets and
liabilities. Interest rate swap agreements entered into by the Company are
generally held to maturity and the differential paid or received, as interest
rates change, is accrued and recognized as an adjustment of interest expense
or interest income over the life of the respective agreement. The related
amount payable to or receivable from counterparties is included in other
liabilities or other assets. Gains or losses on terminated interest rate swaps
that were hedges of underlying assets or obligations are amortized to interest
income or interest expense over the remaining life of the related underlying
obligation. If the underlying asset or obligation is sold, the gain or loss
related to closing the swap is recognized currently in income.
The Company also periodically enters into forward currency exchange
contracts. These financial instruments serve as hedges of its foreign
investment in international subsidiaries and joint ventures or effectively
hedge the translation of the related foreign currency income. Through these
contracts, the Company primarily sells the respective local currency and buys
U.S. dollars. Gains or losses on terminated foreign currency exchange
contracts, which were hedges of net investments in a foreign subsidiary or
joint venture, continue to be deferred and are recognized when the
international investment is sold or is substantially liquidated. Gains or
losses resulting from translation of foreign currency financial statements and
the related effects of the hedges of net investments in joint ventures and
subsidiaries outside the United States, are accumulated in stockholders'
equity, net of related taxes, until the international investment is sold or
substantially liquidated. The change in fair value of contracts, which serve
to effectively hedge the translation of foreign currency income, is included
in the determination of net income.
Stock Based Compensation--
The Company accounts for stock option and stock awards in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). In accordance with APB 25, no compensation expense is
recognized for stock options or awards issued under its stock incentive plan
as the exercise price of the stock options equaled the market value of the
stock on the grant dates.
The restricted stock issued during 1998 was recorded as deferred
compensation at the issue price and is amortized to compensation expense on a
straight-line basis over the vesting period.
Reclassifications--
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
2. Initial Public Offering
In May 1998, the Company issued 38,525,000 shares of Class A Common Stock in
an initial public offering (the "Offering"). The net proceeds to the Company
were $986 million, $450 million of which was used to repay indebtedness of the
Company consisting of a $450 million subordinated note to Fuji America
Holdings, Inc. ("FAHI"), a wholly owned subsidiary of The Fuji Bank, Limited
("Fuji Bank"), issued February 24, 1998 for a previously declared dividend to
FAHI, and $533 million of which was paid as a cash dividend to FAHI. The
51,050,000 outstanding Class B Common Shares are held by FAHI. In addition,
505,912 shares of restricted Class A Common Stock were issued to management of
the Company during 1998. The holders of Class A Common Stock are entitled to
one vote per share and the holders of Class B Common Stock are entitled to
three votes per share (except that the outstanding shares of Class B Common
Stock may never represent more than 79% of the combined voting power of all
outstanding shares of the Company's voting stock). After the offering and the
issuance of shares to management, there were 90,080,912 shares of common stock
of the Company
65
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ssued resulting in FAHI's ownership of 79% of the voting interest and 57% of
the economic interest of the Company's issued common stock. Prior to May 1998,
FAHI owned 100% of the issued and outstanding common stock of the Company.
In anticipation of an initial public offering, the Company amended its
Restated Certificate of Incorporation increasing the number of authorized
shares of Common Stock. The total number of shares of stock which the Company
has authority to issue is 852 million, of which 2 million shares, no par
value, are designated "Preferred Stock", 50 million shares, of the par value
of $0.01 each, are designated "Senior Preferred Stock" and 800 million shares,
of the par value of $0.25 each, are designated "Common Stock." The Company's
Certificate of Incorporation, as amended, now authorizes two classes of Common
Stock, Class A Common Stock and Class B Common Stock. The authorization of the
two classes of Common Stock has been retroactively reflected in the Company's
consolidated financial statements.
3. Acquisition of Factofrance
In April 1997, International Group purchased the interest of its joint
venture partner in Factofrance Heller, S.A. ("Factofrance") for $174 million.
As a result, International Group increased its ownership interest in
Factofrance from 48.8% to 97.6%. International Group has held an interest in
Factofrance for over 30 years, using the equity method of accounting for its
previous ownership position. Factofrance, founded in 1965, is the leading
factoring company in the French marketplace. Factofrance is headquartered in
Paris and has regional sales offices covering local markets.
The Factofrance acquisition was accounted for using the purchase method of
accounting in accordance with Accounting Principles Board Opinion No. 16,
"Business Combinations." Under this method of accounting, the purchase price
was allocated to assets acquired and liabilities assumed based on their
estimated fair values at the date of purchase. Goodwill related to the
acquisition was $78 million and is being amortized over 25 years. The
acquisition price included $18 million for a noncompetition agreement which is
being amortized over the five year life of the agreement.
The following table presents unaudited pro forma combined income statements
of the Company and Factofrance and its subsidiaries for the years ended
December 31, 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 the Company and Factofrance for
1998 and 1997 have been adjusted to reflect the amortization of goodwill, the
amortization of the noncompetition agreement and the costs of financing for
the transaction.
66
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
This information is intended for informational purposes only and is not
necessarily indicative of the future results of operations of the Company or
of the results of operations of the Company that would have occurred had the
acquisition been effective in the periods presented.
<TABLE>
<CAPTION>
For the
Year Ended
December 31,
--------------
1998 1997
------- ------
(in millions)
(unaudited)
<S> <C> <C>
Interest income............................................ $ 1,047 $ 940
Interest expense........................................... 624 526
------- -----
Net interest income...................................... 423 414
Fees and other income...................................... 206 215
Factoring commissions...................................... 124 118
Income of international joint ventures..................... 30 33
------- -----
Operating revenues....................................... 783 780
Operating expenses......................................... 399 377
Provision for losses....................................... 77 167
Restructuring charge....................................... 17 --
------- -----
Income before income taxes and minority interest......... 290 236
Income tax provision....................................... 93 67
Minority interest.......................................... 4 10
------- -----
Net income............................................... $ 193 $ 159
======= =====
</TABLE>
4. Acquisition of the Dealer Products Group
On November 30, 1998, the Company acquired, through its 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") for approximately $775 million,
subject to any purchase price adjustments to be finalized in 1999. The
purchase price includes the assumption and repayment of approximately $260
million of the international subsidiaries' debt. The U.S. and international
subsidiaries of the Dealer Products Group provide customized leasing and
financing to commercial enterprises primarily for the acquisition of computer
and telecommunications equipment. The Dealer Products Group is a recognized
leader in the leasing industry and has operations in the United States,
Canada, United Kingdom, Germany, Switzerland and France.
The Dealer Products Group acquisition was accounted for using the purchase
method of accounting in accordance with Accounting Principles Board Opinion
No. 16, "Business Combinations." Preliminary estimates of goodwill related to
the acquisition totaled $187 million and is being amortized over 25 years. The
Company's 1998 consolidated statement of income includes the results of
operations of the Dealer Products Group since the acquisition date.
The following table presents unaudited pro forma combined income statements
of the Company and the Dealer Products Group for the years ended December 31,
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 the Company and the Dealer Products Group for 1998
and 1997 have been adjusted to reflect the amortization of goodwill and the
costs of financing for the transaction.
67
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
This information is intended for informational purposes only and is not
necessarily indicative of the future results of operations of the Company or
of the results of operations of the Company that would have occurred had the
acquisition been effective in the periods presented.
<TABLE>
<CAPTION>
For the
Year Ended
December 31,
-------------
1998 1997
------ ------
(in millions)
(unaudited)
<S> <C> <C>
Interest income............................................ $1,116 $1,000
Interest expense........................................... 663 561
------ ------
Net interest income...................................... 453 439
Fees and other income...................................... 217 218
Factoring commissions...................................... 124 104
Income of international joint ventures..................... 30 36
------ ------
Operating revenues....................................... 824 797
Operating expenses......................................... 435 394
Provision for losses....................................... 87 176
Restructuring charge....................................... 17 --
------ ------
Income before income taxes and minority interest......... 285 227
Income tax provision....................................... 89 63
Minority interest.......................................... 4 9
------ ------
Net income............................................... $ 192 $ 155
====== ======
</TABLE>
5. Lending Assets
Lending assets include receivables and repossessed assets.
Total receivables at December 31, 1998 consist of $9.5 billion of domestic
commercial finance receivables and $2.4 billion of international factoring and
asset based finance receivables. Of the international receivables, $2.3
billion represent factored accounts receivable of which $2.1 billion relate to
Factofrance and $0.2 billion are from the other foreign consolidated
subsidiaries. Total receivables at December 31, 1997 consist of $8.6 billion
of domestic receivables and $2.1 billion of foreign receivables.
Diversification of Credit Risk--
Concentrations of lending assets of 5% or more at December 31, 1998 and
1997, based on the standard industrial classification of the borrower, are as
follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
-------------- --------------
Amount Percent Amount Percent
------ ------- ------ -------
(dollars in millions)
<S> <C> <C> <C> <C>
Department and general merchandise retail
stores................................... $935 8% $511 5%
Computers................................. 811 7 164 2
General industrial machines............... 732 6 637 6
Automotive................................ 667 6 714 7
Transportation............................ 666 6 294 3
Food, grocery and other miscellaneous
retail................................... 650 5 603 6
</TABLE>
68
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The department and general merchandise retail stores category is primarily
comprised of factored accounts receivable which represent short-term trade
receivables from numerous customers. The computers category consists of
software/hardware distributors and manufacturers, plastic component
manufacturers, and disk drive designers. The total of this category increased
in 1998 due to the Dealer Products Group acquisition. The general industrial
machines classification is distributed among machinery used for many different
industrial applications. The automotive category is primarily comprised of
auto parts distributors and wholesalers, resale and leasing services in the
automotive and aircraft industries, and maintenance services for automotive
and aircraft parts. The lending assets in the transportation category
primarily arise from chartered aircraft services and transportation services
of freight, cargo, and various packages. The majority of lending assets in the
food, grocery and miscellaneous retail category are revolving and term
facilities with borrowers primarily in the business of manufacturing and
retailing of food products.
Contractual Maturity of Loan Receivables--
The contractual maturities of the Company's receivables at December 31,
1998, which are presented in the table below, should not be regarded as a
forecast of cash flows (in millions):
<TABLE>
<CAPTION>
After
1999 2000 2001 2002 2003 2003 Total
------ ------ ------ ------ ---- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial loans............ $ 953 $ 515 $ 606 $ 759 $561 $1,671 $ 5,065
Real estate loans........... 242 200 172 90 56 958 1,718
Factored accounts
receivable................. 2,543 -- -- -- -- -- 2,543
Equipment loans and leases.. 746 561 405 248 200 368 2,528
------ ------ ------ ------ ---- ------ -------
Total..................... $4,484 $1,276 $1,183 $1,097 $817 $2,997 $11,854
====== ====== ====== ====== ==== ====== =======
</TABLE>
Commercial loans consist principally of senior loans secured by receivables,
inventory or property plant and equipment. Real estate loans are principally
collateralized by first mortgages on commercial and residential real estate.
Factored accounts receivable are purchased from clients and the Company
provides credit and collection services in return for a commission. Equipment
loans and leases are secured by the underlying equipment and the Company may
have at least partial recourse to the equipment vendor. Of the loans maturing
after 1999, $2.9 billion have fixed interest rates and $4.5 billion have
floating interest rates.
Impaired Receivables, Repossessed Assets, and Troubled Debt Restructurings--
The Company does not recognize interest and fee income on impaired
receivables or repossessed assets, both of which are classified as nonearning,
as set forth in the following table:
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
---------- ----------
(dollars in millions)
<S> <C> <C>
Impaired receivables............................. $ 208 $ 141
Repossessed assets............................... 3 14
---------- ----------
Total nonearning assets........................ $ 211 $ 155
========== ==========
Ratio of total nonearning assets to total lending
assets.......................................... 1.8% 1.4%
</TABLE>
Nonearning assets include $26 million and $19 million in 1998 and 1997,
respectively, for consolidated international subsidiaries.
69
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The average investment in impaired receivables was $160 million and $236
million for the years ended December 31, 1998 and 1997, respectively.
The Company had $14 million and $13 million of loans that are considered
troubled debt restructurings at December 31, 1998 and December 31, 1997,
respectively. The following table indicates the effect on income if interest
on nonearning impaired receivables and troubled debt restructurings
outstanding at year-end had been recognized at original contractual rates
during the year:
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
December 31, December 31,
---------------------- ----------------------
1998 1997 1996 1998 1997 1996
------ ------ ------ ------ ------ ------
Domestic Foreign
---------------------- ----------------------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Interest income which
would have been
recorded................ $ 15 $ 16 $ 40 $ 15 $ 12 $ 6
Interest income recorded. 4 3 13 -- 1 1
------ ------ ------ ------ ------ ------
Effect on interest
income.................. $ 11 $ 13 $ 27 $ 15 $ 11 $ 5
====== ====== ====== ====== ====== ======
</TABLE>
Loan Modifications--
The Company had $11 million of receivables at December 31, 1998 that were
restructured at a market rate of interest and written down from the original
loan balance. The recorded investment of these receivables is expected to be
fully recoverable. Interest income of approximately $531,000 has been recorded
on these receivables under modified terms, along with approximately $506,000
of cash interest collections during 1998. At December 31, 1998, the Company
was not committed to lend significant additional funds under the restructured
agreements.
Allowance for Losses--
The changes in the allowance for losses of receivables and repossessed
assets were as follows:
<TABLE>
<CAPTION>
For the Year Ended
December 31,
----------------------
1998 1997 1996
------ ------ ------
(in millions)
<S> <C> <C> <C>
Balance at the beginning of the year.............. $ 261 $ 225 $ 231
Provision for losses............................ 77 164 103
Writedowns...................................... (145) (169) (163)
Recoveries...................................... 64 23 55
Factofrance consolidation....................... -- 18 --
Dealer Products Group acquisition............... 18 -- --
Transfers and other............................. (4) -- (1)
------ ------ ------
Balance at the end of the year.................... $ 271 $ 261 $ 225
====== ====== ======
</TABLE>
70
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Impaired receivables with identified reserve requirements were $136 million
and $62 million at December 31, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
---------- ----------
(dollars in millions)
<S> <C> <C>
Identified reserve requirements for impaired
receivables..................................... $ 44 $ 27
Additional allowance for losses of receivables... 227 234
---------- ----------
Total allowance for losses of receivables...... $ 271 $ 261
========== ==========
Ratio of total allowance for losses of
receivables to nonearning impaired receivables.. 130% 185%
</TABLE>
The Company maintains an allowance for losses of receivables based upon
management's estimate of future possible losses in the portfolio of
receivables. Management's estimate is based upon current and forecasted
economic conditions, previous loss history and knowledge of clients' financial
positions and values of underlying collateral. Changes in these estimates
could result in an increase or decrease in the reserve maintained.
6. Investments and Other Assets
Investments in International Joint Ventures--
The following table sets forth a summary of the financial results of the
international joint ventures on a combined basis:
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
---------- ----------
(dollars in millions)
<S> <C> <C>
Total receivables................................... $ 3,625 $ 3,356
Factoring volume.................................... 24,201 18,154
Net income.......................................... 52 55
</TABLE>
The following table shows the investment in international joint ventures by
geographic region:
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
---------- ----------
(dollars in millions)
<S> <C> <C>
Europe.............................................. $ 194 $ 160
Latin America....................................... 21 22
Asia/Pacific........................................ 16 16
North America....................................... 4 --
---------- ----------
Total............................................. $ 235 $ 198
========== ==========
</TABLE>
The Company owns interests of 40% to 50% in these joint ventures. The
Company's largest investment in international joint ventures is NMB-Heller
Holding N.V., which accounts for 56% of the total investments in international
joint ventures. NMB-Heller Holding N.V. operates finance companies primarily
located in the Netherlands, Germany and the United Kingdom. The Company's
investment in NMB-Heller Holding N.V. totaled $131 million and $107 million at
December 31, 1998 and 1997, respectively. NMB-Heller Holding N.V. had total
receivables of $2.8 billion and $2.2 billion, and revenues of $180 million and
$151 million at December 31, 1998 and 1997, respectively.
71
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other Investments--
The following table sets forth a summary of the major components of equity
and real estate investments (in millions):
<TABLE>
<CAPTION>
December 31,
-------------
1998 1997
------ ------
<S> <C> <C>
Real estate investments.................................... $ 271 $ 268
Equity interests and investments........................... 258 205
Available for sale equity securities....................... 88 15
------ ------
Total Equity and real estate investments................. $ 617 $ 488
====== ======
</TABLE>
Real estate investments are acquisition, development and construction
investment transactions. At December 31, 1998, the Company held investments in
207 projects with balances ranging up to $8.2 million.
Equity interests and investments principally include common and preferred
stock and investments in limited partnerships and warrants.
The available for sale equity securities are principally comprised of shares
of common stock. Net unrealized holding gains on these securities were $52
million, $7 million and $28 million at December 31, 1998, 1997 and 1996,
respectively, and are recorded in stockholders' equity on a net of tax basis.
The Company's debt securities are all available for sale debt securities and
consist of purchased investments in debt securities and $112 million of
securities retained in connection with the Company's various securitizations
of which $56 million are rated "BB" or higher. No losses have been realized on
the subordinated securities to date. Net unrealized holding losses on total
available for sale debt securities were $17 million at December 31, 1998, net
unrealized holding gains were $6 million at December 31, 1997, and net
unrealized holding losses were $7 million at December 31, 1996. These amounts
are recorded in stockholder's equity on a net of tax basis. Cash and cash
equivalents includes $9 million of short-term debt securities at December 31,
1998, which are available for sale.
Included in cash and cash equivalents at December 31, 1998 and 1997,
respectively, are $168 million and $664 million of short-term debt securities
that are held to maturity.
Equipment on lease is primarily comprised of aircraft and related equipment.
Noncancellable future minimum rental receipts under the leases are $37
million, $36 million, $25 million, $13 million and $6 million for 1999 through
2003. All aircraft and related equipment was under lease as of December 31,
1998.
72
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other Assets--
The following table sets forth a summary of the major components of other
assets:
<TABLE>
<CAPTION>
December 31,
-------------
1998 1997
------ ------
(in millions)
<S> <C> <C>
Other Assets:
Goodwill................................................. $ 269 $ 82
Deferred income tax benefits, net of allowance of $5 and
$8 in 1998 and 1997, respectively....................... 229 163
Prepaid expenses and other assets........................ 106 76
Furniture, fixtures and equipment........................ 59 37
Non-Compete Agreement.................................... 12 15
Repossessed assets....................................... 3 14
Net advances to affiliates............................... 3 --
------ ------
Total other assets..................................... $ 681 $ 387
====== ======
</TABLE>
Noncash investing activities include $4 million and $17 million of
receivables which were classified as repossessed assets during the periods
ended December 31, 1998 and 1997, respectively. See Note 18 for additional
information on deferred income tax benefits.
7. Senior Debt
Commercial paper and short-term borrowings--The Company uses commercial
paper to finance its domestic operations and short-term borrowings are used by
the consolidated international subsidiaries to finance international
operations. Total commercial paper borrowings represent 26% of total debt at
December 31, 1998. Combined commercial paper and short-term borrowings
represent 35% of total debt at December 31, 1998.
The following table is a summary of the Company's commercial paper and
short-term borrowings as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
December 31,
-------------
1998 1997
------ ------
(in millions)
<S> <C> <C>
Domestic commercial paper................................... $2,450 $2,279
Factofrance commercial paper................................ 242 281
Factofrance short-term borrowings........................... 858 685
Other consolidated subsidiaries short-term borrowings....... 131 187
------ ------
Commercial paper and short-term borrowings................ $3,681 $3,432
====== ======
</TABLE>
The table below sets forth information concerning the Company's domestic
commercial paper borrowings. The average interest rates and average borrowings
are computed based on the average daily balances during the year. The Company
issues commercial paper with maturities ranging up to 270 days.
73
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(dollars in millions)
<S> <C> <C> <C>
Commercial Paper--domestic:
Average interest rate
During the year........................... 5.71% 5.67% 5.50%
During the year, including the effect of
commitment fees.......................... 5.83 5.78 5.65
At year-end, including the effect of
commitment fees.......................... 5.59 5.99 5.63
Average borrowings.......................... $ 2,619 $ 2,917 $ 2,367
Maximum month-end borrowings................ 2,974 3,264 2,613
End of period borrowings.................... 2,450 2,279 2,576
</TABLE>
Factofrance commercial paper issued as of December 31, 1998 had an average
interest rate of 3.58% and its short-term borrowings at December 31, 1998 had
an average interest rate of 3.56%. Factofrance uses primarily short-term debt
and commercial paper to fund its assets which are short-term in nature.
Available credit and asset sale facilities--At December 31, 1998, the
Company had total committed credit and asset sale facilities of $5.1 billion,
and available credit and asset sale facilities of $4.4 billion. This includes
$414 million of additional alternative liquidity which is available by
discounting eligible French receivables with the French Central Bank since
Factofrance is a registered financial institution in France. In addition, the
Company has $36 million available credit under two foreign currency revolving
credit agreements.
The Company has approximately $3.7 billion in available liquidity support
under three agreements, the longest, of which, is a 5-year facility expiring
April 8, 2002. The Company's 364-day bank credit facilities will expire on
April 6, 1999 and October 26, 1999. They each include a term loan option which
expires one year after the option exercise date. The terms of the bank credit
facilities require the Company to maintain stockholders' equity of $1 billion.
Under the terms of the debt covenants of the agreements, the Company could
have borrowed an additional $7.7 billion of debt at December 31, 1998.
The Company has a factored accounts receivable sale facility of its domestic
accounts receivable which allows the Company to sell an undivided interest of
up to $550 million in a designated pool of its factored accounts receivable to
five bank-sponsored conduits on a limited recourse basis. The Company had sold
$475 million of receivables under this facility as of December 31, 1998. The
underlying liquidity support for the conduits is provided by unaffiliated
entities. One of the conduits has an operating agreement with Fuji Bank.
The Company, through its wholly-owned subsidiary, Factofrance, has an
additional factored accounts receivable sale facility. This facility allows
the subsidiary 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 December 31, 1998, approximately 1
billion French francs (or $188 million) of receivables were sold under this
facility.
In July 1998, the Company filed with the Securities and Exchange Commission
a shelf registration statement covering the sale of up to $5 billion in debt
securities, senior preferred stock and Class A Common Stock. As of December
31, 1998, there was $4.2 billion available under this shelf registration.
During December 1998, the Company established a $250 million secured
committed warehouse line, available to finance fixed rate commercial mortgage
loans. The facility expires in June 1999. As of December 31, 1998, the Company
had not drawn any funds under this facility.
In December 1998, the Company established a 364-day facility which allows
the Company to sell up to $550 million of its equipment receivables to two
bank-sponsored conduits on a limited recourse basis. As of December 31, 1998,
the Company has sold $434 million of receivables under this facility.
74
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Notes and debentures--The scheduled maturities of debt outstanding at
December 31, 1998, other than commercial paper and short-term borrowings and
excluding the net unamortized premium of $3 million, are as follows:
<TABLE>
<CAPTION>
Scheduled Maturities at December 31,
-----------------------------------------------
After
1999 2000 2001 2002 2003 2003 Total
------ ------ ---- ---- ---- ----- ------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Various fixed rate notes and
debentures................. $1,052 $1,336 $703 $542 $ 43 $210 $3,886
Fixed weighted average
rate..................... 7.22% 5.46% 6.20% 6.60% 5.90% 6.94% 6.31%
Various floating rate notes
and debentures............. $1,464 $1,127 $150 $ 45 $ 22 $ 71 $2,879
Floating weighted average
rate..................... 5.24% 5.47% 5.92% 5.45% 5.47% 4.00% 5.34%
Total notes and debentures.. $2,516 $2,463 $853 $587 $ 65 $281 $6,765
</TABLE>
Notes redeemable solely at the option of the Company prior to the final
maturity date are reflected in the table above as maturing on their
contractual maturity date. The Company has outstanding $200 million of fixed
rate notes due August 15, 2009, which are callable or putable on August 15,
1999. These notes are reflected in the table above as maturing after 2003.
The Company's various fixed and floating rate notes and debentures are
denominated in U.S. dollars, Japanese yen and French francs. In order to fix
the exchange rate of Japanese yen to U.S. dollars on the yen denominated debt,
the Company has entered into cross currency interest rate swap agreements. In
order to convert certain of the Company's fixed rate debt to floating rate
debt and vice-versa, the Company has entered into interest rate swap
agreements. The following table provides the year-end weighted average
interest rate of the U.S. dollar and Japanese yen denominated debt excluding
the net unamortized premium of $3 million before and after the effect of the
swap agreements. The Company has $26 million of French franc denominated fixed
rate debt and $140 million of French franc denominated variable rate debt
which support French franc denominated assets.
<TABLE>
<CAPTION>
Weighted Average Interest Rate
---------------------------------------------------------------
Before After Before After
Effect Effect Variable Effect Effect
Fixed Debt of of Debt of of Total Debt
Outstanding Swap Swap Outstanding Swap Swap Outstanding
----------- ------ ------ ----------- ------ ------ -----------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
1998:
United States dollar.. $3,554 6.58% 6.24% $2,739 5.41% 5.59% $6,293
Japanese yen.......... 306 3.26 5.45 -- -- -- 306
------ ------ ------
Total................ $3,860 6.32% 6.17% $2,739 5.41% 5.59% $6,599
====== ====== ======
1997:
United States dollar.. $3,614 7.22% 6.72% $1,834 5.94% 5.95% $5,448
Japanese yen.......... 306 3.26 6.10 200 1.07 6.59 506
------ ------ ------
Total................ $3,920 6.91% 6.67% $2,034 5.46% 6.01% $5,954
====== ====== ======
</TABLE>
The contractual interest rates for the U.S. dollar denominated fixed rate
debt range between 5.63% and 9.13% at December 31, 1998. The contractual rates
on the U.S. dollar denominated floating rate debt are based primarily on
indices such as the Constant Maturity Treasury Index less a range of 0.12% to
0.15%, the Federal Funds rate plus 0.25% to 0.40%, the one-month London Inter-
Bank Offered Rate ("LIBOR") plus 0.14%, three-month LIBOR plus 0.05% to 0.90%,
six-month LIBOR plus 0.25% or the Prime rate less 2.60% to 2.75%.
75
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Financial Instruments with Off-Balance Sheet Risk
The Company is a party to several types of agreements involving financial
instruments with off-balance sheet risk. These instruments are used to meet
the financing needs of borrowers and to manage the Company's own exposure to
interest rate and currency exchange rate fluctuations. These instruments
principally include interest rate swap agreements, forward currency exchange
contracts, purchased options, loan commitments, letters of credit and
guarantees.
Derivative financial instruments used for risk management purposes--The
Company utilizes derivatives as an integral part of its asset/liability
management program to reduce its overall level of financial risk. These
derivatives, particularly interest rate swap agreements, are used to lower
funding costs, diversify sources of funding or alter interest rate exposure
arising from mismatches between assets and liabilities. The Company's
derivative instruments are entirely related to accomplishing these risk
management objectives, which arise from normal business operations. The
Company is not an interest rate swap dealer nor is it a trader in derivative
securities, and it has not used speculative derivative products for the
purpose of generating earnings from changes in market conditions.
Before entering into a derivative agreement, management determines that an
inverse correlation exists between the value of the hedged item and the value
of the derivative. At the inception of each agreement, management designates
the derivative to specific assets, pools of assets or liabilities. The risk
that a derivative will become an ineffective hedge is generally limited to the
possibility that an asset or liability being hedged will prepay before the
related derivative expires. Accordingly, after inception of a hedge,
asset/liability managers monitor its effectiveness through an ongoing review
of the amounts and maturities of assets, liabilities and swap positions. This
information is reported to the Company's Financial Risk Management Committee
("FRMC") whose members include the Company's Chairman, Chief Financial Officer
and Treasurer. The FRMC determines the direction the Company will take with
respect to its asset/liability position. The asset/liability position of the
Company and the related activities of the FRMC are reported regularly to the
Executive Committee of the Board of Directors and to the Board of Directors.
The following table summarizes the notional amounts of the Company's
interest rate swap agreements, foreign exchange contracts, purchased options
and interest rate cap agreements as of December 31, 1998 and 1997. The credit
risk associated with these instruments is limited to amounts earned but not
collected and to any additional amounts which may be incurred to replace the
instrument under then current market conditions. These amounts will increase
or decrease during the life of the instruments as interest rates and foreign
exchange rates fluctuate, and are substantially less than the notional amounts
of these agreements. The Company manages this risk by establishing minimum
credit ratings for each counterparty and by limiting the exposure to
individual counterparties as measured by the total notional amount and the
current replacement cost of existing agreements. The Company has not
experienced nonperformance by any counterparty related to its derivative
financial instruments.
<TABLE>
<CAPTION>
Contract or
Notional Amount
---------------
1998 1997
------- -------
(in millions)
<S> <C> <C>
Interest rate swap agreements............................ $ 4,620 $ 4,553
Cross currency interest rate swap agreements............. 616 612
Basis swap agreements.................................... 2,471 1,470
Forward currency exchange contracts...................... 820 623
Purchased options........................................ -- 74
Interest rate cap agreements............................. 20 --
</TABLE>
76
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Interest rate swaps are primarily used to convert fixed rate financings to
variable rate debt. Less frequently, when the issuance of debt denominated in
a foreign currency is deemed more cost effective, cross currency interest rate
swaps are employed to convert foreign currency denominated debt to U.S. dollar
denominated debt and U.S. based indices. The Company also uses swap agreements
to alter the characteristics of specific asset pools to more closely match the
interest terms of the underlying financing. These agreements enhance the
correlation of the interest rate and currency characteristics of the Company's
assets and liabilities and thereby mitigate its exposure to interest rate
volatility. Basis swap agreements involve the exchange of two different
floating rate interest payment obligations and are used to manage the risk
between different floating rate indices.
Forwards are contracts for the delivery of an item in which the buyer agrees
to take delivery of an instrument or currency at a specified price and future
date. To minimize the effect of exchange rate movements in the currencies of
foreign countries, in which certain of its subsidiaries and investments are
located, the Company will periodically enter into forward currency exchange
contracts or purchase options. These financial instruments serve as hedges of
its foreign investment in international subsidiaries and joint ventures or
effectively hedge the translation of the related foreign currency income. The
Company also periodically enters into forward contracts to hedge receivables
denominated in foreign currencies or may purchase foreign currencies in the
spot market to settle a foreign currency denominated liability.
Commitments, letters of credit and guarantees--The Company generally enters
into various commitments, letters of credit and guarantees in response to the
financing needs of its customers. As many of the agreements are expected to
expire unused, the total commitment amount does not necessarily represent
future cash requirements. The credit risk involved in issuing these
instruments is essentially the same as that involved in extending loans to
borrowers and the credit quality and collateral policies for controlling this
risk are similar to those involved in the Company's normal lending
transactions. The contractual amount of the Company's commitments, letters of
credit and guarantees are shown below:
<TABLE>
<CAPTION>
Contract Amount
---------------
1998 1997
------- -------
(in millions)
<S> <C> <C>
Loan commitments......................................... $ 2,188 $ 2,154
Letters of credit and financial guarantees............... 709 754
Factoring credit guarantees.............................. 286 285
Investment commitments................................... 123 130
</TABLE>
Commitments to fund new and existing borrowers generally have fixed
expiration dates and termination clauses and typically require payment of a
fee. Letters of credit and financial guarantees are conditional commitments
issued by the Company to guarantee the performance of a borrower or an
affiliate to a third party. At December 31, 1998, the contractual amount of
guarantees includes $5 million related to international joint ventures. For
factoring credit guarantees, the Company receives a fee for guaranteeing the
collectibility of certain factoring clients' accounts receivable. Under this
arrangement, clients generally retain the responsibility for collection and
bookkeeping. Losses related to these services historically have not been
significant.
9. Legal Proceedings
The Company is party to a number of legal proceedings as plaintiff and
defendant, all arising in the ordinary course of its business. Although the
ultimate amount for which the Company may be held liable, if any, is not
ascertainable, the Company believes that the amounts, if any, which may
ultimately be funded or paid with respect to these matters will not have a
material adverse effect on the financial condition or results of operations of
the Company.
77
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Rental Commitments
The Company and its consolidated subsidiaries have minimum rental
commitments under noncancellable operating leases at December 31, 1998, as
follows (in millions):
<TABLE>
<S> <C>
1999................................................................. $ 21
2000................................................................. 21
2001................................................................. 19
2002................................................................. 19
2003................................................................. 18
Thereafter........................................................... 43
----
$141
====
</TABLE>
The total rent expense, net of rental income from subleases, was $34
million, $30 million and $23 million for the years ended December 31, 1998,
1997 and 1996, respectively.
11. Preferred Stock
Cumulative Perpetual Senior Preferred Stock ($.01 Par Value; stated value,
$25; 8.125%; 5,000,000 shares authorized and outstanding)--The Company's
Cumulative Perpetual Senior Preferred Stock, Series A ("Series A Preferred
Stock") is not redeemable prior to September 22, 2000. On or after that date,
the Perpetual Preferred Stock will be redeemable at the option of the Company,
in whole or in part, at a redemption price of $25 per share, plus accrued and
unpaid dividends. The Series A Preferred Stock has an annual dividend rate of
8.125%. Dividends are cumulative and payable quarterly. The Series A Preferred
Stock ranks senior with respect to payment of dividends and liquidation to
other preferred stock of the Company that is not designated as Cumulative
Senior Perpetual Preferred Stock.
Noncumulative Perpetual Senior Preferred Stock ($.01 Par Value; stated
value, $100; 6.687%; 1,500,000 shares authorized and outstanding)--In June,
1997, the Company issued 1,500,000 shares of 6.687% Noncumulative Perpetual
Senior Preferred Stock, Series B ("Series B Preferred Stock"), at $100 per
share and received proceeds of $150 million less underwriting costs of two
percent. The shares were initially sold to Lehman Brothers, Inc., Chase
Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, each
of whom agreed to offer or sell such shares only to qualified institutional
buyers in reliance on Rule 144A under the Securities Act of 1933 and to a
limited number of institutional accredited investors pursuant to Regulation D
under the Securities Act. Effective January 1998, the Company exchanged 6.687%
Fixed Rate Noncumulative Perpetual Senior Preferred Stock, Series C ("Series C
Preferred Stock") for all formerly outstanding Series B Preferred Stock.
Series C Preferred Stock remains outstanding and is registered with the
Securities and Exchange Commission. The Series C Preferred Stock is not
redeemable prior to August 15, 2007. On or after such date, the Series C
Preferred Stock will be redeemable at the option of the Company, in whole or
in part, at a redemption price of $100 per share, plus any accrued and unpaid
dividends.
Noncumulative Perpetual Senior Preferred Stock ($.01 Par Value; stated
value, $100; 6.95%; 1,250,000 shares authorized and outstanding)--In December
1998, the Company publicly issued 1,250,000 shares of 6.95% Noncumulative
Perpetual Senior Preferred Stock, Series D ("Series D Preferred Stock"), at
$100 per share and received proceeds of $125 million less underwriting costs
of two percent. The Series D Preferred Stock is not redeemable prior to
February 15, 2009. On or after such date, the Series D 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.
Redeemable Preferred Stock--The Company has authorized the issuance of
100,000 shares of a series of preferred stock designated NW Preferred Stock,
Class B (No Par Value) ("NW Preferred Stock"), pursuant to
78
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the Keep Well Agreement between the Company and Fuji Bank, dated as of April
23, 1983 and as subsequently amended (the "Keep Well Agreement"), wherein,
among other things, Fuji Bank has agreed to purchase NW Preferred Stock in an
amount required to maintain the Company's stockholders' equity at $500
million. The Company's stockholders' equity was $1,962 million at December 31,
1998. If and when issued, dividends will be paid quarterly on NW Preferred
Stock at a rate per annum equal to 1% over the three-month LIBOR. Subject to
certain conditions, NW Preferred Stock will be redeemable at the option of the
holder within a specified period of time after the end of a calendar quarter
in an aggregate amount not greater than the excess of the stockholders' equity
of the Company as of the end of such calendar quarter over $500 million and at
a redemption price equal to the price paid for such stock plus accumulated
dividends. No purchases of NW Preferred Stock have been made by Fuji Bank
under the Keep Well Agreement.
12. Dividend Restrictions and Payments
Dividends may legally be paid only out of the Company's surplus, as
determined under the provisions of the Delaware General Corporation Law, or
net profits for either the current or preceding fiscal year, or both. In
addition, the Company is prohibited from paying dividends on Common Stock
unless all current and full cumulative dividends on the Series A Preferred
Stock and the current dividends on the Series C and Series D Preferred Stock
have been paid. In addition, the Company is prohibited from paying dividends
on any other preferred stock that ranks, with respect to the payment of
dividends, equal or junior to the Series A, Series C and Series D Preferred
Stock, unless all current and full cumulative dividends on the Series A,
Series C and Series D Preferred Stock have been paid.
The Company declared and paid dividends on the Series A Preferred Stock of
$11 million and $10 million in 1998 and 1997, respectively, and declared and
paid dividends of $10 million on the Series C Preferred Stock in 1998. In
1997, the Company also paid dividends of $4 million on the Series B Preferred
Stock.
Common Stock dividends paid by the Company in 1998 consisted of over $1
billion paid in cash and included dividends paid to FAHI of $450 million paid
in the form of a subordinated note dated February 24, 1998 and $533 million
paid in May 1998 subsequent to the Offering. In 1997, the Company paid
dividends of $69 million on the Common Stock to HIC which included $43 million
paid in cash and $26 million paid in the form of preferred stock issued by
International Group.
13. Treasury Stock
The Company has an executive deferred compensation plan ("the Plan"), in
which certain employees of the Company may elect to defer a portion of their
annual compensation on a pre-tax basis. The amount deferred remains an asset
of the Company, and is invested in several mutual funds and Class A Common
Stock of the Company. The acquisitions of Class A Common Stock of the Company,
under this Plan, are reported as treasury stock and are included in the
calculation of basic and diluted earnings per share. At December 31, 1998,
292,821 shares of treasury stock were held by the Company through the Plan.
See Note 17 for additional information relating to the Plan.
79
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Fees and Other Income
The following table summarizes the Company's fees and other income for the
years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Year ended
December 31,
--------------
1998 1997 1996
---- ---- ----
(in millions)
<S> <C> <C> <C>
Fee income and other....................................... $130 $111 $76
Net investment gains....................................... 59 69 3
Gains on securitization of receivables..................... 17 26 --
---- ---- ---
Total.................................................... $206 $206 $79
==== ==== ===
</TABLE>
Fee income and other includes servicing income, late fees, prepayment fees,
other miscellaneous fees and equipment residual gains.
The Company had realized gains from sales of total investment securities of
$92 million, $119 million and $106 million during the years ended December 31,
1998, 1997 and 1996, respectively, and had realized losses and writedowns
totaling $33 million, $50 million and $103 million for 1998, 1997 and 1996,
respectively.
15. Operating Expenses
The following table sets forth a summary of the major components of
operating expenses:
<TABLE>
<CAPTION>
Year ended
December 31,
--------------
1998 1997 1996
---- ---- ----
(in millions)
<S> <C> <C> <C>
Salaries and other compensation........................... $227 $214 $154
Legal and professional fees............................... 31 26 12
Space costs............................................... 30 30 23
Equipment costs........................................... 24 17 12
Business acquisition costs................................ 20 15 9
Travel and entertainment costs............................ 16 15 12
Goodwill and noncompete agreement amortization............ 8 6 1
Other..................................................... 43 34 24
---- ---- ----
Total................................................... $399 $357 $247
==== ==== ====
</TABLE>
Of the increase in operating expenses in 1998, $21 million related to the
consolidation of Factofrance for the full year 1998 versus nine months in
1997.
16. Restructuring Charge
The Company incurred a one time charge of $17 million related to its
restructuring initiative, which includes $8 million related to severance
benefits for termination of approximately 15% of the Company's domestic
employees, and $6 million related to the termination of office leases and the
writedown of related leasehold improvements. Of the total restructuring
charge, $11 million is recorded as a liability of the Company as of December
31, 1998 and will be paid during 1999.
80
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
17. Employee Benefits
The Company has various incentive compensation plans and a savings and
profit-sharing plan which provide for annual contributions to eligible
employees based on the Company's achievement of certain financial objectives
and employee achievement of certain objectives.
Pension and Post Retirement Plans--The Company has a noncontributory defined
benefit pension plan covering substantially all of its domestic employees and
a supplemental retirement plan ("SERP") in which certain employees
participate. The Company's policy is to fund, at a minimum, pension
contributions as required by the Employee Retirement Income Security Act of
1974. Benefits under the defined benefit and supplemental retirement plans are
based on an employee's years of service and average earnings for the five
highest consecutive years of compensation occurring during the last ten years
before retirement.
The Company also provides health care benefits for eligible retired
employees and their eligible dependents through the Post-retirement Health
Care Plan ("Health Care Plan").
The following table summarizes the change in the benefit obligations for the
defined benefit and post-retirement health care plans at the end of the
respective year and identifies the assumptions used to determine the benefit
obligation.
<TABLE>
<CAPTION>
Post-retirement
Defined Benefit Plan Health Care Plan
Year Ended Year Ended
December 31, December 31,
---------------------- -------------------
1998 1997 1996 1998 1997 1996
------ ------ ------ ----- ----- -----
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at January
1........................... $ 47 $ 38 $ 32 $ 10 $ 7 $ 7
Service Cost................ 4 3 3 -- -- --
Interest Cost............... 3 3 2 1 1 1
Actuarial (gain) loss....... (1) 4 1 (1) 2 (1)
Benefits paid............... (1) (1) -- -- -- --
------ ------ ------ ----- ----- -----
Benefit obligation at
December 31................. $ 52 $ 47 $ 38 $ 10 $ 10 $ 7
====== ====== ====== ===== ===== =====
Change in plan assets
Fair value of plan assets at
January 1................... $ 42 $ 37 $ 34 $ -- $ -- $ --
Actual return on plan
assets..................... 9 6 3 -- -- --
Benefits paid............... (1) (1) -- -- -- --
------ ------ ------ ----- ----- -----
Fair value of plan assets at
December 31................. $ 50 $ 42 $ 37 $ -- $ -- $ --
====== ====== ====== ===== ===== =====
Reconciliation of funded status
Funded status................ $ (2) $ (5) $ (1) $ (10) $ (10) $ (7)
Unrecognized prior service
cost........................ (1) (1) (1) -- -- --
Unrecognized actuarial (gain)
loss........................ (3) 4 2 -- 1 (1)
Unrecognized transition
(asset) obligation.......... -- (1) (1) 5 5 6
------ ------ ------ ----- ----- -----
Net amount recognized in the
statement of financial
position at December 31.... $ (6) $ (3) $ (1) $ (5) $ (4) $ (2)
====== ====== ====== ===== ===== =====
Weighted-average assumptions as
of December 31:
Discount rate................ 7.00% 7.25% 7.75% 7.00% 7.25% 7.75%
Expected return on assets.... 9.00 9.00 9.00 N/A N/A N/A
Rate of salary increases..... 5.00 6.00 6.00 N/A N/A N/A
</TABLE>
81
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Components of net pension cost for the defined benefit plan and the
postretirement healthcare plan for the following periods are:
<TABLE>
<CAPTION>
Postretirement
Healthcare
Defined Benefit Plan Plan Year
Year Ended Ended December
December 31, 31,
------------------------ --------------
1998 1997 1996 1998 1997 1996
------ ------ ------ ---- ---- ----
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Service cost................... $ 4 $ 3 $ 3 $-- $-- $--
Interest cost.................. 4 3 3 1 1 1
Expected return on plan assets. (4) (3) (3) -- -- --
Prior service cost and
transition amount............. (1) (1) (1) -- -- --
------ ------ ------ ---- ---- ----
Net periodic benefit cost.... $ 3 $ 2 $ 2 $ 1 $ 1 $ 1
====== ====== ====== ==== ==== ====
</TABLE>
The SERP has an unfunded benefit obligation of $3 million at December 31,
1998 and $4 million at December 31, 1997 and 1996. The SERP has an
unrecognized prior service cost of $2 million at December 31, 1998, 1997 and
1996. The unrecognized actuarial gain was $4 million, $2 million and $1
million for the years ended December 31, 1998, 1997 and 1996, respectively.
The ending accrued benefit cost recognized was $5 million, $4 million and $3
million at December 31, 1998, 1997 and 1996, respectively. The net periodic
pension cost for the SERP was approximately $1 million for the years ended
December 31, 1998, 1997 and 1996. The weighted average assumptions as of
December 31, 1998, 1997, and 1996 for the SERP were equal to the discount rate
and rate of salary increases applied for the defined benefit plan.
In conjunction with the Dealer Products Group acquisition, approximately 215
domestic employees of the Dealer Products Group became eligible to participate
in the defined benefit plan and the SERP as of December 1, 1998 and are
subject to the defined benefit plan provisions regarding service from that
date. The eligible employees were granted vested service under the defined
benefit plan since their date of hire with the Dealer Products Group. The
Company's pension expense for 1998 was not materially affected by the
additional employees. The increase in pension expense for 1999 related to the
new employees is expected to be less than $1 million.
The Company adjusts the discount and salary rates, as well as the rates of
return on assets, for the defined benefit plan and the SERP to reflect market
conditions at the measurement date. Changes in these assumptions will impact
the amount of the pension expense in future years. The change in the discount
rate and salary rate at December 31, 1998 is not expected to materially affect
pension expense in 1999. The change in the discount rate at December 31, 1997
increased 1998 pension expense by $1 million. The Company decreased the salary
rate assumption to 5% at December 31, 1998, based upon the Company's
expectation that a greater portion of future salary increases will be provided
in the form of incentive compensation, which is not currently covered under
Heller's retirement plans.
The Company also adjusts the discount, salary and health care cost trend
rates for the Health Care Plan to reflect market conditions at the measurement
date. Changes in these assumptions will impact the amount of the benefit
expense in future years. The accumulated post retirement benefit obligation,
under the terms of the Health Care Plan, as amended, was calculated using
relevant actuarial assumptions and health care cost trend rates projected at
annual rates ranging from 8.5% in 1998 trending down to 5.5% in 2004 and
thereafter. The effect of a 1.0% annual increase in those assumed cost trend
rates would increase the accumulated post retirement benefit obligation by $1
million, while annual service and interest cost components in the aggregate
would not be materially affected. The effect of a 1.0% annual decrease in
these assumed cost trend rates would decrease the accumulated post retirement
benefit obligation by $1 million, while annual service and interest cost
components
82
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
in the aggregate would not be materially affected. The change in the discount
rate at December 31, 1998 had no effect on the 1998 expense and is expected to
increase 1999 expense by less than $1 million. The change in the discount rate
at December 31, 1997 increased 1998 expense by less than $1 million.
Executive Deferred Compensation Plan--The Company has an Executive Deferred
Compensation Plan (the "Plan"), a nonqualified deferred compensation plan, in
which certain employees of the Company may elect to defer a portion of their
annual compensation on a pre-tax basis. The amount deferred remains an asset
of the Company and may be invested, at the participant's discretion, into
certain mutual funds and Class A Common Stock of the Company. Payment of
amounts deferred is made in a lump sum or in annual installments over a five,
ten or fifteen year period as determined by the participant.
The acquisition of Class A Common Stock of the Company, under this plan, is
reported as treasury stock. At December 31, 1998, 292,821 shares of treasury
stock were held by the Company through the Plan. Plan assets, other than
treasury stock, totaled $24 million at December 31, 1998 and 1997.
Earnings on plan assets totaled $4 million, $5 million and $1 million in
1998, 1997 and 1996, respectively, and are included as part of fees and other
income. Compensation expense of these same amounts was also recorded in each
of these years.
Long Term Incentive Plans--The Company has long-term incentive plans in
which participants receive performance units that are granted at the beginning
of a three year performance period. The value of a performance unit is based
on the three year average return on equity target for the Company. The total
expense related to the long-term incentive plans was $4 million in 1998 and $3
million in 1997 and 1996. These plans will terminate in 1999.
1998 Stock Incentive Plan--The Company adopted a stock-based incentive plan,
The Heller Financial, Inc. 1998 Stock Incentive Plan (the "Stock Incentive
Plan"), covering non-employee directors and employees of the Company and its
subsidiaries (collectively, "Participants").
The Stock Incentive Plan provides for the grant of incentive and non-
qualified stock options, restricted stock, stock appreciation rights,
performance shares and performance units ("Awards"). The terms of the Awards
are set forth in award agreements ("Award Agreements"). The Compensation
Committee, in its sole discretion, selects the employees to whom Awards will
be granted and determines the type, size and terms and conditions applicable
to each Award. The Compensation Committee also has the authority to interpret,
construe and implement the provisions of the Stock Incentive Plan. Awards to
non-employee directors will be made by members of the Company's Board of
Directors who are not otherwise entitled to participate in the Stock Incentive
Plan, or will be based on a formula developed by the Board of Directors or the
Compensation Committee.
Under the Stock Incentive Plan, 4,890,011 shares of Class A Common Stock are
available for Awards as of December 31, 1998. During 1998, the Company awarded
shares of restricted stock and non-qualified options to purchase shares of
Class A Common Stock as discussed below:
Restricted Stock--The Company issued 505,912 shares of restricted Class A
Common Stock in connection with the Offering. As of December 31, 1998, 486,538
restricted shares were outstanding. All restricted shares were issued at $27
per share which equaled the fair market value on the date of issue. The
outstanding shares vest on January 1, 2001, if the Company achieves certain
net income growth targets as specified in the Restricted Stock Award
Agreements. If the Company does not achieve these growth targets by January 1,
2001, the restricted stock will vest on January 1, 2004. The holder of
restricted stock generally has the rights of a stockholder of the Company,
including the right to vote and to receive cash dividends prior to the end of
the vesting period. Compensation expense related to these shares totaled $5
million during 1998.
83
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Options--The Company granted options to purchase 1,322,202 shares of
Class A Common Stock, at exercise prices ranging from $22 to $29.94 per share
which equaled the fair market value on the grant dates. No compensation
expense related to the stock option grants was recorded as the option exercise
prices were equal to the fair market values on the dates of grant. Each option
represents the right to purchase one share of Class A Common Stock. The
options, which vest 100% on January 1, 2001, expire ten years from the date of
grant. There were no options exercisable at December 31, 1998 and 30,250
options were forfeited during 1998.
Employee Stock Purchase Plan--The Company adopted an Employee Stock Purchase
Plan (the "ESPP") which offers the Company's employees the opportunity to
purchase Class A Common Stock at a discount through payroll deductions. The
ESPP meets the requirements of Section 423 of the Internal Revenue Code. All
regular full-time and part-time employees of the Company are eligible to
participate in the ESPP after six months of employment. Employees desiring to
purchase stock through ESPP may elect to reduce their pay by up to 10% in any
payroll period. These payroll deductions accumulate during a three-month
"purchase period." At the end of each purchase period, the payroll deductions
are used to purchase Class A Common Stock at a price equal to 85% of the fair
market value of the Class A Common Stock on the last day of the respective
purchase period. The Company purchases shares of Class A Common Stock in the
open market to satisfy purchases under the ESPP. During 1998, the Company
incurred expenses related to the ESPP of $142,000.
Accounting for Stock-Based Compensation Plans--The Company accounts for the
stock options in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"). Under APB No. 25,
the Company does not recognize compensation expense on the issuance of its
stock options as the option terms are fixed and the exercise price equals the
market price of the underlying stock on the grant date. If the Company were to
implement Statement of Financial Accounting Standard No. 123, "Accounting for
Stock Based Compensation" ("SFAS No. 123"), the Company's net income
applicable to common stock for 1998 and pro-forma diluted earnings per share
would have been $169 million and $1.88, respectively. The weighted average
fair value of each option granted during 1998 was $9.08. The annual cost of
the stock options was determined using a Black-Scholes option-pricing model
that assumed the following for 1998: a ten-year option life, risk-free
interest rate of 5.67%, dividend yield of 1.6%, and volatility of 19.44% based
on industry peers' volatility.
18. Income Taxes
The provision for income taxes is summarized in the following table:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(in millions)
<S> <C> <C> <C>
Current:
Federal................................................ $35 $107 $60
Utilization of investment and foreign tax credits...... (4) (46) (29)
--- ---- ---
Net federal.......................................... 31 61 31
State.................................................. 5 5 (4)
Foreign................................................ 24 19 4
--- ---- ---
Total current........................................ 60 85 31
--- ---- ---
Deferred:
Federal................................................ 32 (17) 11
State.................................................. 1 (2) 1
--- ---- ---
Total deferred....................................... 33 (19) 12
--- ---- ---
$93 $ 66 $43
=== ==== ===
</TABLE>
84
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company, including its wholly-owned domestic subsidiaries, filed a
consolidated United States federal income tax return with FAHI through the
date of the Offering (and with HIC in 1997 and 1996) and from that date
forward, files its own United States federal income tax return. International
Group filed a separate United States federal income tax return through the
date of the Offering. Subsequent to that date, International Group is included
in the consolidated United States federal income tax return of the Company.
The Company records future tax benefits for deductible temporary differences
if it is more likely than not that these benefits will be realized. In periods
during which the Company filed consolidated income tax returns with FAHI or
HIC, the Company recorded income tax expense as if it were a separate
taxpayer. Included in income tax expense are amounts relating to the
International Group.
The Company made payments of its United States federal income tax of $20
million from the date of the Offering through December 1998 related to its
consolidated return for that period. United States federal income taxes paid
by International Group amounted to $3 million in 1997 and $5 million in 1996.
Under the terms of the tax allocation agreements between FAHI and the
Company through April 1998, and between HIC and the Company during 1997 and
1996 each company, covered by the agreements, calculated its current and
deferred income taxes based on its separate company taxable income or loss,
utilizing separate company net operating losses, tax credits, capital losses
and deferred tax assets or liabilities. In accordance with the provisions of
the tax allocation agreements, net payments of $6 million were made to FAHI
through April 1998 and payments of $73 million and $43 million were made to
HIC in 1997 and 1996, respectively.
The reconciliation between the statutory federal income tax provision and
the actual effective tax provision for each of the three years ended December
31 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(in millions)
<S> <C> <C> <C>
Tax provision at statutory rate.......................... $101 $82 $64
State and foreign income taxes, net of federal income tax
effects................................................. 31 23 8
Income of foreign subsidiaries and joint ventures and
foreign tax credit utilization.......................... (37) (32) (13)
Resolution of tax issues................................. (3) (2) (7)
Other, net............................................... 1 (5) (9)
---- --- ---
$ 93 $66 $43
==== === ===
</TABLE>
85
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The significant components of the deferred tax assets and deferred tax
liabilities at December 31, 1998 and 1997 are shown below:
<TABLE>
<CAPTION>
December 31,
--------------
1998 1997
------ ------
(in millions)
<S> <C> <C>
Deferred Tax Assets:
Allowance for loan losses.............................. $ 112 $ 97
Foreign tax credits.................................... 5 8
Lease portfolio acquisitions........................... 58 --
Net operating losses................................... 48 41
Equity interests and other investments................. 25 22
Terminated swap income................................. 1 5
Accrued expenses....................................... 29 25
------ ------
Gross deferred tax assets................................ 278 198
Valuation allowance...................................... (5) (8)
------ ------
Gross deferred tax assets, net of valuation allowance.... 273 190
Deferred Tax Liabilities:
Repossessed properties................................. $ (3) $ (6)
Fixed assets and deferred income from lease financing.. (28) (17)
Unrealized appreciation of securities available for
sale.................................................. (13) (4)
------ ------
Gross deferred tax liabilities........................... (44) (27)
------ ------
Net deferred tax asset................................... $ 229 $ 163
====== ======
</TABLE>
Provision has not been made for United States or additional foreign taxes on
$179 million of undistributed earnings of subsidiaries outside the United
States, as those earnings are intended to be reinvested. Such earnings would
become taxable upon the sale or liquidation of these international operations
or upon the remittance of dividends. Given the availability of foreign tax
credits and various tax planning strategies, management believes any tax
liability which may ultimately be paid on these earnings would be
substantially less than that computed at the statutory federal income tax
rate. Upon remittance, certain foreign countries impose withholding taxes that
are then available, subject to certain limitations, for use as credits against
the Company's United States tax liability. The amount of withholding tax that
would be payable upon remittance of the entire amount of undistributed
earnings is approximately $18 million.
The Company had unused foreign tax credit carryforwards of $5 million and $8
million at December 31, 1998 and 1997, respectively. Due to substantial
restrictions on the utilization of foreign tax credits imposed by the Tax
Reform Act of 1986, the Company may not be able to utilize a significant
portion of foreign tax credit carryforwards prior to expiration. Accordingly,
the Company has recognized a valuation allowance for the amount of foreign tax
credits recorded at December 31, 1998 and 1997.
The Company has recorded a net deferred tax asset of $229 million as of
December 31, 1998. Although realization is not assured, management believes it
is more likely than not that the deferred tax assets will be realized. The
amount of the deferred tax assets considered realizable, however, could be
reduced if estimates of future taxable income are reduced.
86
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
19. 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 December 31, Twelve Months Ended December 31,
--------------------------- -----------------------------------
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).............. $ 41 $ 31 $ 41 $ 31 $ 172 $ 144 $ 172 $ 144
====== ====== ====== ====== ======== ======== ======== ========
Average equivalent
shares of common stock
outstanding (in
thousands)............. 90,081 51,050 90,081 51,050 77,050 51,050 77,200 51,050
Stock Options........... -- -- 4 -- -- -- 5 --
------ ------ ------ ------ -------- -------- -------- --------
Total Average
equivalent shares.... 90,081 51,050 90,085 51,050 77,050 51,050 77,205 51,050
====== ====== ====== ====== ======== ======== ======== ========
Net income per share.... $ 0.46 $ 0.61 $ 0.46 $ 0.61 $ 2.23 $ 2.82 $ 2.23 $ 2.82
====== ====== ====== ====== ======== ======== ======== ========
</TABLE>
The table below identifies the pro forma net income applicable to common
stock per share on a basic and diluted basis. Pro forma basic net income
applicable to common stock per share is computed based on net income
applicable to common stock divided by the average number of shares outstanding
after the Company's initial public offering. Pro forma diluted net income
applicable to common stock per share is computed based on net income
applicable to common stock divided by the average number of shares outstanding
after the offering plus the dilutive effect of stock options.
<TABLE>
<CAPTION>
Quarter Ended December 31, Twelve Months Ended December 31,
--------------------------- -----------------------------------
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).............. $ 41 $ 31 $ 41 $ 31 $ 172 $ 144 $ 172 $ 144
====== ====== ====== ====== ======== ======== ======== ========
Pro forma shares (in
thousands):
Shares of common stock
outstanding.......... 90,081 90,081 90,081 90,081 89,797 89,797 90,073 90,073
Stock Options......... -- -- 4 4 -- -- 5 5
------ ------ ------ ------ -------- -------- -------- --------
Total pro forma
shares............... 90,081 90,081 90,085 90,085 89,797 89,797 90,078 90,078
====== ====== ====== ====== ======== ======== ======== ========
Net income per share.... $ 0.46 $ 0.34 $ 0.46 $ 0.34 $ 1.92 $ 1.60 $ 1.91 $ 1.60
====== ====== ====== ====== ======== ======== ======== ========
</TABLE>
20. Related Parties
Several financial, administrative or other service arrangements exist
between the Company and Fuji Bank, FAHI or related affiliates. In management's
opinion, the terms of these arrangements were similar to those the Company
would have been able to obtain in like agreements with unaffiliated entities
in arms-length transactions.
Keep Well Agreement with Fuji Bank. The Keep Well Agreement provides that if
the Company should lack sufficient cash or credit facilities to meet its
commercial paper obligations, Fuji Bank will lend the Company up to $500
million. That loan would be payable on demand and the proceeds from the loan
could only be used
87
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
by the Company to meet its commercial paper obligations. The Keep Well
Agreement further provides that Fuji Bank will maintain the Company's
stockholders' equity in an amount equal to $500 million. Accordingly, if the
Company should determine, at the close of any month, that its stockholders'
equity is less than $500 million, then Fuji Bank will purchase, or cause one
of its subsidiaries to purchase, shares of the Company's NW Preferred Stock in
an amount necessary to increase the Company's stockholders' equity to $500
million. Commitment fees paid by the Company to Fuji Bank under the Keep Well
Agreement amounted to less than $1 million in 1998, 1997 and 1996. Interest on
any loans will be charged at the prime rate of Morgan Guaranty Trust Company
of New York plus .25% per annum. No loans or purchases of NW Preferred Stock
have been made by Fuji Bank under this agreement.
The Keep Well Agreement cannot be terminated by either party prior to
December 31, 2002. After December 31, 2002, the Agreement cannot be terminated
by either party unless the Company has received written certifications from
Moody's Investor Service, Inc. and Standard and Poor's Corporation that upon
such termination, the Series A Preferred Stock will be rated no lower than
"a3" and "A-", respectively and the Series C Preferred Stock will be rated no
lower than "baa1" and "BBB" respectively. Similarly, after December 31, 2002,
the agreement may only be terminated if the Company's senior debt ratings were
unchanged as a result of the termination of the Agreement. After December 31,
2007, either Fuji Bank or the Company may terminate the agreement upon 30
business days prior written notice.
In connection with the Offering, the Keep Well Agreement was amended to
allow the Company or Fuji Bank or any of its affiliates to sell or dispose of
Common Stock to any person or entity, provided that after any such sale or
disposition, Fuji Bank (directly or indirectly through one or more
subsidiaries) continues to hold greater than 50% of the combined voting power
of the outstanding Common Stock.
Purchase of Interest in International Group from Fuji Bank. In connection
with the Offering, the Company purchased Fuji Bank's interest in International
Group for total cash consideration of approximately $83 million, $54 million
of which was for the International Group common stock owned by Fuji Bank,
valued at book value, and $29 million of which was for the International Group
preferred stock owned by Fuji Bank, valued at a modest premium over book
value.
Services Provided by Fuji Bank and HIC for the Company. Certain employees of
Fuji Bank performed managerial, administrative and other related functions for
the Company during 1998, 1997, and 1996. Certain employees of HIC also
performed managerial, administrative, and other related functions for the
Company during 1997 and 1996. In conjunction with the ownership transfer of
the Company from HIC to FAHI in January 1998, the majority of HIC's employees
were transferred to the Company. The Company compensated Fuji Bank for the use
of such individuals' services at a rate which reflects current costs. The
amount paid to Fuji Bank for these services was $1 million in 1998. The
amounts paid to Fuji Bank and HIC for these services were $2 million and $77
million, respectively, for 1997 and $2 million and $60 million for 1996.
Additionally, certain subsidiaries of Fuji Bank act as registrar and paying
agent for certain debt issuances by the Company. These services are provided
at market rates.
Services Provided by the Company for Fuji Bank and Affiliates. The Company
performs services for its affiliates, including FAHI, and charges them for the
cost of the work performed. The amount paid to the Company by FAHI was less
than $1 million in 1998. Additionally, the Company guaranteed payment under a
deferred compensation arrangement between FAHI and certain of its employees
who were providing services to the Company. The Company may also guarantee the
obligations of its clients or the clients of certain joint ventures, under
letters of credit issued by financial institutions, some of which are
affiliates of the Company.
Intercompany Receivables, Payables, Transactions and Financial
Instruments. At December 31, 1998, other receivables included net amounts due
from affiliates of $3 million, and at December 31, 1997, other
88
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
liabilities included net amounts due to affiliates of $29 million. These
amounts are principally comprised of interest bearing demand notes
representing amounts due to or from the Company arising from an interest rate
swap agreement with FAHI, advances, administrative fees and costs charged to
other subsidiaries of FAHI and amounts payable to FAHI for services provided.
The notes bear interest at rates which approximate the average rates on the
Company's commercial paper obligations or short-term bank borrowing rates
outstanding during the period. During 1998, the Company paid interest of $1.7
million to FAHI related to these notes.
The Company was party to a $200 million notional amount interest rate swap
agreement with FAHI. The purpose of this agreement was to manage the Company's
exposure to interest rate fluctuations. Under this agreement, the Company paid
interest to the counterparty at a variable rate based on the commercial paper
rate published by the Board of Governors of the Federal Reserve System. The
counterparty paid interest to the Company at a fixed rate of 5.57%. This
agreement, which FAHI assumed from HIC in January 1998, was terminated in June
1998. Under the terms of this agreement, the Company's interest expense
increased by $58,000 and $295,000 in 1998 and 1997, respectively. In
conjunction with the termination of this agreement, the Company paid a
termination fee to FAHI of approximately $1 million.
In the ordinary course of its business, the Company participates in joint
financings with Fuji Bank or certain affiliates. During 1997, the Company sold
$10 million of an outstanding $25 million commitment to Fuji Bank at book
value. No gain or loss was recorded on the sale.
The trust department of Fuji Bank may purchase commercial paper of the
Company for its clients. Interest expense paid by the Company related to such
commercial paper borrowings was $272,000 and $235,000 in 1998 and 1997,
respectively.
Fuji Bank, and one of its subsidiaries, provided uncommitted lines of credit
to consolidated international subsidiaries totaling $27 million and $29
million at December 31, 1998 and 1997, respectively. Borrowings under these
facilities totaled $2 million and $5 million at December 31, 1998 and 1997,
respectively. In addition, Fuji Bank provides committed and uncommitted lines
of credit to certain international joint ventures.
The Company has an accounts receivable sale facility which allows the
Company to sell an undivided interest of up to $550 million in a designated
pool of its factored accounts receivable to five bank-sponsored conduits. The
Company sold approximately $475 million of receivables under this facility as
of December 31, 1998. The underlying liquidity support for the conduits is
provided by unaffiliated entities. One of the conduits has an operating
agreement with Fuji Bank. The Company paid fees of $346,000 to Fuji Bank
during 1998 for services provided under this agreement.
In conjunction with the formation of FAHI, the Company purchased, at book
value, less than $10 million of real estate receivables from HIC on December
31, 1997.
21. Fair Value Disclosures
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosure of fair value information
for certain financial instruments, for which it is practicable to estimate
that value. Since there is no well-established market for many of the
Company's assets and financial instruments, fair values are estimated using
present value, property yield, historical rate of return and other valuation
techniques. These techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows. These
assumptions are inherently judgmental and changes in such assumptions could
significantly affect fair value calculations. The derived fair value estimates
may not be substantiated by comparison to independent markets and may not be
realized in immediate liquidation of the instrument.
89
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1998 1997
------------------- -------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
-------- --------- -------- ---------
(in millions)
<S> <C> <C> <C> <C>
Net receivables..................... $11,583 $11,887 $10,461 $10,883
Total investments................... 1,338 1,391 994 1,044
Debt................................ 10,449 10,456 9,436 9,371
Swap agreements:
Asset............................. 9 50 4 12
Liability......................... (14) (106) (7) (111)
Forward contracts................... 2 2 23 23
</TABLE>
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments. Carrying values
approximate fair values for all financial instruments which are not
specifically addressed.
For variable rate receivables that reprice frequently and are performing at
acceptable levels, fair values were assumed to equal carrying values. All
other receivables were pooled by loan type and risk rating. The fair value for
these receivables was estimated by employing discounted cash flow analyses,
using interest rates equal to the London Inter-Bank Offered Rate or the Prime
rate offered as of December 31, 1998 and 1997 plus an adjustment for normal
spread, credit quality and the remaining terms of the loans.
Carrying and fair values of the securities available for sale are based on
quoted market prices. The fair values of equity interests and other
investments are calculated by using the Company's business valuation model to
determine the estimated value of these investments as of the anticipated
exercise date. The business valuation model analyzes the cash flows of the
related company and considers values for similar equity investments. The
determined value is then discounted back to December 31, 1998 and 1997, using
a rate appropriate for returns on equity investments.
The fair value of the notes and debentures was estimated using discounted
cash flow analyses, based on current incremental borrowing rates for
arrangements with similar terms and remaining maturities, as quoted by
independent financial institutions as of December 31, 1998 and 1997. Fair
values were assumed to equal carrying values for commercial paper and other
short term borrowings.
The carrying value of the swap agreements represents the interest receivable
and interest payable as of December 31, 1998 and 1997. The estimated fair
value represents the mark to market loss and mark to market gain outstanding
as of December 31, 1998 and 1997, respectively, as based upon quoted market
prices obtained from independent financial institutions. Forward contracts are
carried at fair value. The fair value on forward contracts at December 31,
1997 includes the fair value relating to $74 million in notional amount of
purchased options. The fair values of loan commitments, letters of credit and
guarantees are negligible.
22. Operating Segments
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information," in 1998
which requires segments to be reported based upon the way management organizes
segments within the Company for making operating decisions and assessing
performance.
90
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's two reportable segments, Domestic Commercial Finance and
International Factoring and Asset Based Finance, were organized geographically
and identified based upon the Company's strategic business units whose long-
term financial performance is affected by similar economic conditions. Each
segment is managed separately by its own President.
Domestic Commercial Finance--This segment consists of five business units:
(i) Heller Corporate Finance ("Corporate Finance") which provides
collateralized cash flow and asset based lending, (ii) Heller Real Estate
Financial Services ("Real Estate Finance") which provides secured real estate
financing, (iii) Heller Leasing Services ("Leasing Services") which provides
debt and lease financing of small and large ticket equipment and commercial
aircraft, (iv) Heller Small Business Finance ("Small Business Finance") which
provides financing to small businesses, primarily under U.S. Small Business
Administration ("SBA") loan programs, and (v) Heller Commercial Services
("Commercial Services") which provides factoring and receivables management
services.
International Factoring and Asset Based Finance--This segment, managed by
the International Group, Inc. ("International Group"), provides factoring and
receivables management services, asset based financing, acquisition financing,
leasing and vendor finance and/or trade finance programs through four majority
owned subsidiaries and joints ventures with operations in 16 countries in
Europe, Asia/Pacific and Latin America.
The Company evaluates the performance of its operating segments based on net
interest revenue and net income before income taxes. Inter-segment sales and
transfers are not significant. The accounting policies of the reportable
segments are consistent with those of the Company, as described in Note 1,
"Summary of Significant Accounting Policies."
Summarized financial information concerning the Company's reportable
segments is shown in the following table. Differences between consolidated
Company information and total reportable segment information relate to
corporate support functions, business areas the Company is no longer pursuing
and Real Estate and Corporate Finance assets originated, prior to 1990, under
different underwriting criteria.
<TABLE>
<CAPTION>
International
Domestic Factoring and
Commercial Asset Based Consolidated
Finance Finance Other Company
---------- ------------- ----- ------------
<S> <C> <C> <C> <C>
Total assets:
1998..................... $10,625 $3,088 $ 653 $14,366
1997..................... 8,687 2,583 1,591 12,861
1996..................... 7,597 624 1,705 9,926
Revenues:
1998..................... $ 1,098 $ 244 $ 65 $ 1,407
1997..................... 1,007 187 76 1,270
1996..................... 817 82 86 985
Income of international
joint ventures
1998..................... $ -- $ 30 -- $ 30
1997..................... -- 36 -- 36
1996..................... -- 44 -- 44
Net interest income:
1998..................... $ 341 $ 42 $ 40 $ 423
1997..................... 333 26 49 408
1996..................... 302 4 49 355
Segment profit (loss):
1998..................... $ 233 $ 64 $ (7) $ 290
1997..................... 281 45 (93) 233
1996..................... 232 33 (82) 183
</TABLE>
91
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table shows certain financial information by geographic region
for the years ended December 31, 1998, 1997 and 1996. The Company has
attributed revenues to the specific region of transaction origination.
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------------
United Other Asia/ Latin
States France Europe Pacific America Consolidated
------ ------ ------ ------- ------- ------------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Long-lived assets
1998................. $ 502 $102 $237 $17 $39 $ 897
1997................. 225 94 146 17 44 526
1996................. 153 84 156 15 31 439
Total revenues
1998................. $1,159 $188 $ 31 $21 $ 8 $1,407
1997................. 1,083 127 26 26 8 1,270
1996................. 903 19 23 28 12 985
</TABLE>
92
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
23. Summary of Quarterly Financial Information (Unaudited)
The following financial information for the calendar quarters of 1998, 1997
and 1996, is unaudited. In the opinion of management, all adjustments
necessary to present fairly the results of operations for such periods have
been included.
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
(in millions)
<S> <C> <C> <C> <C>
Net interest income
1998.................................. $ 99 $105 $109 $110
1997.................................. 92 107 104 105
1996.................................. 90 87 87 91
Operating revenues
1998.................................. $186 $194 $196 $207
1997.................................. 141 199 193 221
1996.................................. 131 129 124 149
Provision for losses
1998.................................. $ 15 $ 17 $ 27 $ 18
1997.................................. 22 34 48 60
1996.................................. 24 25 12 42
Net income
1998.................................. $ 48 $ 51 $ 47 $ 47
1997.................................. 39 44 40 35
1996.................................. 34 35 35 29
</TABLE>
24. Accounting Developments
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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 its 2000 interim financial statements.
25. Subsequent Events
On January 19, 1999, the Company awarded to various employees approximately
1.2 million options to purchase shares of the Company's Class A Common Stock
at an exercise price of $28.75. No compensation expense was recorded in
conjunction with the awards as the exercise price equaled the market value of
the stock on the date of grant. Of the options granted, a majority will vest
equally over each of the next four years. The remaining options will vest on
January 1, 2001.
Also on January 19, 1999, the Company's Compensation Committee approved
approximately 17,000 stock awards of its Class A Common Stock to employees of
the Company. Compensation expense will be recorded over the one year vesting
period.
93
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On February 15, 1999, the Company paid dividends of $0.09 per share on its
Class A and Class B Common Stock.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
94
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item pertaining to executive officers of
the Company is set forth below. The information required by this item
pertaining to directors of the Company and to compliance with Section 16(a) of
the Securities Exchange Act of 1934 is incorporated by reference to the
Company's Proxy Statement for the 1999 Annual Meeting of Stockholders.
Executive Officers
Richard J. AlmeidaMr. Almeida, age 56, has served as Chairman of the Board and
Chief Executive Officer of Heller and Heller International
Group, Inc. (International Group) since November 1995, and
as a Director of Heller and International Group since
November 1987. He previously served as Executive Vice
President and Chief Financial Officer of Heller and
International Group from November 1987 to November 1995. He
has served as Director of Fuji America Holdings, Inc.
(FAHI), a subsidiary of The Fuji Bank, Limited, and the
majority stockholder of Heller, since January 1998. He is
also on the Board of Directors of Fuji Bank and Trust
Company, a subsidiary of Fuji Bank. Prior to joining Heller
in 1987, Mr. Almeida served in a number of operating
positions, both in corporate banking and investment banking,
for Citicorp.
Nina B. Eidell Ms. Eidell, age 46, has served as Executive Vice President
and Chief Human Resources Officer of Heller since March
1998. From February 1995 to February 1998, she served as
Director, Human Resources of the American Bar Association.
Ms. Eidell previously spent eight years with Citicorp, where
she held a variety of human resources management roles. She
has also held human resources leadership positions with Sara
Lee Corporation and R.R. Donnelley & Sons Company.
Michael J. Litwin Mr. Litwin, age 51, has served as Executive Vice President
and Chief Credit Officer of Heller since January 1997, and
Executive Vice President of International Group since
January 1989. He previously served as Director of Heller
from April 1990 to July 1998, Senior Group President of
Heller from October 1990 to January 1997, and Director of
International Group from January 1997 to July 1998. Mr.
Litwin has served in various other positions since joining
Heller in 1971, including Assistant General Counsel.
Dennis P. LockhartMr. Lockhart, age 52, has served as a Director of Heller and
International Group and as President of International Group
since January 1988. In his current position, he has
principal responsibility for Heller's international
operations. Mr. Lockhart has also served as a Director of
Tri Valley Corporation since April 1981. Prior to joining
Heller in 1988, Mr. Lockhart was employed by Citicorp for 16
years, holding a number of positions in
corporate/institutional banking domestically and abroad,
including assignments in Lebanon, Saudi Arabia, Greece,
Iran, New York and Atlanta, with regional experience
encompassing Europe, the Middle East, Africa and Latin
America.
Lauralee E. MartinMs. Martin, age 48, has served as Executive Vice President
and Chief Financial Officer of Heller and International
Group since May 1996, and Director of Gables Residential
Trust since January 1994. She previously served as Director
of Heller from May 1991 to July 1998, Director of
International Group from May 1996 to July 1998, and Senior
Group President of Heller from October 1990 to May 1996.
Prior to
95
<PAGE>
joining Heller in 1986, Ms. Martin held a variety of senior
management positions with General Electric Credit
Corporation.
Debra H. Snider Ms. Snider, age 44, has served as Chief Administrative
Officer of Heller since February 1997, General Counsel of
Heller and International Group since October 1995, Executive
Vice President and Secretary of Heller and International
Group since April 1995, and Secretary of FAHI since January
1998. She previously served as Acting General Counsel for
Heller and International Group from April 1995 to October
1995. Ms. Snider was a Partner at Katten Muchin & Zavis from
February 1991 to March 1995 and previously served as First
Vice President and Associate General Counsel at the Balcor
Company.
Frederick E. Wolfert
Mr. Wolfert, age 44, has served as a Director of Heller
since July 1998 and as President and Chief Operating Officer
of Heller since January 1998. In this capacity, he has
principal responsibility for all of Heller's domestic
businesses. He served as Chairman of Key Global Finance Ltd.
from April 1996 to December 1997, Chairman, President and
Chief Executive Officer of KeyCorp Leasing, Ltd. from June
1993 to December 1997, Chairman, President and Chief
Executive Officer of KeyBank USA N.A. from June 1993 to
December 1996, President and Chief Operating Officer of
KeyCorp Leasing, Ltd. from December 1991 to June 1993, and
Executive Vice President of KeyBank USA N.A. from December
1991 to June 1993. Mr. Wolfert also served for nine years in
management positions with U.S. Leasing Corporation in its
San Francisco headquarters.
Item 11. Executive Compensation.
The information required by this Item is incorporated by reference to the
Company's Proxy Statement for the 1999 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference to the
Company's Proxy Statement for the 1999 Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is incorporated by reference to the
Company's Proxy Statement for the 1999 Annual Meeting of Stockholders.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents Filed as Part of This Report:
1. Financial Statements (All Financial Statements listed below are those of
the Company and its consolidated subsidiaries):
Report of Independent Public Accountants--Arthur Andersen LLP
Consolidated Balance Sheets--December 31, 1998 and 1997
Consolidated Statements of Income for the Years Ended December 31,
1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996
96
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
Schedules are omitted because they are not applicable or because the
required information appears in the financial statements or the notes
thereto.
3. Exhibits:
Any shareholder who would like a copy of the following Exhibits may
obtain one upon request from the Company at a charge that reflects the
reproduction cost of such Exhibits. Requests should be made to the
Secretary, Heller Financial, Inc., 500 W. Monroe St., Chicago, IL
60661.
<TABLE>
<C> <S> <C>
(3)(a) Amended and Restated Certificate of Incorporation of the
Company, as amended and restated on April 30, 1998, is
incorporated by reference to Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the period ended March
31, 1998 (File No. 1-6157).
(3)(b) Amended and Restated By-laws of the Company, adopted on
April 27, 1998, are incorporated by reference to Exhibit
3.2 to the Company's Quarterly Report on Form 10-Q for the
period ended March 31, 1998 (File No. 1-6157).
(4)(a) Certificate of Designation, Preferences and Rights of
Cumulative Perpetual Senior Preferred Stock, Series A, as
filed with the Delaware Secretary of State on September
16, 1992, is incorporated by reference to Exhibit 4(a) to
the Company's Annual Report on Form 10-K for the Fiscal
Year Ended December 31, 1992 (File No. 1-6157).
(4)(b) Certificate of Designation, Preferences and Rights of the
Company's Fixed Rate Noncumulative Perpetual Senior
Preferred Stock, Series C (Liquidation Preference $100.00
Per Share) filed with the Secretary of State of Delaware
on November 5, 1997, is incorporated by reference to
Exhibit 4.4 to the Company's Registration Statement on
Form S-4 dated October 24, 1997 (File No. 333-38627).
(4)(c)* Certificate of Designation, Preferences and Rights of the
Company's Fixed Rate Noncumulative Perpetual Senior
Preferred Stock, Series D (Liquidation Preference $100.00
Per Share), filed with the Secretary of State of Delaware
on December 3, 1998.
(4)(d) Heller Financial, Inc. Standard Multiple-Series Indenture
Provisions dated February 5, 1987 are incorporated by
reference to Exhibit (4)(a) to the Company's Registration
Statement on Form S-3 dated February 5, 1987 (File No. 33-
11757).
(4)(e) Form of Indenture dated as of February 5, 1987 between the
Company and The First National Bank of Chicago, Trustee,
with respect to Senior Securities is incorporated by
reference to Exhibit (4)(b) to the Company's Registration
Statement on Form S-3 dated February 5, 1987 (File No. 33-
11757).
(4)(f) Form of Indenture dated as of February 24, 1993 between
the Company and The First National Bank of Boston,
Trustee, with respect to Senior Securities is incorporated
by reference to Exhibit (4)(h) to the Company's
Registration Statement on Form S-3 dated February 24, 1993
(File No. 33-58716).
(4)(g) First Supplemental Indenture dated September 29, 1995 to
the Indenture dated February 24, 1993 between the Company
and State Street Bank and Trust Company, as successor to
The First National Bank of Boston, with respect to Senior
Securities is incorporated by reference to Exhibit (4)(a)
to the Company's Current Report on Form 8-K filed October
3, 1995 (File No. 1-6157).
</TABLE>
97
<PAGE>
<TABLE>
<C> <S> <C>
(4)(h) Form of Indenture dated as of February 5, 1987 between the
Company and Chemical Bank, Trustee, with respect to Senior
Securities is incorporated by reference to Exhibit (4)(c)
to the Company's Registration Statement on Form S-3 dated
February 5, 1987 (File No. 33-11757).
(4)(i) First Supplemental Indenture dated as of December 1, 1989
to the Indenture dated as of February 5, 1987 between
Chemical Bank, as Trustee, and the Company is incorporated
by reference to Exhibit (4)(e) to the Company's Annual
Report on Form 10-K for the Fiscal Year Ended December 31,
1994 (File No. 1-6157).
(4)(j) Form of Indenture dated as of September 30, 1991 between
the Company and The Bank of New York, Trustee, with
respect to Senior Securities is incorporated by reference
to Exhibit (4)(h) to the Company's Registration Statement
on Form S-3 dated September 30, 1991 (File No. 33-43020).
(4)(k) Indenture dated as of September 1, 1995 between the
Company and State Street Bank and Trust Company, as
successor to Shawmut Bank Connecticut, National
Association, as Trustee, with respect to Senior Securities
is incorporated by reference to Exhibit 4.3 to
the Company's Registration Statement on Form S-3 dated
October 23, 1997 (File No. 333-38545).
(4)(l) First Supplemental Indenture dated as of October 13, 1995,
to the Indenture dated as of September 1, 1995, between
the Company and State Street Bank and Trust Company, as
successor to Shawmut Bank Connecticut, National
Association, as Trustee, with respect to Senior Securities
is incorporated by reference to an exhibit to the
Company's Current Report on Form 8-K, filed October 18,
1995 (File No. 1-6157).
(4)(m) Second Supplemental Indenture dated November 17, 1997 to
the Indenture dated September 1, 1995 between the Company
and State Street Bank and Trust Company, as Trustee, with
respect to Senior Securities is incorporated by reference
to Exhibit 4(a) to the Company's Current Report on Form 8-
K filed December 4, 1997 (File No. 1-6157).
(4)(n) Indenture dated as of September 1, 1995 between the
Company and State Street Bank and Trust Company, as
successor to Shawmut Bank Connecticut, National
Association, as Trustee, with respect to Subordinated
Securities is incorporated by reference to Exhibit 4.5 to
the Company's Registration Statement on Form S-3 dated
October 23, 1997 (File No. 333-38545).
(4)(o) First Supplemental Indenture dated as of October 13, 1995,
to the Indenture dated as of September 1, 1995, between
the Company and State Street Bank and Trust Company, as
successor to Shawmut Bank Connecticut, National
Association, as Trustee, with respect to Subordinated
Securities is incorporated by reference to an exhibit to
the Company's Current Report on Form 8-K, filed October
18, 1995 (File No. 1-6157).
(4)(p) Indenture dated as of September 1, 1995 between the
Company and State Street Bank and Trust Company, as
successor to Shawmut Bank Connecticut, National
Association, as Trustee, with respect to Junior
Subordinated Securities is incorporated by reference to
Exhibit 4.7 to the Company's Registration Statement on
Form S-3 dated October 23, 1997 (File No. 333-38545).
(4)(q) First Supplemental Indenture dated October 13, 1995 to the
Indenture dated as of September 1, 1995 between the
Company and State Street Bank and Trust Company, as
successor to Shawmut Bank Connecticut, National
Association, as Trustee, with respect to Junior
Subordinated Securities is incorporated by reference to
Exhibit 4(d)(i) to the Company's Current Report on Form 8-
K filed October 18, 1995 (File No. 1-6157).
</TABLE>
98
<PAGE>
<TABLE>
<C> <S> <C>
(4)(r) Form of Medium-Term Note, Series I (Fixed Rate) due from 9
months to 30 years from date of issue is incorporated by
reference to Exhibit 4(a) to the Company's Current Report
on Form 8-K filed September 18, 1998 (File No. 1-6157).
(4)(s) Form of Medium-Term Note, Series I (Fixed Rate/Currency
Indexed) due from 9 months to 30 years from date of issue
is incorporated by reference to Exhibit 4(b) to the
Company's Current Report on Form 8-K filed September 18,
1998 (File No. 1-6157).
(4)(t) Form of Medium-Term Note, Series I (Floating Rate) due
from 9 months to 30 years from date of issue filed as
Exhibit 4(c) to the Company's Current Report on Form 8-K
filed September 18, 1998 (File No. 1-6157).
(4)(u) Form of Medium-Term Note, Series I (Floating Rate/Currency
Indexed) due from 9 months to 30 years from date of issue
is incorporated by reference to Exhibit 4(d) to the
Company's Current Report on Form 8-K filed September 18,
1998 (File No. 1-6157).
(10)(a) Amended and Restated Keep Well Agreement between The Fuji
Bank, Limited (Fuji Bank) and the Company, as amended, is
incorporated by reference to Exhibit 4.13 to the Company's
Registration Statement on Form S-3 dated July 8, 1998
(File No. 333-58723).
(10)(b)* Registration Rights Agreement dated May 6, 1998 between
the Company and Fuji Bank.
(10)(c) Services Agreement dated January 1, 1985 between the
Company and Fuji Bank is incorporated by reference to
Exhibit (10)(e) to the Company's Annual Report on Form
10-K for the Fiscal Year Ended December 31, 1992 (File No.
1-6157).
(10)(d) Management Agreement dated as of January 1, 1991 between
Heller International Corporation (HIC) and the Company is
incorporated by reference to Exhibit (10)(m) to the
Company's Quarterly Report on Form 10-Q for the period
ending March 31, 1991 (File No. 1-6157).
(10)(e) Management Services Agreement dated as of January 2, 1998
between Fuji America Holdings, Inc. (FAHI) and the Company
is incorporated by reference to Exhibit 10(d) to the
Company's Annual Report on Form 10-K for the Fiscal Year
ended December 31, 1997, as amended on Form 10-K/A (File
No. 1-6157).
(10)(f) Agreement for the Allocation of Federal, State and Foreign
Income Tax Liability and Benefits among HIC and its
Subsidiaries, effective as of July 1, 1996, is
incorporated by reference to Exhibit (10)(g) to the
Company's annual Report on Form 10-K for the Fiscal Year
Ended December 31, 1996 (File No. 1-6157).
(10)(g)* Agreement for the Allocation of Federal Income Tax
Liability and Benefits among FAHI and the Company,
effective as of January 2, 1998.
(10)(h)+ Management Incentive Plan (Effective January 1, 1987,
Revised January 1, 1989) is incorporated by reference to
Exhibit 10(m) to the Company's Annual Report on Form 10-K
for the Fiscal Year Ended December 31, 1995 (File No. 1-
6157).
(10)(i)+ 1996-1998 Long Term Incentive Plan, effective January 1,
1996, is incorporated by reference to Exhibit 10(h) to the
Company's Annual Report on Form 10-K for the Fiscal Year
ended December 31, 1997, as amended on Form 10-K/A (File
No. 1-6157).
(10)(j)+ 1997-1999 Long Term Incentive Plan, effective January 1,
1997, is incorporated by reference to Exhibit 10(i) to the
Company's Annual Report on Form 10-K for the Fiscal Year
ended December 31, 1997, as amended on Form 10-K/A (File
No. 1-6157).
(10)(k)+ Supplemental Executive Retirement Benefit Plan, amended
and restated effective January 1, 1996, is incorporated by
reference to Exhibit (10)(e) to the Company's Annual
Report on Form 10-K for the Fiscal Year Ended December 31,
1996 (File No. 1-6157).
</TABLE>
99
<PAGE>
<TABLE>
<C> <S> <C>
(10)(l)+ Savings and Profit Sharing Plan, amended and restated
effective as of January 1, 1989, is incorporated by
reference to Exhibit (10)(q) to the Company's Annual
Report on Form 10-K for the Fiscal Year Ended December 31,
1996 (File No. 1-6157).
(10)(m)+ First Amendment to Savings and Profit Sharing Plan, dated
December 23, 1993, is incorporated by reference to Exhibit
(10)(r) to the Company's Annual Report on Form 10-K for
the Fiscal Year Ended December 31, 1996 (File No. 1-6157).
(10)(n)+ Second Amendment to Savings and Profit Sharing Plan, dated
December 20, 1994, is incorporated by reference to Exhibit
(10)(s) to the Company's Annual Report on Form 10-K for
the Fiscal Year Ended December 31, 1996 (File No. 1-6157).
(10)(o)+ Third Amendment to Savings and Profit Sharing Plan, dated
September 9, 1996, is incorporated by reference to Exhibit
(10)(t) to the Company's Annual Report on Form 10-K for
the Fiscal Year Ended December 31, 1996 (File No. 1-6157).
(10)(p)+ Fourth Amendment to Savings and Profit Sharing Plan, dated
April 30, 1997, is incorporated by reference to Exhibit
10(u) to the Company's Annual Report on Form 10-K for the
Fiscal Year ended December 31, 1997, as amended on Form
10-K/A (File No. 1-6157).
(10)(q)+ Fifth Amendment to Savings and Profit Sharing Plan,
effective as of April 30, 1998, is incorporated by
reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the period ending June 30, 1998
(File No. 1-6157).
(10)(r)+ 1998 Heller Financial, Inc. Stock Incentive Plan is
incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-2 initially filed on
February 26, 1998, as amended (File No. 333-46915).
(10)(s)+ Heller Financial, Inc. 1998 Employee Stock Purchase Plan
is incorporated by reference to Exhibit 10.34 to the
Company's Registration Statement on Form S-2 initially
filed on February 26, 1998, as amended (File No. 333-
46915) is incorporated by reference.
(10)(t)+ Amended and Restated Executive Deferred Compensation Plan,
effective as of January 1, 1998, is incorporated by
reference to Exhibit 10 to the Company's Quarterly Report
on Form 10-Q for the period ended September 30, 1998 (File
No. 1-6157).
(10)(u)+* First Amendment to Amended and Restated Executive Deferred
Compensation Plan dated March 2, 1999.
(10)(v)+ Employment Letter Agreement, dated as of December 31,
1997, between the Company and Richard J. Almeida, is
incorporated by reference to Exhibit 10(w) to the
Company's Annual Report on Form 10-K for the Fiscal Year
ended December 31, 1997, as amended on Form 10-K/A (File
No. 1-6157).
(10)(w)+* Amendment of Letter Agreement, effective as of May 6,
1998, between the Company and Richard J. Almeida.
(10)(x)+ Employment Letter Agreement, dated as of December 31,
1997, between the Company and Frederick E. Wolfert, is
incorporated by reference to Exhibit 10(x) to the
Company's Annual Report on Form 10-K for the Fiscal Year
ended December 31, 1997, as amended on Form 10-K/A (File
No. 1-6157).
(10)(y)+* Amendment of Letter Agreement, effective as of May 6,
1998, between the Company and Frederick E. Wolfert.
(10)(z)+ Form of Change in Control Agreement is incorporated by
reference to Exhibit 10.32 to the Company's Registration
Statement on Form S-2 initially filed on February 26,
1998, as amended (File No. 333-46915).
</TABLE>
100
<PAGE>
<TABLE>
<C> <S> <C>
(12)* Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends
(21)* Subsidiaries of the Registrant
(23)* Consent of Independent Public Accountants
(27)* Financial Data Schedule
</TABLE>
- --------
*Filed herewith.
+Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K.
Instruments defining the rights of holders of certain issues of long-term
debt of the Company have not been filed as exhibits to this Report because the
authorized principal amount of any one of such issues does not exceed 10% of
the total assets of the Company. The Company hereby agrees to furnish to the
Securities and Exchange Commission, upon request, a copy of each instrument
that defines the rights of holders of the Company's long-term debt.
(b)Current Reports on Form 8-K:
<TABLE>
<CAPTION>
Date of Report Item Description
-------------- ---- -----------
<C> <C> <S>
October 13, 1998 5, 7 A report filing a press release announcing the
signing of a purchase agreement to acquire assets
associated with the US and international
information technology leasing business of Dana
Corporation.
October 19, 1998 5, 7 A report filing a press release announcing the
declaration of dividends on the Company's common
and preferred stocks.
October 20, 1998 5, 7 A report filing a press release announcing earnings
for the quarter ending September 30, 1998.
November 24, 1998 5, 7 A report filing a press release announcing a new
business structure and senior leadership changes
designed to increase operating revenues, optimize
operational efficiencies and improve return on
shareholders' equity.
November 25, 1998 5, 7 Report of (i) the filing of a Prospectus Supplement
under the Company's Registration Statement on Form
S-3 (File No. 333-58723) for the public offering of
1,250,000 shares of Fixed Rate Noncumulative
Perpetual Senior Preferred Stock, Series D,
and (ii) the filing of the forms of related
documents.
December 3, 1998 5,7 A report filing a press release announcing the
acquisition of assets of Dana Corporation's leasing
operation.
January 20, 1999 5,7 A report filing a press release announcing (i)
earnings for the year ending 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.
</TABLE>
101
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Form 10K to be signed
on its behalf by the undersigned, thereunto duly authorized on this 1st day of
March, 1999.
Heller Financial, Inc.
/s/ R.J. Almeida
By: _________________________________
Richard J. Almeida
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K has been signed by the following persons on behalf of the registrant
in their capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ R.J. Almeida Chairman and Chief Executive March 1, 1999
____________________________________ Officer
Richard J. Almeida
/s/ Lawrence G. Hund Executive Vice President, March 1, 1999
____________________________________ Controller, and Chief
Lawrence G. Hund Accounting Officer
/s/ Lauralee E. Martin Executive Vice President and March 1, 1999
____________________________________ Chief Financial Officer
Lauralee E. Martin
/s/ F. Wolfert Director, President and March 1, 1999
____________________________________ Chief Operating Officer
Frederick E. Wolfert
/s/ S. Hirabayashi Director March 1, 1999
____________________________________
Soichi Hirabayashi
/s/ Michael A. Conway Director March 1, 1999
____________________________________
Michael A. Conway
/s/ T. Hayano Director March 1, 1999
____________________________________
Tsutomu Hayano
/s/ Mark Kessel Director March 1, 1999
____________________________________
Mark Kessel
/s/ Tetuso Kumon Director March 1, 1999
____________________________________
Tetsuo Kumon
</TABLE>
102
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ D.P. Lockhart Director March 1, 1999
____________________________________
Dennis P. Lockhart
/s/ Frank S. Ptak Director March 1, 1999
____________________________________
Frank S. Ptak
/s/ Masahiro Sawada Director March 1, 1999
____________________________________
Masahiro Sawada
/s/ K. Tanaka Director March 1, 1999
____________________________________
Kenichiro Tanaka
/s/ T. Yamasaki Director March 1, 1999
____________________________________
Terumasa Yamasaki
</TABLE>
103
<PAGE>
EXHIBIT 4(c)
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS
OF
FIXED RATE NONCUMULATIVE PERPETUAL SENIOR PREFERRED STOCK,
SERIES D
(Liquidation Preference $100.00 Per Share)
_________________________________
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
___________________________________
The undersigned DOES HEREBY CERTIFY that the following resolutions were
duly adopted by the Board of Directors (the "Board of Directors" or "Board") of
Heller Financial, Inc., a Delaware corporation (the "Corporation"), by unanimous
written consent dated as of November 6, 1998 and in accordance with the
provisions of Section 151 of the Delaware General Corporation Law:
RESOLVED, that pursuant to authority conferred upon the Board of Directors
by the provisions of the Amended and Restated Certificate of Incorporation (the
"Restated Certificate") and the Amended and Restated By-Laws (the "Restated By-
Laws") of the Corporation, the Board of Directors hereby creates one series of
the Senior Preferred Stock, $.01 par value per share, of the Corporation
("Senior Preferred Stock") and fixes the designation and voting powers of the
shares of such series as follows:
1. Designation. The designation of the series of Senior Preferred Stock
created by these resolutions shall be Fixed Rate Noncumulative Perpetual Senior
Preferred Stock, Series D ("Series D Senior Preferred Stock"). The number of
authorized shares constituting the Series D Senior Preferred Stock is 1,250,000.
The shares of the Series D Senior Preferred Stock shall have a stated value of
$100.00 per share.
2. Voting Rights. The Series D Senior Preferred Stock shall not have any
voting powers, either general or special, except as required by applicable law
and as stated herein.
(a) Unless the vote or consent of the holders of a greater number of
shares shall then be required by law, the consent of the holders of at least
66 2/3% of all of the shares of Series D Senior Preferred Stock at the time
outstanding, given in person or by proxy, either in writing or by a vote at a
meeting called for the purpose at which the holders of shares of Series D Senior
Preferred Stock shall vote together as a separate class, shall be necessary for
authorizing, effecting or validating the amendment, alteration or repeal of any
of the provisions of the Restated Certificate, of the applicable Certificate of
Designation, Preferences and Rights or of any other certificate amendatory of or
supplemental to the Restated Certificate (including any certificate of
designation, preferences and rights or any similar document relating to any
series of Senior Preferred Stock or any series of the Preferred Stock, no par
value per share, of the Corporation ("Junior Preferred Stock")) or of the
Restated By-laws of the Corporation which would adversely affect the
preferences, rights, powers or privileges of the Series D Senior Preferred
Stock;
<PAGE>
(b) Unless the vote or consent of the holders of a greater number of
shares shall then be required by law, the consent of the holders of at least
66 2/3% of all of the Series D Senior Preferred Stock and all other series of
Senior Preferred Stock for which dividends are noncumulative ("Noncumulative
Senior Preferred Stock") ranking on a parity with shares of the Series D Senior
Preferred Stock, either as to dividends or upon liquidation, at the time
outstanding, given in person or by proxy, either in writing or by a vote at a
meeting called for the purpose at which the holders of shares of the Series D
Senior Preferred Stock and such other series of Noncumulative Senior Preferred
Stock shall vote together as a single class without regard to series, shall be
necessary for authorizing, effecting, increasing or validating the creation,
authorization or issue of any shares of any class of stock of the Corporation
ranking prior to the shares of the Series D Senior Preferred Stock as to
dividends or upon liquidation, or the reclassification of any authorized stock
of the Corporation into any such prior shares, or the creation, authorization or
issue of any obligation or security convertible into or evidencing the right to
purchase any such prior shares.
(c) If, at the time of any annual meeting of stockholders for the
election of directors of the Corporation, a default in preference dividends on
the Series D Senior Preferred Stock or any other class or series of
Noncumulative Senior Preferred Stock ranking on a parity with the Series D
Senior Preferred Stock, either as to dividends or upon liquidation, and upon
which like voting rights have been conferred and are exercisable (excluding any
other class or series of Noncumulative Senior Preferred Stock expressly entitled
to elect additional directors to the Board by a vote separate and distinct from
the vote provided for in this paragraph (c), "Voting Noncumulative Senior
Preferred Stock") shall exist, the number of directors constituting the Board
shall be increased by two (without duplication of any increase made pursuant to
the terms of any other class or series of Voting Noncumulative Senior Preferred
Stock), and the holders of the Series D Senior Preferred Stock and the Voting
Noncumulative Senior Preferred Stock shall have the right at such meeting,
voting together as a single class without regard to class or series (to the
exclusion of the holders of Common Stock, Junior Preferred Stock and of any
series of Senior Preferred Stock which is not Voting Noncumulative Senior
Preferred Stock), to elect two directors of the Corporation to fill such newly
created directorships. Each director elected by the holders of shares of Series
D Senior Preferred Stock and any class or series of Voting Noncumulative
Preferred Stock in an election provided for by this Section 2(c) (herein called
a "Preferred Director") shall continue to serve as such director until the next
annual meeting of stockholders for the election of directors of the Corporation
and until such director's successor is elected and qualified, notwithstanding
that prior to the end of such term a default in preference dividends shall cease
to exist. Any Preferred Director may be removed by, and shall not be removed
except by, the vote of the holders of record of the outstanding shares of Series
D Senior Preferred Stock and Voting Noncumulative Senior Preferred Stock
entitled to have originally voted for such director's election, voting together
as a single class without regard to class or series, at a meeting of the
Corporation's stockholders, or of the holders of shares of Series D Senior
Preferred Stock and Voting Noncumulative Senior Preferred Stock, called for that
purpose. So long as a default in any preference dividends on the Series D Senior
Preferred Stock or any class or series of Voting Noncumulative Senior Preferred
Stock shall exist, (A) any vacancy in the office of a Preferred Director may be
filled (except as provided in the following clause (B)) by an instrument in
writing signed by the remaining Preferred Director and filed with the
Corporation and (B) in the case of the removal of any Preferred Director, the
vacancy may be filled by the vote of the holders of the outstanding shares of
Series D Senior Preferred Stock and Voting Noncumulative Senior Preferred Stock
entitled to have originally voted for the removed director's election, voting
together as a single class without regard to class or series, at the same
meeting at which such removal shall be voted. Each director appointed as
aforesaid shall be deemed for all purposes hereto to be a Preferred Director.
-2-
<PAGE>
Whenever the term of office of the Preferred Directors shall end and a
default in preference dividends shall no longer exist, the number of directors
constituting the Board shall be reduced by two. For purposes hereof, a "default
in preference dividends" on the Series D Series Preferred Stock or any class or
series of Voting Noncumulative Senior Preferred Stock shall be deemed to have
occurred whenever dividends upon the Series D Senior Preferred Stock or such
class or series of Voting Noncumulative Senior Preferred Stock have not been
paid or declared and set aside for payment for the equivalent of six full
quarterly dividend periods or more (whether or not consecutive), and, having so
occurred, such default shall be deemed to exist thereafter until, but only
until, all dividends on the Series D Senior Preferred Stock or such other class
or series of Voting Noncumulative Senior Preferred Stock have been paid or
declared and set apart for payment regularly for at least one year (i.e., four
consecutive full quarterly dividend periods).
3. Preferences. The Series D Senior Preferred Stock will be fixed rate
noncumulative perpetual (i.e., will be redeemable, if at all, solely at the
option of the Corporation) Senior Preferred Stock and will rank senior to the
Junior Preferred Stock as to payments of dividends and upon liquidation.
4. Dividends.
(a) The holders of shares of the Series D Senior Preferred Stock shall
be entitled to receive cash dividends thereon at a rate per annum to be
determined by either of Richard J. Almeida, Chairman and Chief Executive
Officer, Lauralee E. Martin, Chief Financial Officer, or Anthony O'B. Beirne,
Executive Vice President and Treasurer (each, a "Special Financing Officer"),
but not in any event to exceed the rate that is equivalent to the higher of (i)
seven and one half percent (7 1/2%) or (ii) 200 basis points over the rate at
the time of determination on United States Treasury Bonds with a thirty year
maturity, such rate per annum to be computed on the basis of the stated value
thereof of $100.00 per share, and no more, payable (if declared) quarterly out
of the funds of the Corporation legally available for the payment of dividends.
Such dividends shall be payable, when, as and if declared by the Board or a duly
authorized committee thereof, on February 15, May 15, August 15 and November 15
of each year (each a "Dividend Payment Date"), commencing February 15, 1999.
Each such dividend shall be paid to the holders of record of shares of Series D
Senior Preferred Stock as they appear on the stock register of the Corporation
on the close of business on such record date, which shall be not less than five
nor more than 50 days (whether or not business days) preceding the Dividend
Payment Date, as shall be fixed by the Board or a duly authorized committee
thereof. The rights of holders of the Series D Senior Preferred Stock shall be
noncumulative. Accordingly, if the Board fails to declare a dividend on the
Series D Senior Preferred Stock payable on a Dividend Payment Date, then holders
of Series D Senior Preferred Stock will have no right to receive a dividend in
respect of the dividend period ending on such Dividend Payment Date, and the
Corporation will have no obligation to pay dividends accrued for such period,
whether or not dividends on the Series D Senior Preferred Stock are declared
payable on any future Dividend Payment Date. The amount of dividends payable for
any period shorter than a full quarterly dividend period will be calculated on
the basis of a 360-day year consisting of twelve 30-day months.
(b) If, at any time prior to 18 months after the date of original
issuance of the Series D Senior Preferred Stock, one or more amendments to the
Internal Revenue Code of 1986, as amended (the "Code"), are enacted that reduce
the percentage of the dividends received deduction (generally, 70%) as specified
in Section 243(a)(1) of the Code or any successor provision (the "Dividends
Received Percentage"), the amount of each dividend payable (if declared) per
share of the Series D Senior Preferred Stock for dividend payments made on or
after the date of enactment of such change shall be increased by multiplying the
amount of the dividend payable determined as
-3-
<PAGE>
described above (before adjustment) by a factor, which shall be the number
determined in accordance with the following formula (the "DRD Formula") and
rounding the result to the nearest cent (with one-half cent rounded up):
1 - [.35 (1 - .70)]
-------------------
1 - [.35 (1 - DRP)]
For purposes of the DRD Formula, "DRP" means the Dividends Received
Percentage applicable to the dividend in question; provided, however, that if
the Dividends Received Percentage applicable to the dividend in question is less
than 50%, then the DRP will equal 0.50. No amendment to the Code, other than a
change in the percentage of the dividends received deduction set forth in
Section 243(a)(1) of the Code or any successor provision prior to 18 months
after the date of original issuance of the Series D Senior Preferred Stock, will
give rise to an adjustment. Notwithstanding the foregoing provisions, in the
event that, with respect to any such amendment, the Corporation shall receive
either (i) an unqualified opinion of independent recognized tax counsel based
upon the legislation amending or establishing the DRP or upon a published
pronouncement of the Internal Revenue Service (the "IRS") addressing such
legislation or (ii) a private letter ruling or similar form of assurance from
the IRS, in either case to the effect that such an amendment would not apply to
dividends payable on shares of Series D Senior Preferred Stock, then any such
amendment shall not result in the adjustment provided for pursuant to the DRD
Formula. The Corporation's calculation of the dividends payable, as so adjusted
and as certified accurate as to calculation and reasonable as to method by the
independent certified public accountants then regularly engaged by the
Corporation, shall be final and not subject to review.
If any such amendment to the Code which reduces the Dividends Received
Percentage is enacted after a dividend payable on a Dividend Payment Date has
been declared but before such dividend has been paid, the amount of dividends
payable on such Dividend Payment Date will not be increased; but instead, an
amount, equal to the excess, if any, of (x) the product of the dividends paid by
the Corporation on such Dividend Payment Date and the DRD Formula (where the DRP
used in the DRD Formula would be equal to the greater of the reduced Dividends
Received Percentage and 0.50) over (y) the dividends paid by the Corporation on
such Dividend Payment Date, will be payable (if declared) on the next succeeding
Dividend Payment Date to holders of Series D Senior Preferred Stock on the
record date applicable to such succeeding Dividend Payment Date, in addition to
any other amounts payable on such Dividend Payment Date.
In addition, if any such amendment to the Code is enacted that reduces the
Dividends Received Percentage and such reduction retroactively applies to a
Dividend Payment Date as to which the Corporation previously paid dividends on
shares of Series D Senior Preferred Stock (each, an "Affected Dividend Payment
Date"), the Corporation will pay (if declared) additional dividends (the
"Retroactive Dividends") on the next succeeding Dividend Payment Date (or if
such amendment is enacted after the dividend payable on such Dividend Payment
Date has been declared, on the second succeeding Dividend Payment Date following
the date of enactment), to holders of Series D Senior Preferred Stock on the
record date applicable to such succeeding Dividend Payment Date, in an amount
equal to the excess, if any, of (x) the product of the dividends paid by the
Corporation on each Affected Dividend Payment Date and the DRD Formula (where
the DRP used in the DRD Formula would be equal to the greater of the reduced
Dividends Received Percentage and 0.50, applied to each Affected Dividend
Payment Date) over (y) the dividends paid by the Corporation on each Affected
Dividend Payment Date.
-4-
<PAGE>
Retroactive Dividends will not be paid in respect of the enactment of any
amendment to the Code if such amendment would not result in an adjustment due to
the Corporation having received either an opinion of counsel or tax ruling
referred to in the third preceding paragraph. The Corporation will only make
one payment of Retroactive Dividends.
No adjustments in the dividends payable by the Corporation will be made,
and no Retroactive Dividends will be payable by the Corporation, because of any
amendment to the Code at any time beginning 18 months after the date of original
issuance of the Series D Senior Preferred Stock that reduces the Dividends
Received Percentage.
In the event that the amount of dividends payable per share of Series D
Senior Preferred Stock shall be adjusted pursuant to the DRD Formula and/or
Retroactive Dividends are to be paid, the Corporation will cause notice of each
such adjustment and, if applicable any Retroactive Dividends, to be sent to each
holder of record of the shares of Series D Senior Preferred Stock at such
holder's address as the same appears on the stock register of the Corporation.
(c) So long as any shares of Series D Senior Preferred Shares are
outstanding, no dividend (other than a dividend in Common Stock, Junior
Preferred Stock or any other stock of the Corporation ranking junior to the
Series D Senior Preferred Stock as to dividends and upon liquidation and other
than as provided in subsection (c) of this Section 4) shall be declared or paid
or set aside for payment, nor shall any other distribution be declared or made
upon the Common Stock, Junior Preferred Stock or any other stock of the
Corporation ranking junior to or on a parity with the Series D Senior Preferred
Stock as to dividends or upon liquidation, nor shall any Common Stock, Junior
Preferred Stock or other stock of the Corporation ranking junior to or on a
parity with the Series D Senior Preferred Stock as to dividends or upon
liquidation be redeemed, purchased or otherwise acquired for any consideration
(nor shall any funds be paid to, or made available for, a sinking fund for the
redemption of any shares of any such stock) by the Corporation (except by
conversion into or exchange for stock of the Corporation ranking junior to the
Series D Senior Preferred Stock as to dividends and upon liquidation) unless, in
each case, the full dividends on all outstanding shares of the Series D Senior
Preferred Stock shall have been, or contemporaneously are, paid, or declared and
a sum sufficient for the payment thereof has been or is set apart for such
payment, for the then-current dividend period (without accumulation of accrued
and unpaid dividends for prior dividend periods unless previously declared).
(d) When dividends are not paid or declared and set aside for payment
in full, as aforesaid, upon the shares of Series D Senior Preferred Stock and
any other Senior Preferred Stock ranking on a parity as to dividends with the
Series D Senior Preferred Stock, all dividends declared upon shares of Series D
Senior Preferred Stock and any other class or series of Senior Preferred Stock
ranking on a parity as to dividends with the Series D Senior Preferred Stock
shall be declared pro rata so that the amount of dividends declared per share on
the Series D Senior Preferred Stock and such other Senior Preferred Stock shall
in all cases bear to each other the same ratio that dividends per share on the
shares of Series D Senior Preferred Stock for the then-current dividend period
(without accumulation of accrued and unpaid dividends for prior dividend periods
unless previously declared) and such other Senior Preferred Stock bear to each
other. Holders of shares of Series D Senior Preferred Stock shall not be
entitled to any dividend, whether payable in cash, property or stock, in excess
of full dividends for the then-current dividend period (without accumulation of
accrued and unpaid dividends for prior dividend periods unless previously
declared), as herein provided, on the Series D Senior Preferred Stock.
5. Redemption.
-5-
<PAGE>
(a) The shares of Series D Senior Preferred Stock shall not be
redeemable prior to a date to be determined by any Special Financing Officer,
provided that such date shall not be earlier than ten (10) years after the end
of the calendar quarter in which the Series D Senior Preferred Stock is issued.
On and after such initial redemption date, the Corporation, at its option, may
redeem shares of the Series D Senior Preferred Stock, in whole or in part, at
any time or from time to time, at a redemption price of $100.00 per share, plus
accrued and unpaid dividends thereon (whether or not earned or declared) for the
then-current dividend period (without accumulation of accrued and unpaid
dividends for prior dividend periods unless previously declared), including any
dividends payable due to changes in the Dividends Received Percentage and
Retroactive Dividends to the date fixed for redemption. In the event that fewer
than all the outstanding shares of Series D Senior Preferred Stock are to be
redeemed pursuant to this Section 5(a), the number of shares to be redeemed
shall be determined by the Board and the shares to be redeemed shall be
determined by lot or pro rata as may be determined by the Board or by any other
method as may be determined by the Board in its sole discretion to be equitable.
(b) Notwithstanding the foregoing, if dividends for the then-current
dividend period to the redemption date (without accumulation of accrued and
unpaid dividends for prior dividend periods unless previously declared) have not
been declared and paid or set apart for payment on all outstanding shares of
Series D Senior Preferred Stock, no shares of Series D Senior Preferred Stock
shall be redeemed unless all outstanding shares of Series D Senior Preferred
Stock are simultaneously redeemed, and the Corporation shall not purchase or
otherwise acquire any shares of Series D Senior Preferred Stock; provided,
however, that the foregoing shall not prevent the purchase or acquisition of
shares of Series D Senior Preferred Stock pursuant to a tender or exchange offer
made on the same terms to all holders of Series D Senior Preferred Stock and
mailed to the holders of record of the Series D Senior Preferred Stock at such
holders' addresses as the same appear on the stock register of the Corporation;
provided, further, that if some, but less than all, of the shares of the Series
D Senior Preferred Stock are to be purchased or otherwise acquired pursuant to
such tender or exchange offer and the number of shares so tendered exceeds the
number of shares so to be purchased or otherwise acquired by the Corporation,
the shares of the Series D Senior Preferred Stock tendered will be purchased or
otherwise acquired by the Corporation on a pro rata basis (with adjustments to
eliminate fractions) according to the number of such shares tendered by each
holder tendering shares of Series D Senior Preferred Stock.
(c) In the event the Corporation shall redeem shares of Series D
Senior Preferred Stock pursuant to subsection (a) of this Section 5, notice of
such redemption shall be given by first class mail, postage prepaid, mailed not
less than 30 nor more than 60 days prior to the redemption date, to each holder
of record of the shares to be redeemed, at such holder's address as the same
appears on the stock register of the Corporation. Each such notice shall state:
(i) the redemption date; (ii) the number of shares of Series D Senior Preferred
Stock to be redeemed and, if fewer than all the shares held by such holder are
to be redeemed, the number of such shares to be redeemed from such holder; (iii)
the redemption price; (iv) the place or places where certificates for such
shares are to be surrendered for payment of the redemption price; and (v) that
dividends on the shares to be redeemed will cease to accrue on such redemption
date.
(d) Notice having been mailed as aforesaid, from and after the
redemption date (unless default shall be made by the Corporation in providing
funds for the payment of the redemption price) dividends on the shares of Series
D Senior Preferred Stock so called for redemption under subsection (a) of this
Section 5 shall cease to accrue, and said shares shall no longer be deemed to be
outstanding, and all rights of the holders thereof as stockholders of the
Corporation (except the right to receive from the Corporation the redemption
price against delivery
-6-
<PAGE>
of such shares) shall cease. Upon surrender in accordance with said notice of
the certificates for any shares so redeemed (properly endorsed or assigned for
transfer, if the Board shall so require and the notice shall so state), such
shares shall be redeemed by the Corporation at the applicable redemption price.
In case fewer than all the shares represented by any such certificate are
redeemed, a new certificate shall be issued representing the unredeemed shares
without cost to the holder thereof.
(e) If the Corporation gives notice of redemption, then, by 12:00
Noon, Chicago time, on the redemption date, the Corporation shall irrevocably
deposit with a paying agent (which may be an affiliate of the Corporation) (the
"Paying Agent"), which shall be a bank or trust company organized and in good
standing under the laws of the United States, the State of Illinois or the State
of New York and having capital, surplus and undivided profits aggregating at
least $10,000,000, funds sufficient to pay the applicable redemption price,
including any accrued and unpaid dividends to the redemption date, and shall
give the Paying Agent irrevocable instructions and authority to pay the
redemption price to the holder or holders of record of the shares of Series D
Senior Preferred Stock upon surrender of certificates for such shares (properly
endorsed or assigned for transfer). If notice of redemption shall have been
given, then upon the date of such deposit, all rights of holders of the shares
so called for redemption shall cease, except the right of the holders of such
shares to receive the redemption price against delivery of such shares, but
without interest, and such shares shall cease to be outstanding. The Corporation
shall be entitled to receive, from time to time, from the Paying Agent, the
interest, if any, earned on such funds deposited with the Paying Agent, and the
holders of any shares to be redeemed with such funds shall have no claim to any
such interest. Any funds so deposited which are unclaimed at the end of two
years from such redemption date shall upon demand be repaid to the Corporation,
after which the holders of the shares of Series D Senior Preferred Stock so
called for redemption shall be entitled to look only to the Corporation for
payment thereof.
6. Liquidation Preference.
(a) Upon the dissolution, liquidation or winding up of the
Corporation, voluntary or involuntary, the holders of the shares of Series D
Senior Preferred Stock shall be entitled to receive and be paid out of the
assets of the Corporation available for distribution to its stockholders, before
any payment or distribution of assets shall be made on the Common Stock, the
Junior Preferred Stock or any other class of stock of the Corporation ranking
junior to the Series D Senior Preferred Stock upon liquidation, the amount of
$100.00 per share, plus an amount equal to the sum of all accrued and unpaid
dividends (whether or not earned or declared) on such shares for the then-
current dividend period (without accumulation of accrued and unpaid dividends
for prior dividend periods unless previously declared) to the date of final
distribution.
(b) Neither the sale of all or substantially all the property or
business of the Corporation nor the merger or consolidation of the Corporation
into or with any other corporation or the merger or consolidation of any other
corporation into or with the Corporation, shall be deemed to be a dissolution,
liquidation or winding up, voluntary or involuntary, for the purposes of this
Section 6.
(c) After the payment to the holders of the shares of Series D Senior
Preferred Stock of the full preferential amounts provided for in this Section 6,
the holders of the shares of Series D Senior Preferred Stock, as such, shall
have no right or claim to any of the remaining assets of the Corporation.
(d) In the event the assets of the Corporation available for
distribution to the holders of the shares of Series D Senior Preferred Stock and
any other class or series of shares of
-7-
<PAGE>
Senior Preferred Stock ranking on a parity with the Series D Senior Preferred
Stock as to such distribution upon any dissolution, liquidation or winding up of
the Corporation, whether voluntary or involuntary, shall be insufficient to pay
in full all preferential amounts to which such holders are entitled, no such
distribution shall be made on account of the Series D Senior Preferred Stock or
any shares of any other class or series of Senior Preferred Stock ranking on a
parity with the shares of Series D Senior Preferred Stock upon such dissolution,
liquidation or winding up, unless proportionate distributive amounts shall be
paid on account of the shares of Series D Senior Preferred Stock and such shares
of Senior Preferred Stock ratably, in proportion to the full distributable
amounts for which holders of all such parity shares are respectively entitled
upon such dissolution, liquidation or winding up.
7. Conversion and Exchange. The holders of shares of the Series D Senior
Preferred Stock shall not have any rights to convert such shares into, or to
exchange such shares for, shares of Common Stock, any other class or classes of
capital stock (or any other security) or any other series of any class or
classes of capital stock (or any other security) of the Corporation.
8. Priority as to Certain Distributions. As a series of Senior Preferred
Stock, the shares of the Series D Senior Preferred Stock shall be entitled to
such rights and priorities, and subject to such limitations, as to dividends as
are set forth in these resolutions and in the Restated Certificate of the
Corporation.
9. Sinking Fund. No sinking fund shall be provided for the purchase or
redemption of shares of the Series D Senior Preferred Stock.
10. Ranking. Without limitation to any provision set forth in these
resolutions or in the Restated Certificate, it is hereby confirmed and expressly
declared that the Series D Senior Preferred Stock constitutes a series of Senior
Preferred Stock and, accordingly, ranks senior to all shares of Junior Preferred
Stock as to dividends and distributions of assets upon liquidation, dissolution
or winding up.
For purposes hereof, any class or series or stock of the Corporation shall
be deemed to rank:
(a) prior to the Series D Senior Preferred Stock as to dividends or
distribution of assets upon liquidation, dissolution or winding up, if the
holders of such class or series shall be entitled to the receipt of dividends or
of amounts distributable upon liquidation, dissolution or winding up, as the
case may be, in preference or priority to the holders of Series D Senior
Preferred Stock;
(b) on a parity with the Series D Senior Preferred Stock as to
dividends or distribution of assets upon liquidation, dissolution or winding up,
whether or not the dividend rates, dividend payment dates, redemption prices or
liquidation preferences per share thereof are different from those of the Series
D Senior Preferred Stock, if the holders of such class or series of stock and of
the Series D Senior Preferred Stock shall be entitled to the receipt of
dividends or of amounts distributable upon liquidation, dissolution or winding
up, as the case may be, in proportion to their respective dividend amounts or
liquidation preferences, without preference or priority to the holders of Series
D Senior Preferred Stock; and
(c) junior to the Series D Senior Preferred Stock as to dividends or
distribution of assets upon liquidation, dissolution or winding up, if such
stock shall be Common Stock or Junior Preferred Stock or if the holders of the
Series D Senior Preferred Stock shall be entitled to the receipt of dividends or
of amounts distributable upon liquidation, dissolution or winding up, as the
case may
-8-
<PAGE>
be, in preference or priority to the holders of shares of such class or series.
11. Exclusion of Other Rights. Unless otherwise required by law, shares
of the Series D Senior Preferred Stock shall not have any rights, including
preemptive rights, or preferences other than those specifically set forth herein
or as provided by applicable law.
12. Miscellaneous. The Board of Directors may interpret the provisions
hereof to resolve any inconsistency or ambiguity which may arise or be revealed
and if such inconsistency or ambiguity reflects an inaccurate provision hereof,
the Board of Directors may, in appropriate circumstances, authorize the filing
of a certificate of correction pursuant to Delaware law.
13. Change in Number of Shares. As provided in the Restated Certificate
of the Corporation, but subject to applicable law, the Board of Directors may
increase or decrease the number of shares of this series of Senior Preferred
Stock subsequent to the issue of shares of this series, but not below the number
of shares of Series D Senior Preferred Stock then outstanding.
FURTHER RESOLVED, that the 1,250,000 shares of Series D Senior Preferred
Stock authorized for issuance pursuant to the resolutions of this Board of
Directors all constitute Senior Preferred Stock within the 50,000,000 shares
authorized pursuant to the Restated Certificate of the Corporation.
The undersigned DOES HEREBY FURTHER CERTIFY that the following resolution
was duly adopted on December 2, 1998 by Richard J. Almeida, Chairman and Chief
Executive Officer of the Corporation pursuant to the authorization conferred
upon him by the Board of Directors as set forth above:
RESOLVED, that pursuant to the authority conferred upon Richard J. Almeida,
Chairman and Chief Executive Officer of Heller Financial, Inc. (the
"Corporation"), by resolutions adopted by the Board of Directors of the
Corporation by Unanimous Written Consent dated as of November 2, 1998 (the
"Resolutions"), Richard J. Almeida hereby (1) fixes the dividend rate on the
Series D Senior Preferred Stock of the Corporation at 6.95% per annum, which
rate does not exceed the higher of (i) seven and one half percent (7 1/2%) or
(ii) 200 basis points over the rate at the time of determination on United
States Treasury Bonds with a 30 year maturity and which rate is subject to
adjustment as provided in Section 4 of the Resolutions and (2) sets the first
date on which any shares of the Series D Senior Preferred Stock may be redeemed
as February 15, 2009, which date is not earlier than ten (10) years after the
end of the calendar quarter in which the Series D Senior Preferred Stock is
being issued.
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
hereunto affixed and this Certificate to be signed by Kurt J. Roemer, its Senior
Vice President and Assistant Treasurer, and attested to by Mark J. Ohringer, its
Assistant Secretary, this 3rd day of December, 1998.
By: /s/ Kurt J. Roemer
Kurt J. Roemer
Senior Vice President and
Assistant Treasurer
[SEAL]
ATTEST
-9-
<PAGE>
By: /s/ Mark J. Ohringer
Mark J. Ohringer
Assistant Secretary
-10-
<PAGE>
EXHIBIT 10(b)
REGISTRATION RIGHTS AGREEMENT
-----------------------------
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made and entered
into this 6th day of May, 1998, by and between HELLER FINANCIAL, INC., a
Delaware corporation (the "Company"), and THE FUJI BANK LIMITED, a Japanese
banking corporation (together with its subsidiaries is hereinafter referred to
as "Fuji Bank").
WHEREAS, in connection with the initial public offering of shares of Class
A common stock, $0.25 par value per share, of the Company (the "Class A Common
Stock"), the Company desires to grant to Fuji Bank and a Qualified Transferee
(as defined below) certain registration rights with respect to the Class A
Common Stock held directly or indirectly by Fuji Bank or a Qualified Transferee
or issuable upon conversion of any other security (including shares of the Class
B common stock, $0.25 par value per share, of the Company (the "Class B Common
Stock") held by Fuji Bank or such Qualified Transferee.
WHEREAS, the parties hereto desire to set forth the terms and conditions of
the Company's covenants and agreements in respect of the registration of the
Class A Common Stock with the Securities and Exchange Commission and all
applicable state securities agencies.
NOW, THEREFORE, in consideration of the foregoing and the mutual convents
and agreements herein contained, and intending to be legally bound hereby, the
parties hereto hereby agree as follows:
1. Certain Definitions. The following terms, as used herein, have the
following meanings:
"Affiliate" of a Holder means a Person who controls, is controlled by
or is under common control with such Holder or the spouse or children (or a
trust exclusively for the benefit of a spouse or children) of such Holder
or, in the case of a Holder that is a partnership, its partners.
"Agreement" has the meaning set forth in the preamble to this
Agreement.
"Class A Common Stock" has the meaning set forth in the preamble to
this Agreement.
"Class B Common Stock" has the meaning set forth in the preamble to
this Agreement.
"Common Stock" means the Class A Common Stock and the Class B Common
Stock, collectively.
"Company" has the meaning set forth in the preamble to this Agreement.
<PAGE>
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any similar federal statute, and the rules and regulations of the SEC
thereunder, all as the same shall be in effect at the time.
"Fuji Bank" has the meaning set forth in the preamble to this
Agreement.
"Holder(s)" means Fuji Bank and a Qualified Transferee.
"Initiating Holders" has the meaning set forth in Section 2(a).
"IPO" means the initial public offering of the Class A Common Stock.
"NASD" means the National Association of Securities Dealers, Inc.
"Person" means an individual, corporation, partnership, limited
liability company, limited partnership, syndicate, person (including,
without limitation, a "person" as defined in Section 13(d)(3) of the
Exchange Act), trust, association or entity or government, political
subdivision, agency or instrumentality of a government.
"Qualified Transferee" means one unrelated person or its subsidiaries
to whom shares of Class B Common Stock representing more than 50% of the
combined voting power of all outstanding shares of the Company's voting
stock are transferred by Fuji Bank in a single transaction.
"register," "registered" and "registration" refer to a registration
effected by preparing and filing a registration statement or similar
document in compliance with the Securities Act and the declaration or
ordering of effectiveness by the SEC of such registration statement or
document .
"Registrable Stock" means (a) the Class A Common Stock issuable upon
the conversion of the Class B Common Stock owned by a Holder immediately
after the IPO, (b) any Class A Common Stock acquired by a Holder in the
open market at a time when such Holder is deemed to be an Affiliate of the
Company, so long as (i) such Class A Common Stock is owned by such Holder
and (ii) such Holder continues to be deemed an Affiliate of the Company,
and (c) any shares of Class A Common Stock issued or issuable with respect
to any such shares of Registrable Stock referred to in clauses (a) and (b)
above by way of a stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization or otherwise. For purposes of this Agreement, any
Registrable Stock shall cease to be Registrable Stock when (1) a
registration statement covering such Registrable Stock has been declared
effective and such Registrable Stock has been disposed of pursuant to such
effective registration statement, (2) such Registrable Stock is sold or
otherwise transferred by a Person in a transaction in which the rights
under the provisions of this Agreement are not assigned or (3) such
Registrable Stock is sold pursuant to Rule 144
-2-
<PAGE>
(including Rule 144(k)) (or any similar provision then in force under the
Securities Act) without registration under the Securities Act.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended, or any
similar federal statute, as the same shall be in effect at the time.
2. Demand for Registration.
(a) On and after the date that is six (6) months from the date of the
final prospectus (as included in a registration statement filed under the
Securities Act and declared effective by the SEC) covering the shares of
Class A Common Stock sold by the Company in the IPO, the Holders of the
Registrable Stock (the "Initiating Holders") may demand in a written notice
that the Company file a registration statement under the Securities Act
covering the registration of any or all Registrable Stock held by such
Initiating Holders in the manner specified in such notice. Following
receipt of any notice under this Section 2 the Company shall (i) within
twenty (20) days notify all other Holders, if any, of such request in
writing and (ii) use its reasonable efforts to effect the registration (as
set forth in Section 4) of all Registrable Stock that the Initiating
Holders and such other Holders have demanded, within ten (10) days after
the Company has given such notice, be registered in accordance with the
manner of disposition specified in such notice by the Initiating Holders.
(b) If the Initiating Holders have set forth in their written demand
for registration that they intend to have the Registrable Stock distributed
by means of an underwritten offering, the Company shall include such
information in the written notice referred to in clause (i) of Section
2(a). In such event, the right of any Holder to include its Registrable
Stock in such registration shall be conditioned upon such Holder's
participation in such underwritten offering and the inclusion of such
Holder's Registrable Stock in the underwritten offering (unless otherwise
mutually agreed by a majority in interest of the Initiating Holders and
such Holder) on the terms provided below. All Holders proposing to
distribute Registrable Stock through such underwritten offering shall enter
into an underwriting agreement in customary form with the underwriter or
underwriters. Such underwriter or underwriters shall be selected by a
majority in interest of the Initiating Holders and shall be approved by the
Company, which approval shall not be unreasonably withheld, provided, that
(i) all of the representations and warranties by, and the other agreements
on the part of, the Company to and for the benefit of such underwriters
shall also be made to and for the benefit of such Holders of Registrable
Stock, and (ii) any or all of the conditions precedent to the obligations
of such underwriters under such underwriting agreement shall be conditions
precedent to the obligations of such Holders of Registrable Stock. If
Holder of Registrable Stock disapproves of the terms of the underwriting,
such Holder may elect to withdraw all its Registrable Stock by written
notice to the Company, the managing underwriter or
-3-
<PAGE>
underwriters, and the Initiating Holders. The Registrable Stock so
withdrawn shall also be withdrawn from registration.
(c) Notwithstanding any provision of this Agreement to the contrary:
(i) the Company shall not be required to effect a registration
pursuant to this Section 2 during the period starting with
the date thirty (30) days prior to the filing by the
Company of, and ending on a date one hundred eighty (180)
days following the effective date of, a registration
statement pertaining to a public offering of securities for
the account of the Company or on behalf of selling
stockholders under any other registration rights agreement
which the Holders have been entitled to join pursuant to
Section 3; provided that the Company shall actively employ
in good faith all reasonable efforts to cause such
registration statement to become effective as soon after
such period as possible; and
(ii) if the Company shall determine in good faith that such
registration would require the Company to disclose a
material financing, acquisition or other transaction then
being pursued by the Company and the Company shall
determine in good faith that such disclosure is not in the
best interests of the Company or would interfere with such
transaction, the Company's obligation to use its reasonable
efforts to file a registration statement shall be deferred
for a period not to exceed ninety (90) days.
(d) The Company shall not be obligated to effect or pay for more than
one (1) registration pursuant to this Section 2; provided, that a
registration demanded pursuant to this Section 2 shall not be deemed to
have been effected for purposes of this Section 2(d) unless (i) it has been
declared effective by the SEC, (ii) it has remained effective for the
period set forth in Section 4 and (iii) the offering of Registrable Stock
pursuant to such registration is not subject to any stop order, injunction,
or other order or requirement of the SEC preventing the use of the
registration statement (other than any such stop order, injunction, or
other order or requirement of the SEC prompted by any act or omission of
Holders of Registrable Stock).
3. Participatory Registration. If at any time the Company determines that
it shall file a registration statement under the Securities Act (other than a
registration statement on a Form S-4 or S-8 or any successor forms or filed in
connection with a merger, acquisition, exchange offer or other business
combination transaction or an offering of securities solely to the Company's
existing securityholders or employees) on any form that would also permit the
registration of the Registrable Stock and such filing is to be on its behalf or
on behalf of selling holders of its securities, or on behalf of both, for the
general registration of its Class A Common Stock to be sold for cash, the
Company shall each such time promptly give each Holder written
-4-
<PAGE>
notice of such determination setting forth the date on which the Company
proposes to file such registration statement, which date shall be no earlier
than fifteen (15) days from the date of such notice, and advising each Holder of
its right to request that its Registrable Stock be included in such
registration. Upon the written request of any Holder received by the Company no
later than ten (10) days after the date of receipt of the Company's notice, the
Company shall use its reasonable efforts to effect the registration (as set
forth in Section 4) of all of the Registrable Stock that each such Holder has so
requested to be registered and to cause the managing underwriter or underwriters
of the proposed underwritten offering to permit such Holder to include its
Registrable Stock in such offering on the same terms and conditions as the
shares of Class A Common Stock to be sold by the Company (or, if no shares are
to be sold by the Company, the shares of Class A Common Stock to be sold by
selling stockholders) included therein. If, in the written opinion of the
managing underwriter or underwriters (or, in the case of a non-underwritten
offering, in the reasonable good faith opinion of the Company), the total number
of shares of Class A Common Stock to be so registered, including such
Registrable Stock, will exceed the maximum number of shares of Class A Common
Stock which can be marketed (a) at a price per share reasonably related to the
then current market value per share of the Class A Common Stock, and (b) without
otherwise materially and adversely affecting the entire offering, then the
Company shall be entitled to reduce the number of shares of Registrable Stock to
be registered. Any reduction made pursuant to the immediately preceding sentence
shall be allocated among all such Holders in proportion (as nearly as
practicable) to the amount of Registrable Stock owned by each Holder at the time
of filing the registration statement. The Company shall not be required under
this Section 3 to include shares of Registrable Stock in any underwritten
offering unless the Holders of such shares of Registrable Stock accept the terms
of the underwriting of such offering that have been reasonably agreed upon
between the Company and the underwriters selected by the Company.
4. Registration Procedures. Whenever required under Section 2 or 3 to use
its reasonable efforts to effect the registration of any Registrable Stock, the
Company shall, as expeditiously as reasonably possible:
(a) prepare and file with the SEC a registration statement, signed,
pursuant to Section 6(a) of the Securities Act, by the requisite officers
and directors of the Company, with respect to such Registrable Stock and
use its reasonable efforts to cause such registration statement to become
and remain effective for the period of the distribution contemplated
thereby determined as hereinafter provided;
(b) prepare and file with the SEC such amendments and supplements to
such registration statement, signed, pursuant to Section 6(a) of the
Securities Act, by the requisite officers and directors of the Company, and
the prospectus used in connection therewith as may be necessary to comply
with the provisions of the Securities Act with respect to the disposition
of all Registrable Stock covered by such registration statement;
(c) furnish to the Holders such numbers of copies of the registration
statement and the prospectus included therein (including each preliminary
prospectus and any
-5-
<PAGE>
amendments or supplements thereto in conformity with the requirements of
the Securities Act) and such other documents and information as they may
reasonably request;
(d) use its reasonable efforts to register or qualify the Registrable
Stock covered by such registration statement under such other securities or
blue sky laws of such jurisdictions (if any) within the United States and
Puerto Rico as shall be reasonably appropriate for the distribution of the
Registrable Stock covered by the registration statement; provided, however,
that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business in or to file a general consent
to service of process in any jurisdiction wherein it would not but for the
requirements of this paragraph (d) be obligated to do so; and provided,
further, that the Company shall not be required to qualify such Registrable
Stock in any jurisdiction in which the securities regulatory authority
requires that any Holder submit any shares of its Registrable Stock to the
terms, provisions and restrictions of any escrow, lockup or similar
agreement(s) for consent to sell Registrable Stock in such jurisdiction,
unless such Holder agrees to do so;
(e) promptly notify each Holder for whom such Registrable Stock is
covered by such registration statement, at any time when a prospectus
relating thereto is required to be delivered under the Securities Act, of
the happening of any event as a result of which the prospectus included in
such registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading in light of the circumstances under which they were made, and at
the request of any such Holder promptly prepare and furnish to such Holder
a reasonable number of copies of a supplement to or an amendment of such
prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such securities, such prospectus shall not include an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading in light of the circumstances under which they were made (and
the Holders shall suspend the use of the prospectus until the requisite
changes thereto have been made);
(f) furnish, at the request of any Holder demanding registration of
Registrable Stock pursuant to Section 2, if the method of distribution is
by means of an underwriting, on the date that the shares of Registrable
Stock are delivered to the underwriters for sale pursuant to such
registration, or if such Registrable Stock is not being sold through
underwriters, on the date that the registration statement with respect to
such shares of Registrable Stock becomes effective, (i) a signed opinion,
dated such date, of legal counsel representing the Company for the purpose
of such registration, addressed to the underwriters, if any, and if such
Registrable Stock is not being sold through underwriters, then to the
Holders making such request, as to such matters as such underwritten or the
Holders holding a majority of the Registrable Stock included in such
registration, as the case may be, may reasonably request and as would be
customary in such a transaction; and (ii) letters dated such date and the
date the offering is priced from
-6-
<PAGE>
the independent certified public accountants of the Company, addressed to
the underwriters, if any, and if such Registrable Stock is not being sold
through underwriters, then to the Holders making such request and, if such
accountants refuse to deliver such letters to such Holders, then to the
Company (A) stating that they are independent certified public accountants
within the meaning of the Securities Act and that, in the opinion of such
accountants, the financial statements and other financial data of the
Company included in the registration statement or the prospectus, or any
amendment or supplement thereto, comply as to form in all material respects
with the applicable accounting requirements of the Securities Act and (B)
covering such other financial matters (including information as to the
period ending not more than five (5) business days prior to the date of
such letters) with respect to the registration in respect of which such
letter is being given as such underwriters or the Holders holding a
majority of the Registrable Stock included in such registration, as the
case may be, may reasonably request and as would be customary in such a
transaction;
(g) enter into customary agreements (including if the method of
distribution is by means of an underwriting, an underwriting agreement in
customary form) and take such other actions as are reasonably required in
order to expedite or facilitate the disposition of the Registrable Stock to
be so included in the registration statement;
(h) otherwise use its reasonable efforts to comply with all applicable
rules and regulations of the SEC, and make available to its security
holders, as soon as reasonably practicable, but not later than eighteen
(18) months after the effective date of the registration statement, an
earnings statement covering the period of at least twelve (12) months
beginning with the first day of the first full fiscal quarter after the
effective date of such registration statement, which earnings statements
shall satisfy the provisions of Section 11 (a) of the Securities Act;
(i) use its reasonable efforts to list the Registrable Stock covered
by such registration statement with any securities exchange on which the
Class A Common Stock is then listed; and
(j) notwithstanding any provision of this Section 4 to the contrary,
the Company shall not be required to amend or supplement a prospectus for a
period not to exceed ninety (90) days if (i) such amendment or supplement
would require the Company to disclose a material financing, acquisition or
other transaction then being pursued by the Company and the Company shall
determine in good faith that such disclosure is not in the best interests
of the Company or would interfere with such transaction or (ii) the Company
shall determine in good faith that there is a valid business purpose or
reason for suspending the use of such prospectus in accordance with Section
4(e) hereof instead of making such amendment or supplement.
For purposes of Sections 4(a) and 4(b), the period of distribution of
Registrable Stock in a firm commitment underwritten public offering shall be
deemed to extend until each
-7-
<PAGE>
underwriter has completed the distribution of all securities purchased by it,
and the period of distribution of Registrable Stock in any other registration
shall be deemed to extend until the earlier of (i) the sale of all Registrable
Stock covered thereby and (ii) six (6) months after the effective date thereof.
5. Information from Holders. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Agreement that
the Holders shall furnish to the Company such information regarding themselves,
the Registrable Stock held by them, and the intended method of disposition of
such securities as the Company shall reasonably request and as shall be required
in connection with the action to be taken by the Company.
6. Expenses of Registration. All expenses incurred in connection with
each registration pursuant to Section 2 and Section 3 of this Agreement,
excluding underwriters' discounts and commissions, but including without
limitation all registration, filing and qualification fees, word processing,
duplicating, printers' and accounting fees (including the expenses of any
special audits or "cold comfort" letters required by or incident to such
performance and compliance), fees of the New York Stock Exchange or other
listing fees, NASD filing fees, messenger and delivery expenses, fees and
expenses of complying with state securities or blue sky laws, fees and
disbursements of counsel for the Company, and the reasonable fees and
disbursements of one counsel for the selling Holders (which counsel shall be
selected by the Holders holding a majority in interest of the Registrable Stock
being registered), shall be paid by the Company; provided, however, that if a
registration request pursuant to Section 2 of this Agreement is subsequently
withdrawn at the request of the Holders, such withdrawing Holders shall bear
such expenses. The Holders shall bear and pay the underwriting commissions and
discounts applicable to securities offered for their account in connection with
any registrations, filings and qualifications made pursuant to this Agreement.
7. Information from the Company. With a view to making available the
benefits of certain rules and regulations of the SEC which may at any time
permit the sale of the Registrable Stock to the public without registration, (a)
at all times after ninety (90) days after the registration statement under the
Securities Act covering the IPO shall have been declared effective by the SEC,
the Company agrees to:
(i) use its reasonable best efforts to file with the SEC in a
timely manner all reports and other documents required of
the Company under the Securities Act and the Exchange Act,
or otherwise make and keep public information available (as
those terms are understood and defined in Rule 144 under the
Securities Act); and
(ii) furnish to each Holder of Registrable Stock forthwith upon
request a written statement by the Company as to its
compliance with the reporting requirements of the Exchange
Act, a copy of the most recent annual report on Form 10-K or
quarterly report on Form 10-Q of the Company, and such other
reports and documents
-8-
<PAGE>
so filed by the Company as such Holder may reasonably
request in availing itself of any rule or regulation of the
SEC allowing such Holder to sell any Registrable Stock
without registration; and
(b) at all times during which the Company is neither subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, it will
provide, upon the written request of any Holder of Registrable Stock in
written form (as promptly as reasonably practicable and in any event within
15 business days), to any prospective buyer of such stock designated by
such Holder, all information required by Rule 144A(d)(4)(i) of the General
Regulations promulgated by the SEC under the Securities Act.
8. Indemnification. In the event any Registrable Stock is included in a
registration statement under this Agreement:
(a) The Company shall indemnify and hold harmless each Holder, such
Holder's directors and officers, each underwriter (as defined in the
Securities Act) who participates in the offering of the Registrable Stock,
and each Person who controls such Holder within the meaning of Section 15
of the Securities Act, against any losses, claims, damages or liabilities,
joint or several, which a Holder, any such director or officer, underwriter
or controlling Person may incur under the Securities Act or otherwise,
insofar as such losses, claims, damages, liabilities (or proceedings in
respect thereof) arise out of or are based on any untrue or alleged untrue
statement of any material fact contained in such registration statement on
the effective date thereof (including any preliminary prospectus, final
prospectus or other prospectus filed pursuant to Rule 424 under the
Securities Act or any amendments or supplements to any of the foregoing) or
arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading; and shall reimburse each such
Holder, such Holder's directors and officers, such underwriter or
controlling Person for any legal or other expenses reasonably incurred by
him, her or it (but not in excess of expenses incurred in respect of one
counsel for all of them unless, in the reasonable judgement of an
indemnified party there is a conflict of interest with another indemnified
party, in which case the Company will reimburse the indemnified parties for
one additional counsel) in connection with investigating or defending any
such loss, claim, damage, liability or proceeding; provided, however, that
the indemnity agreement contained in this Section 8(a) shall not apply to
any Holder, such Holder's directors and officers, underwriter or
controlling Person in any such case for any such loss, claim, damage,
liability or proceeding if such settlement is effected without the consent
of the Company (which consent shall not be unreasonably withheld);
provided, further, that the Company shall not be liable to any Holder, such
Holder's directors and officers, underwriter or controlling Person in any
such case for any such loss, claim, damage, liability or expenses to the
extent that it arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in connection
with such registration statement, preliminary
-9-
<PAGE>
prospectus, final prospectus, a prospectus filed under Rule 424 of the
Securities Act or amendments or supplements to any of the foregoing, in reliance
upon and in conformity with written information furnished expressly for use in
connection with such registration by any such Holder, such Holder's directors
and officers, underwriter or controlling Person; and provided, further, that,
with respect to any untrue statement or alleged untrue statement or omission or
alleged omission made in any prospectus (preliminary or otherwise), the
foregoing indemnity agreement shall not inure to the benefit of any underwriter
or (in the case of an offering that is not underwritten) any Holder from whom
the person asserting any such loss, claim, damage, liability or proceeding
purchased the Registrable Stock concerned, or any officer or director of or
Person controlling such underwriter or (in the case of an offering that is not
underwritten) such Holder, to the extent any such loss, claim, damage, liability
or proceeding of such underwriter or Holder results from the fact that a copy of
the final prospectus (or the final prospectus as amended or supplemented) was
not sent or given to such person, if required by the Securities Act so to have
been delivered, at or prior to the written confirmation of the sale of such
Registrable Stock to such person, and the untrue statement or the alleged untrue
statement or the omission or the alleged omission was corrected in such final
prospectus (or the final prospectus as amended or supplemented) if the Company
had previously furnished copies of such final prospectus (or the final
prospectus as amended or supplemented) to such underwriter or Holder. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of any such Holder, such Holder's directors and officers,
underwriter or controlling Person, and shall survive the transfer of such
securities by such Holder.
(b) The Holders demanding or joining in a registration, severally and
not jointly, shall indemnify and hold harmless the Company, each of its
directors and officers, each Person, if any, who controls the Company within the
meaning of Section 15 of the Securities Act, and each underwriter (within the
meaning of the Securities Act) who participates in the offering of the
Registrable Stock and each Person who controls such underwriter against any
losses, claims, damages or liabilities, joint or several, to which the Company
or any such director, officer, controlling Person or underwriter may incur,
under the Securities Act or otherwise, insofar as such losses, claims, damages
or liabilities (or proceedings in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in such registration statement on the effective date thereof
(including any preliminary prospectus, final prospectus or other prospectus
filed pursuant to Rule 424 under the Securities Act or any amendments or
supplements to any of the foregoing) or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, in
each case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in such
registration statement, preliminary prospectus, final prospectus or other
prospectus filed pursuant to Rule 424 of the Securities Act or amendments or
supplements to any of the foregoing, in reliance upon and in conformity with
written information furnished by or on behalf
-10-
<PAGE>
of such Holder expressly for use in connection with such registration and each
such Holder shall reimburse any legal or other expenses reasonably incurred by
the Company or any such director, officer, controlling Person or underwriter
(but not in excess of expenses incurred in respect of one counsel for all of
them unless, in the reasonable judgement of an indemnified Person, there is a
conflict of interest with another indemnified Person, in which case such Holder
shall reimburse the indemnified Persons for one additional counsel) in
connection with investigating or defending any such loss, claim, damage,
liability or proceeding; provided, however, that the indemnity agreement
contained in this Section 8(b) shall not apply to amounts paid in settlement of
any such loss, claim, damage, liability or proceeding if such settlement is
effected without the consent of such Holder (which consent shall not be
unreasonably withheld), and provided, further, that the liability of each Holder
hereunder shall not in any event exceed the net proceeds received by such Holder
from the sale of Registrable Stock covered by such registration statement.
(c) Promptly after receipt by an indemnified Person under this Section
8 of notice of the commencement of any action or proceeding, such indemnified
Person shall, if a claim in respect thereof is to be made against any
indemnifying Person under this Section, notify the indemnifying Person in
writing of the commencement thereof, and the indemnifying Person shall have the
right to participate in and assume the defense thereof with counsel selected by
the indemnifying Person and reasonably satisfactory to the indemnified Person;
provided, however, that an indemnified Person shall have the right to retain its
own counsel, with all fees and expenses thereof to be paid by such indemnified
Person (except as provided in paragraph (a) and (b) above), and to be apprised
of all progress in any proceeding the defense of which has been assumed by the
indemnifying Person. The failure to notify an indemnifying Person promptly of
the commencement of any such action shall only release the indemnifying Person
from any of its obligations under this Section 8 if, and only to the extent
that, such indemnifying Person is materially prejudiced by such failure, but the
omission to so notify the indemnifying Person will not relieve it of any
liability that it may have to any indemnified Person otherwise than under this
Section.
(d) To the extent any indemnification by an indemnifying Person
provided for in this Section 8 is prohibited or limited by law, the indemnifying
Person, in lieu of indemnifying such indemnified Person, shall contribute to the
amount paid or payable by such indemnified Person as a result of such losses,
claims, damages or liabilities in such proportion as is appropriate to reflect
the relative fault of the indemnifying Person and the indemnified Person in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative fault of such indemnifying Person and indemnified
Person shall be determined by reference to, among other things, whether an
untrue or alleged untrue statement of material fact or omission or alleged
omission to state a material fact, has been made by, or relates to information
supplied by, such indemnifying Person or indemnified Person, and the parties'
relative intent, knowledge, access to information and
-11-
<PAGE>
opportunity to correct or prevent such statement or omission. The amount
paid or payable by a Person as a result of losses, claims, damages or
liabilities referred to above shall be deemed to include any legal or other
fees or expenses reasonably incurred by such Person in connection with any
investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 8(d) were determined by pro rata
allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. No Person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation.
9. Lockup. Each Holder shall, in connection with any registration of the
Company's securities, upon the request of the Company or the underwriters
managing any underwritten offering of the Company's securities, agree in writing
not to effect any sale, disposition or distribution of any Registrable Stock
(other than that included in the registration) without the prior written consent
of the Company or such underwriters, as the case may be, for such period of time
not to exceed one hundred eighty (180) days from the effective date of such
registration as the Company or the underwriters may specify; provided that all
executive officers and directors of the Company shall also have agreed not to
effect any sale, disposition or distribution of any Registrable Stock under the
circumstances and pursuant to the terms set forth in this Section 9.
10. Assignment of Registration Rights. The registration rights of any
Holder under this Agreement with respect to any Registrable Stock may be
assigned to an Affiliate of such Holder; provided that (a) the assigning Holder
shall give the Company written notice at or prior to the time of such assignment
stating the name and address of the assignee and identifying the securities with
respect to which the rights under this Agreement are being assigned; (b) such
assignee shall agree in writing, in form and substance reasonably satisfactory
to the Company, to be bound as a Holder by the provisions of this Agreement; and
(c) immediately following such assignment the further disposition of such
securities by such assignee is restricted under the Securities Act. No
assignment of the registration rights of any Holder with respect to any
Registrable Stock in accordance with this Section 10 shall cause such
Registrable Stock to lose such status.
11. Binding Effect; Benefit. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective permitted
successors and assigns. Nothing in this Agreement, expressed or implied, is
intended to confer on any Person other than the parties hereto or their
respective permitted successors and assigns any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
12. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the Laws of the State of New York.
-12-
<PAGE>
13. Counterparts. This Agreement may be executed in one or more
counterparts, each of which when executed and delivered shall be deemed to be an
original, but all of which taken together shall constitute one and the same
agreement.
14. Headings. The descriptive headings contained in this Agreement are
included for convenience of reference only and shall not affect in any way the
meaning or interpretation of this Agreement.
15. Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in person, by telecopy
upon written confirmation of receipt by the recipient or by registered or
certified mail (postage prepaid, return receipt requested) to the respective
parties at the following addresses (or at such other address for a party as
shall be specified in a notice given in accordance with this Section 15):
if to the Company:
Heller Financial, Inc.
500 West Monroe Street
Chicago, Illinois 60661
Attention: General Counsel
Telecopy Number: (312) 441-7456
if to Fuji Bank:
The Fuji Bank, Limited
New York Branch
Two World Trade Center
79th Floor
New York, New York 10048
Attention: __________________________
Telecopy Number:________________________
16. Amendments and Waivers. Any provision of this Agreement may be amended
or waived if such amendment or waiver is in writing and is signed, in the case
of an amendment, by each party to this Agreement, or in the case of a waiver, by
the party against whom the waiver is to be effective. No failure or delay by any
party in exercising any rich, power or privilege hereunder shall operate as a
waiver thereof nor shall any single or partial exercise thereof preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege.
17. Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law, or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the
-13-
<PAGE>
economic or legal substance of the transactions set forth in this Agreement is
not affected in any manner materially adverse to any party hereto. Upon such
determination that any term or other provision is invalid, illegal or incapable
of being enforced, the parties hereto shall negotiate in good faith to modify
this Agreement so as to effect the original intent of the parties as closely as
possible in a mutually acceptable manner in order that the transactions set
forth in this Agreement be consummated as originally contemplated to the fullest
extent possible.
18. Entire Agreement. This Agreement constitutes the entire agreement
among the parties with respect to the subject matter hereof and supersedes all
prior agreements and understandings among the parties with respect thereto.
19. Attorneys' Fees. In the event that any party hereto shall file suit to
enforce any of the terms of this Agreement or to recover damages for a breach of
this Agreement, the prevailing party shall be entitled to recover reasonable
attorney's fees and costs incurred in such proceeding
-14-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
HELLER FINANCIAL INC.
By /s/ Richard J. Almeida
----------------------------
Name: RICHARD J. ALMEIDA
Title: CHAIRMAN AND CEO
THE FUJI BANK LIMITED
By /s/ Atsushi Takano
----------------------------
Name: ATSUSHI TAKANO
Title: MANAGING DIRECTOR
-15-
<PAGE>
EXHIBIT 10(G)
AGREEMENT FOR THE ALLOCATION OF FEDERAL INCOME TAX LIABILITY
------------------------------------------------------------
AND BENEFITS AMONG FUJI AMERICA HOLDINGS, INC. AND HELLER
---------------------------------------------------------
FINANCIAL, INC.
---------------
This Agreement, effective as of January 2, 1998, is made by and between Fuji
America Holdings, Inc. (FAHI) and Heller Financial, Inc. (HFI).
1. GENERAL PURPOSE
---------------
FAHI and HFI agree to adhere to the following policy with respect to the annual
allocation of consolidated U.S. federal and state income tax liabilities or
refunds between them.
2. PREPARATION AND FILING OF RETURNS
---------------------------------
Whereas, FAHI succeeded Heller International Corporation (HIC) by merger of HIC
into FAHI on January 2, 1998, and as a result of that merger FAHI has succeeded
HIC as the parent company of a group of corporations which has elected to file
consolidated Federal income tax returns, FAHI agrees to prepare and file the
annual Federal income tax return of HFI and all of its subsidiaries which are
also required to be included in such consolidated returns (collectively, the HFI
Group) as part of the annual FAHI consolidated Federal income tax return.
FAHI also agrees to prepare and file the annual HFI Group Florida, New Mexico,
and Kentucky consolidated state income tax returns as part of the annual FAHI
consolidated returns for those states, as well as for any other states for which
a consolidated filing becomes necessary. FAHI further agrees to prepare the HFI
Group combined unitary state income tax returns in states for which FAHI
determines a combined return to be necessary for the FAHI group.
3. PAYMENT OF TAX
--------------
I. FAHI
As parent company of the consolidated return group, FAHI agrees pay the
consolidated income tax liability of the group to the Internal Revenue Service,
including quarterly estimated tax payments, payments due upon the filing of tax
return extension requests, and payments due upon the filing of tax returns;
including payments arising from the taxable income of the HFI Group. FAHI will
also receive any tax refunds due to the consolidated group from the Internal
Revenue Service, including any tax refunds arising from the activity of the HFI
Group. In addition, FAHI agrees to pay the consolidated and combined state
income tax liabilities for the states for which it will prepare and file
returns, in a similar manner.
II. HFI
HFI agrees to pay to FAHI the Federal income tax liability of the HFI Group,
computed as if the HFI Group were to file a consolidated Federal income tax
return with HFI as the parent
<PAGE>
company, without inclusion of FAHI or other corporations in the group not part
of the HFI Group. HFI agrees to make payments on quarterly estimated tax payment
dates and as necessary on tax return extension dates and tax return filing
dates. In computing quarterly payments of tax pursuant to this paragraph, HFI
shall use the method of determining the proportion of the annual tax to be paid
for each quarterly payment which FAHI has chosen for the payment of the
consolidated tax to the Internal Revenue Service. To the extent a refund of tax
would be due to HFI if the HFI Group were to file a consolidated Federal income
tax return with HFI as the parent company, HFI shall be entitled to receive an
equal amount from FAHI. If the amount so due from FAHI has not been paid at the
time that the next following quarterly payment is due from HFI to FAHI, HFI
shall be entitled to offset the refund amount against the subsequent payment
obligation (and further against additional subsequent payment obligations to the
extent necessary to effectively obtain the refund). In addition, HFI agrees to
pay the consolidated state income tax liability of the HFI Group for states in
which FAHI will prepare and file consolidated state income tax returns, in a
similar manner.
III. OFFSET FOR FOREIGN TAX CREDIT NOT UTILIZED
The parties acknowledge that Heller International Group. Inc., a majority-owned
subsidiary of HFI, and it subsidiaries (the HIG Group), have had a lessened
ability to utilize foreign tax credits in their U.S. Corporation Income Tax
Returns due to the common ownership of FAHI and its subsidiaries other than the
HFI Group in the HIG Group's foreign tax credit limitation calculations. To the
extent that the HIG Group has less foreign tax credit utilization in any tax
year under the combined limitation calculations than it would have under
limitation calculations reflecting only the HFI Group and the HIG Group, whether
or not the HIG Group is included in a FAHI consolidated return, HFI shall be
entitled to reduce payments otherwise due to FAHI under this agreement as an
offset.
IV. SETTLEMENT BETWEEN PARTIES
The parties agree that, to the extent necessary to carry out the terms of this
Agreement, amounts are determined to be due from one party to another, amounts
unpaid fifteen (15) day from the date determined to be due shall bear interest
at a rate equal to HFI's commercial paper rate in effect during such time the
amounts are unpaid.
4. ALLOCATION OF ADDITIONAL CURRENT TAX PROVISION
----------------------------------------------
If FAHI is required to make an additional payment of tax, interest or penalty
due to a tax assessment by the Internal Revenue Service, a state taxing
authority, or due to the filing of an amended return, to the extent that the
payment is attributable to the HFI Group, the HFI Group shall recompute its
payment obligations and pay any increase in tax so computed to FAHI, together
with reimbursement for interest and penalty amounts attributable to the HFI
Group. For the avoidance of doubt, any increase in tax or interest or penalty
attributable to HIC or former subsidiaries of HIC which are not HFI Group
members shall be attributable solely to FAHI pursuant to the merger of HIC into
FAHI, and HFI shall have no obligation to pay FAHI amounts for such items
pursuant to this paragraph.
<PAGE>
If, due to the common ownership of FAHI and its subsidiaries other than the HFI
Group in the HIG Group's foreign tax credit limitation calculations, the HIG
Group has less foreign tax credit utilization in any tax year under the combined
limitation calculations than it would have under limitation calculations
reflecting only the HFI Group and the HIG Group, and, as a result, the HIG Group
is required to make an additional payment of tax, interest or penalty due to a
tax assessment by the Internal Revenue Service or due to the filing of an
amended return, FAHI shall be liable for such items pursuant to this paragraph.
5. PREPARATION AND FILING OF SEPARATE STATE INCOME TAX RETURNS
-----------------------------------------------------------
Except as provided elsewhere in this paragraph, FAHI and HFI agree to prepare
and file their own respective separate state income tax returns in accordance
with the laws of the individual states and pay the required tax. In addition,
this Agreement shall not govern California income tax filing and payment
requirements, which will continue to be governed by the tax sharing agreement
entered into by the parties to this agreement with The Fuji Bank, Limited.
6. INDEMNIFICATION FOR SEVERAL LIABILITY
-------------------------------------
FAHI hereby agrees to hold HFI harmless against assessments of tax made upon HFI
for tax liabilities attributable to FAHI or members of the FAHI consolidated
return other than the HFI Group pursuant to Treasury Regulations Section 1.1502-
6(a). HFI hereby agrees to hold FAHI harmless against assessments of tax made
upon FAHI or members of the FAHI consolidated return other than the HFI Group
for tax liabilities attributable to the HFI Group pursuant to Treasury
Regulations Section 1.1502-6(a).
IN WITNESS WHEREOF, each of the undersigned corporations has executed this
Agreement by an officer thereunto duly authorized.
FUJI AMERICA HOLDINGS, INC.
By: /s/ JAMES S. JASIONOWSKI
Name: James S. Jasionowski
Title: Senior Vice President
HELLER FINANCIAL, INC.
By: /s/ THOMAS KRAMER
Name: Thomas Kramer
Title: Vice President
<PAGE>
EXHIBIT 10(u)
FIRST 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, most recently in the form of
an amendment and restatement effective as of January 1, 1998, and the Company
has determined that further amendment of the Plan is necessary and desirable;
NOW, THEREFORE, in exercise of the power delegated to the Committee by
Section 7 of the Plan and delegated to the undersigned officer by resolution of
the Committee, the Plan, as previously amended, is further amended in the
following particulars:
1. By substituting the following for Section 3.2 of the Plan, effective
March 1, 1999:
"3.2 Investment Elections and Income Crediting. As of the close of
business on each day the New York Stock Exchange is open for business
('Valuation Date'), each Participant's Deferral Account will be credited
with income and gains and charged with losses, expenses and distributions
equal to the amount by which the Deferral Account would have been credited
or charged since the prior Valuation Date (in the manner described below)
had the Participant's Deferral Account been invested in the Investment
Funds (as defined below) selected by the Participant in accordance with the
Participant's investment elections.
"The 'Investment Funds' will consist of two or more mutual funds or
other group investment funds designated by the Committee, in its sole
discretion, for Participants' investment elections. In addition, the
Committee may establish an Investment Fund consisting of the Company's
Class A common stock, par value $0.25 (the 'Company Stock Fund'). Income,
gains, losses, expenses and distributions will be credited and charged in
the manner dictated by each Investment Fund. The Company Stock Fund may use
a unit valuation method of accounting. The Committee may, in its sole
discretion, from time to time designate additional Investment Funds or
terminate existing Investment Funds.
"A Participant must make an investment election at the time of his or
her initial Deferral Election. The investment election must designate the
portion of the amounts deferred to be treated as invested in each available
Investment Fund. As to elections effective on or after March 1, 1999, any
investment election made by a Participant that directed or directs
investment
1
<PAGE>
into the Company Stock Fund will be irrevocable. A Participant may elect no
later than 1 pm Central Standard Time on February 26, 1999 to move amounts
already in the Company Stock Fund out of that Fund; any amounts not moved
by that time will remain in the Company Stock Fund. A Participant's
investment election will remain in effect for each deferral made after the
election is effective, until the Participant files a change in investment
election with the Committee (or its delegate). Except as described above
with regard to amounts invested in the Company Stock Fund, a Participant
may change his or her investment election as to amounts deferred following
the change in investment election, as to the investment allocation of the
Participant's existing Deferral Account, or as to both matters. A change in
investment election must be filed with the Committee (or its delegate) in
the form prescribed by the Committee and in the time and manner specified
by the Committee. A Participant's initial investment election, or any
change in investment election, will become effective in accordance with
rules established by the Committee and applied uniformly to similarly
situated Participants. The Company reserves the right to impose blackout
periods during which no contributions or transfers may be made to, or, for
transfers to be effective before March 1, 1999, from the Company Stock
Fund."
2. By deleting the phrase, "as of the most recent valuation completed
prior to the date on which the balance of the Deferral Account is paid to the
Participant" from the end of the second paragraph of Section 4.1 of the Plan,
effective as of July 1, 1998.
3. By adding the phrase, "as of a Valuation Date occurring" immediately
before the phrase, "as soon as" in each place where the latter phrase occurs in
Sections 4.1 and 4.2 of the Plan, effective July 1, 1998.
4. By deleting the phrase, "Valuation Date coinciding with or next
following the" in each place where it appears in Sections 4.1 and 4.2 of the
Plan, effective as of July 1, 1998.
5. By substituting the following for Section 4.5 of the Plan, effective
March 1, 1999:
"4.5 Form of Payment. Effective March 1, 1999, if a Participant has
directed the investment of all or a part of his or her Deferral Account
into the Company Stock Fund, then any payments to that Participant from
that portion of his or her Deferral Account will be made in Company Stock.
All other payments will be made in cash."
6. By substituting the following for Section 4.6 of the Plan, effective
March 1, 1999:
"4.6 Unforeseeable Financial Emergency. If the Committee determines
that a Participant has incurred an Unforeseeable Financial Emergency (as
defined below), the Participant may withdraw the portion of
2
<PAGE>
the balance of his or her Deferral Account that is needed to satisfy the
Unforeseeable Financial Emergency, to the extent that the Unforeseeable
Financial Emergency may not be relieved:
(1) through reimbursement or compensation by insurance or otherwise;
or
(2) by liquidation of the Participant's assets, to the extent
liquidation of those assets would not itself cause severe
financial hardship.
"An 'Unforeseeable Financial Emergency' is a severe financial hardship
to the Participant resulting from:
(1) a sudden and unexpected illness or accident of the Participant or
of a dependent of the Participant;
(2) loss of the Participant's property due to casualty; or
(3) such other similar extraordinary and unforeseeable circumstances
arising as a result of events beyond the control of the
Participant as determined by the Committee.
"Notwithstanding the foregoing, effective for withdrawals made on or
after March 1, 1999, no portion of a Participant's Deferral Account for
which the Participant has directed investment in the Company Stock Fund may
be withdrawn under this Section 4.6 under any circumstances. A withdrawal
on account of an Unforeseeable Financial Emergency will be paid in cash, as
of a Valuation Date occurring as soon as possible after the date on which
the Committee approves the withdrawal.
"If a Participant is entitled to a withdrawal from the Plan on account
of an Unforeseeable Financial Emergency and at the same time is entitled to
a distribution on account of hardship from a 401(k) Plan (as defined in
Section 2.2(j)), the Participant must withdraw his or her entire Deferral
Account under the Plan on account of the Unforeseeable Financial Emergency
before he or she may receive any distribution on account of hardship under
the 401(k) Plan."
7. By substituting the following for Section 4.7 of the Plan, effective
March 1, 1999:
"4.7 Withholding of Taxes. The Company will withhold any applicable
Federal, state or local income tax from payments due under the Plan. The
Company will also withhold Social Security taxes, including the Medicare
portion of those taxes, and any other employment taxes necessary to comply
with applicable laws. To the extent that a Participant's Deferral
3
<PAGE>
Account does not contain sufficient cash to satisfy the applicable taxes,
the Company will liquidate shares of Company Stock held for a Participant
who directed the investment of all or a portion of his or her Deferral
Account into the Company Stock Fund and use the obtained funds to satisfy
the taxes."
8. By substituting the following for Section 4.8 of the Plan, effective
as of July 1, 1998:
"4.8 Cashout of Account Balances. Notwithstanding any election by
the Participant regarding the timing and manner of a payment of his
Deferral Account, in the event of a Participant's Termination of
Employment, (a) the Employer may elect to pay the Participant a lump sum
distribution of the entire value of the Participant's Deferral Account if
the value is less than one hundred thousand dollars ($100,000) determined
as of the Valuation Date coinciding with or immediately following the
Participant's termination of employment, and (b) the Compensation Committee
may in its sole discretion elect to pay the Participant a lump sum
distribution of the entire value of the Participant's Deferral Account."
9. By adding the following as new Section 5.9, immediately following
Section 5.8 of the Plan, effective March 1, 1999:
"5.9 Voting Company Stock. Effective March 1, 1999, any Participant
that has directed or directs the investment of any part of his or her
Deferral Account into the Company Stock Fund will have the right to direct
the voting of shares of Company Stock allocated to his or her Deferral
Account. The Participant will direct the voting of shares allocated to his
or her Deferral Account according to the procedures and deadlines
established by the Committee."
10. By substituting the following for Section 6.1 of the Plan, effective
as of January 1, 1999:
"6.1 Adoption of Plan. Any subsidiary or affiliate of the Company
(including any domestic or foreign entity which is related to the Company
by less than a 50% direct or indirect ownership interest by or in the
Company) (an 'Employer') may, with the approval of the Committee and under
such terms and conditions as the Committee may prescribe, adopt the
corresponding portions of the Plan by resolution of its board of directors.
The Committee 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 Committee has approved
the Employer's adoption of the Plan. An adopting Employer has no authority
to amend or terminate the Plan under Section 7."
4
<PAGE>
11. By substituting the following for Section 6.2 of the Plan, effective
March 1, 1999:
"6.2 Withdrawal from the Plan by Employer. Any Employer has the
right, at any time, upon the approval of and under such conditions as may
be provided by the Committee, to withdraw from the Plan by delivering to
the Committee written notice of its election to withdraw. Upon receipt of
such a notice, the Committee will direct that the portion of the Deferral
Account of a Participant or Beneficiary attributable to amounts deferred
while the Participant was an employee of the withdrawing Employer, plus any
net earnings, gains and losses on those amounts, be distributed from the
Trust in cash, and, effective for distributions made on or after March 1,
1999, to the extent invested in the Company Stock Fund, in shares of
Company Stock. Distribution under the preceding sentence will be made at
such time or times as the Committee, in its sole discretion, deems to be in
the best interest of the withdrawing Employer's employees and their
Beneficiaries. To the extent the amounts held in the Trust for the benefit
of its Participants and Beneficiaries are not sufficient to satisfy the
withdrawing Employer's obligation to its Participants and their
Beneficiaries accrued on account of their employment with the withdrawing
Employer, the amount remaining necessary to satisfy the obligation will be
an obligation of the withdrawing Employer, and the Company will have no
further obligation to the withdrawing Employer's Participants and
Beneficiaries with respect to those amounts."
12. By adding the following new Appendix A to the Plan, immediately at the
end of the Plan, effective as of January 1, 1999:
"Appendix A
----------
Adopting Employers
------------------
"The affiliates and subsidiaries of the Company listed below have adopted
the Plan for their employees effective as of the dates indicated.
"Adopting Employer Effective Date
----------------- --------------
Heller Financial Leasing, Inc. January 1, 1999"
* * *
IN WITNESS WHEREOF, on behalf of the Company and Committee, the undersigned
officer has executed this amendment and consent this 2nd day of March, 1999.
HELLER FINANCIAL, INC.
5
<PAGE>
By: /s/ Nina B Eidell
-------------------------
Nina B. Eidell
Executive Vice President
Chief Human Resources Officer
6
<PAGE>
EXHIBIT 10(W)
AMENDMENT OF LETTER AGREEMENT
------------------------------
This Amendment of Letter Agreement is entered into between Heller
Financial, Inc., a Delaware corporation (the "Company"), and Richard J. Almeida
(the "Executive");
WITNESSETH THAT:
---------------
WHEREAS, the Company and Executive entered into a Letter Agreement
detailing the terms and conditions of Executive's employment as Chief Executive
Officer and Chairman of the Board of the Company, effective as of December 31,
1997 (the "Letter Agreement"); and
WHEREAS, a portion of the Company's stock is being sold to the public as
part of an initial public offering, and the Company and Executive desire to
amend the Letter Agreement to provide additional protection to Executive in
connection with any future change in control of the Company;
NOW, THEREFORE, it is hereby agreed by and between the parties, for good
and valuable consideration the receipt and sufficiency of which are hereby
acknowledged, that the Letter Agreement be and it hereby is amended, effective
as of May 6, 1998, by adding the following new Paragraphs 11 and 12 to the
Letter Agreement, immediately after Paragraph 10 thereof:
"11. Payments and Benefits Upon Employment Termination After a Change in
Control. If, during the Term of this Agreement and within the period
ending on the earlier of two (2) years after a Change in Control (all
capitalized terms as defined below) or May 6, 2001, or during the
Period Pending a Change in Control, (i) your employment with the
Company and its Affiliates is terminated without cause (as defined in
Subparagraph 7(c)), or (ii) you voluntarily terminate your employment
with Good Reason, the Company will, within 30 days (except as
otherwise expressly provided) of your Employment Termination, make the
payments and provide the benefits described below.
(a) The Company will continue your annual Base Salary (as defined
below) for twenty-four (24) months following Employment
Termination at the same time and in the same manner as the
Company paid salary during employment (including the right to
defer such amounts under the Company's non-qualified deferred
compensation plan) or, at your election, make a lump sum cash
payment to you equal to the present value of two times your Base
Salary; and
(b) For the year in which Employment Termination occurs, the Company
will pay an Annual Incentive Plan bonus calculated as of the end
of the Annual Incentive Plan year, based on performance for the
entire year, at the applicable Target bonus level for that year.
The Company will pay such bonus in a lump sum within 45 days of
the end of the year of Employment Termination; and
-1-
<PAGE>
(c) With respect to each Welfare Benefit Plan, for the period
beginning on Employment Termination and ending on the earlier of
(i) two years following Employment Termination, or (ii) the date
you become covered by a welfare benefit plan or program
maintained by an entity other than the Company or an Affiliate
which provides coverage or benefits at least equal, in all
respects, to such Welfare Benefit Plan, you shall continue to
participate in such Welfare Benefit Plan on the same basis and at
the same cost to you as was the case immediately prior to the
Change in Control (or, if more favorable to you, as was the case
prior to your Employment Termination), or, if any benefit or
coverage cannot be provided under a Welfare Benefit Plan because
of applicable law or contractual provisions, you shall be
provided with substantially similar benefits and coverage for
such period; and
(d) The Company will pay you a lump sum amount equal to the present
value of the additional benefit that you would have accrued under
the Company's qualified and non-qualified retirement plans (as in
effect prior to the Change in Control or, if benefits are
increased under the plans after the Change in Control, as in
effect prior to your Employment Termination) had you continued to
receive benefits thereunder through the end of the 24th month
following Employment Termination. All benefits under the
Company's non-qualified retirement plans will be fully vested (to
the extent, if any, not vested upon the Change in Control). The
Company will pay such lump sum to you within 45 days of the end
of the year of Employment Termination; and
(e) The Company will add 24 months to your age and benefit service
for purposes of determining your eligibility for and benefits
under the Company's retiree medical benefit plan; and
(f) You will continue to be eligible for the executive perquisites
outlined in the Company's policies in effect at the time of the
Change in Control (or, if more favorable to you, as in effect
prior to your Employment Termination) through the end of the 24th
month following Employment Termination. The Company will bear the
cost of such benefits and perquisites, at the same level in
effect immediately prior to Employment Termination; and
(g) If Employment Termination occurs in 1998, you will be fully
vested in all performance shares granted to you under the
Company's 1996-1998 LTIP, and vested in two-thirds (2/3) of the
performance shares under the 1997-1999 LTIP. If Employment
Termination occurs in 1999, you will be fully vested in all
performance shares granted to
-2-
<PAGE>
you under the Company's 1997-1999 LTIP. The award paid to you
under the 1996-1998 and 1997-1999 LTIPs will be determined under
the terms of such LTIP for the applicable cycle, using actual
performance for each such cycle, and will be paid to you in a
lump sum within 45 days of the end of the year of your Employment
Termination.
In the event that, under the terms of this Letter Agreement, you could
be entitled to both the payments and benefits described in this
Paragraph 12 and the payments and benefits provided in Paragraph 7,
you shall elect the Paragraph under which payments and benefits are
made to you; provided that, in no event shall payments and benefits be
paid to you under both Paragraph 7 and this Paragraph. Notwithstanding
any provision of this Paragraph to the contrary, any payment or
distribution by or on behalf of the Company or any Affiliate to or for
the benefit of you (whether paid or payable or distributed or
distributable pursuant to the terms of this Letter Agreement or
otherwise) as a result of a Change in Control shall not exceed 2.99
times your average "Annualized Includible Compensation for the Base
Period," as defined in Code Section 280G(d)(1).
13. Other Definitions. For purposes of Paragraph 12 of this Letter
Agreement:
(a) "Affiliate" shall mean any entity that is a member of a
controlled group of corporations or a group of trades or
businesses under common control (each as defined in Code Section
1563), which includes the Company.
(b) "Base Salary" shall mean your salary at the greater of the rate
in effect on the date of (i) the Change in Control, or (ii)
Employment Termination.
(c) A "Change in Control" of the Company will be deemed to occur as
of the first day that The Fuji Bank, Limited and its subsidiaries
shall cease to own, directly or indirectly, at least fifty
percent (50%) of the combined voting power of the then
outstanding voting securities of the Company entitled to vote
generally in the election of the Board (the "Company Voting
Securities") of the Company and any successor to the Company
resulting from a reorganization, merger or consolidation, or sale
or other disposition of all or substantially all of the assets of
the Company.
(d) "Employment Termination" shall mean the effective date of: (i)
your voluntary termination of employment with the Company or any
Affiliate with Good Reason; or (ii) the termination of your
employment by the Company or any Affiliate without cause.
-3-
<PAGE>
(e) "Good Reason" shall exist if, without your express written
consent, any of the following events occur:
(i) The Company or an Affiliate significantly diminishes your
assigned duties and responsibilities from the level or
extent at which they existed before a Change in Control
including, without limitation, if the Company or Affiliate
removes your title(s) or materially diminishes the powers
associated with your title(s). For Good Reason to exist,
you must deliver written notice to the Company or Affiliate
specifying the diminution in assigned duties and
responsibilities that you believe constitutes Good Reason,
and the Company or Affiliate must fail to reverse the same
or to take all reasonable steps to that end within 30 days
after receiving the notice;
(ii) The Company or an Affiliate materially reduces your Base
Salary below the greater of that in effect as of the date
of this Agreement and that in effect as of the Change in
Control;
(iii) The Company or Affiliate requires you to relocate your
principal business office or your principal place of
residence outside the Chicago, Illinois Standard
Metropolitan Statistical Area (the "Geographical Employment
Area"), or assigns to you duties that would reasonably
require such a relocation;
(iv) The Company or an Affiliate requires, or assigns duties to
you which would reasonably require, you to spend more than
one hundred (100) normal working days away from the
Geographical Employment Area during any consecutive twelve-
month period; or
(v) The Company or an Affiliate fails to continue in effect any
cash or stock-based incentive or bonus plan, retirement
plan, welfare benefit plan, or other benefit plan, program
or arrangement that applied to you on the date of the
Change in Control, unless the aggregate value (as computed
by an independent employee benefits consultant selected by
the Company) of all such compensation, retirement and
benefit plans, programs and arrangements provided to you is
not materially less than their aggregate value as of the
date of the amendment of this Letter Agreement, or, if
greater, their aggregate value as of the date of the Change
in Control.
(f) "Period Pending a Change in Control" shall mean the period
after the
-4-
<PAGE>
approval by the Company's stockholders and prior to the
effective time of any transaction described in subparagraph
13(c) above.
(g) "Welfare Benefit Plan" shall mean each welfare benefit plan
maintained or contributed to by the Company or any Affiliate,
including, but not limited to a plan that provides health
(including medical, dental or both), life, accident or
disability benefits or insurance, or similar coverage, in which
you were participating at the time of the Change in Control."
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first written above.
HELLER FINANCIAL, INC.
By: /s/ D. H. Snider /s/ RICHARD J. ALMEIDA
-------------------------- ________________________
Its: EVP RICHARD J. ALMEIDA
-------------------------
<PAGE>
EXHIBIT 10(Y)
AMENDMENT OF LETTER AGREEMENT
-----------------------------
This Amendment of Letter Agreement is entered into between Heller
Financial, Inc., a Delaware corporation (the "Company"), and Frederick E.
Wolfert (the "Executive");
WITNESSETH THAT:
---------------
WHEREAS, the Company and Executive entered into a Letter Agreement
detailing the terms and conditions of Executive's employment as President and
Chief Operating Officer of the Company, effective as of December 31, 1997 (the
"Letter Agreement"); and
WHEREAS, a portion of the Company's stock is being sold to the public as
part of an initial public offering, and the Company and Executive desire to
amend the Letter Agreement to provide additional protection to Executive in
connection with any future change in control of the Company;
NOW, THEREFORE, it is hereby agreed by and between the parties, for good
and valuable consideration the receipt and sufficiency of which are hereby
acknowledged, that the Letter Agreement be and it hereby is amended, effective
as of May 6, 1998, by adding the following new Paragraphs 16 and 17 to the
Letter Agreement, immediately after Paragraph 15 thereof:
"16. Payments and Benefits Upon Employment Termination After a Change in
Control. If, during the Term of this Agreement and within the period
ending on the earlier of two (2) years after a Change in Control (all
capitalized terms as defined below) or May 6, 2001, or during the
Period Pending a Change in Control, (i) your employment with the
Company and its Affiliates is terminated without cause (as defined in
Subparagraph 12(c)), or (ii) you voluntarily terminate your employment
with Good Reason, the Company will, within 30 days (except as
otherwise expressly provided) of your Employment Termination, make the
payments and provide the benefits described below.
(a) The Company will continue your annual Base Salary (as defined
below) for twenty-four (24) months following Employment
Termination at the same time and in the same manner as the
Company paid salary during employment (including the right to
defer such amounts under the Company's non-qualified deferred
compensation plan) or, at your election, make a lump sum cash
payment to you equal to the present value of two times your Base
Salary; and
(b) For the year in which Employment Termination occurs, the Company
will pay an Annual Incentive Plan bonus calculated as of the end
of the Annual Incentive Plan year, based on performance for the
entire year, at the applicable Target bonus level for that year.
The Company will pay such bonus in a lump sum within 45 days of
the end of the year of Employment Termination; and
-1-
<PAGE>
(c) With respect to each Welfare Benefit Plan, for the period
beginning on Employment Termination and ending on the earlier of
(i) two years following Employment Termination, or (ii) the date
you become covered by a welfare benefit plan or program
maintained by an entity other than the Company or an Affiliate
which provides coverage or benefits at least equal, in all
respects, to such Welfare Benefit Plan, you shall continue to
participate in such Welfare Benefit Plan on the same basis and at
the same cost to you as was the case immediately prior to the
Change in Control (or, if more favorable to you, as was the case
prior to your Employment Termination), or, if any benefit or
coverage cannot be provided under a Welfare Benefit Plan because
of applicable law or contractual provisions, you shall be
provided with substantially similar benefits and coverage for
such period; and
(d) The Company will pay you a lump sum amount equal to the present
value of the additional benefit that you would have accrued under
the Company's qualified and non-qualified retirement plans (as in
effect prior to the Change in Control or, if benefits are
increased under the plans after the Change in Control, as in
effect prior to your Employment Termination) had you continued to
receive benefits thereunder through the end of the 24th month
following Employment Termination. All benefits under the
Company's non-qualified retirement plans will be fully vested (to
the extent, if any, not vested upon the Change in Control). The
Company will pay such lump sum to you within 45 days of the end
of the year of Employment Termination; and
(e) The Company will add 24 months to your age and benefit service
for purposes of determining your eligibility for and benefits
under the Company's retiree medical benefit plan; and
(f) You will continue to be eligible for the executive perquisites
outlined in the Company's policies in effect at the time of the
Change in Control (or, if more favorable to you, as in effect
prior to your Employment Termination) through the end of the 24th
month following Employment Termination. The Company will bear the
cost of such benefits and perquisites, at the same level in
effect immediately prior to Employment Termination; and
(g) If Employment Termination occurs in 1998, you will be fully
vested in all performance shares granted to you under the
Company's 1996-1998 LTIP, and vested in two-thirds (2/3) of the
performance shares under the 1997-1999 LTIP. If Employment
Termination occurs in 1999, you will be fully vested in all
performance shares granted to
-2-
<PAGE>
you under the Company's 1997-1999 LTIP. The award paid to you
under the 1996-1998 and 1997-1999 LTIPs will be determined under
the terms of such LTIP for the applicable cycle, using actual
performance for each such cycle, and will be paid to you in a
lump sum within 45 days of the end of the year of your Employment
Termination.
In the event that, under the terms of this Letter Agreement, you could
be entitled to both the payments and benefits described in this
Paragraph 16 and the payments and benefits provided in Paragraph 12,
you shall elect the Paragraph under which payments and benefits are
made to you; provided that, in no event shall payments and benefits be
paid to you under both Paragraph 12 and this Paragraph.
Notwithstanding any provision of this Subparagraph 16 to the contrary,
any payment or distribution by or on behalf of the Company or any
Affiliate to or for the benefit of you (whether paid or payable or
distributed or distributable pursuant to the terms of this Letter
Agreement or otherwise) as a result of a Change in Control shall not
exceed 2.99 times your average "Annualized Includible Compensation for
the Base Period," as defined in Code Section 280G(d)(1).
17. Other Definitions. For purposes of Paragraph 16 of this Letter
Agreement:
(a) "Affiliate" shall mean any entity that is a member of a
controlled group of corporations or a group of trades or
businesses under common control (each as defined in Code Section
1563), which includes the Company.
(b) "Base Salary" shall mean your salary at the greater of the rate
in effect on the date of (i) the Change in Control, or (ii)
Employment Termination.
(c) A "Change in Control" of the Company will be deemed to occur as
of the first day that The Fuji Bank, Limited and its subsidiaries
shall cease to own, directly or indirectly, at least fifty
percent (50%) of the combined voting power of the then
outstanding voting securities of the Company entitled to vote
generally in the election of the Board (the "Company Voting
Securities") of the Company and any successor to the Company
resulting from a reorganization, merger or consolidation, or sale
or other disposition of all or substantially all of the assets of
the Company.
(d) "Employment Termination" shall mean the effective date of: (i)
your voluntary termination of employment with the Company or any
Affiliate with Good Reason; or (ii) the termination of your
employment by the Company or any Affiliate without cause.
-3-
<PAGE>
(e) "Good Reason" shall exist if, without your express written
consent, any of the following events occur:
(i) The Company or an Affiliate significantly diminishes your
assigned duties and responsibilities from the level or
extent at which they existed before a Change in Control
including, without limitation, if the Company or Affiliate
removes your title(s) or materially diminishes the powers
associated with your title(s). For Good Reason to exist,
you must deliver written notice to the Company or
Affiliate specifying the diminution in assigned duties and
responsibilities that you believe constitutes Good Reason,
and the Company or Affiliate must fail to reverse the same
or to take all reasonable steps to that end within 30 days
after receiving the notice;
(ii) The Company or an Affiliate materially reduces your Base
Salary below the greater of that in effect as of the date
of this Agreement and that in effect as of the Change in
Control;
(iii) The Company or Affiliate requires you to relocate your
principal business office or your principal place of
residence outside the Chicago, Illinois Standard
Metropolitan Statistical Area (the "Geographical
Employment Area"), or assigns to you duties that would
reasonably require such a relocation;
(iv) The Company or an Affiliate requires, or assigns duties to
you which would reasonably require, you to spend more than
one hundred (100) normal working days away from the
Geographical Employment Area during any consecutive
twelve-month period; or
(v) The Company or an Affiliate fails to continue in effect
any cash or stock-based incentive or bonus plan,
retirement plan, welfare benefit plan, or other benefit
plan, program or arrangement that applied to you on the
date of the Change in Control, unless the aggregate value
(as computed by an independent employee benefits
consultant selected by the Company) of all such
compensation, retirement and benefit plans, programs and
arrangements provided to you is not materially less than
their aggregate value as of the date of the amendment of
this Letter Agreement, or, if greater, their aggregate
value as of the date of the Change in Control.
(f) "Period Pending a Change in Control" shall mean the period after
the
-4-
<PAGE>
approval by the Company's stockholders and prior to the effective
time of any transaction described in subparagraph 16(c) above.
(g) "Welfare Benefit Plan" shall mean each welfare benefit plan
maintained or contributed to by the Company or any Affiliate,
including, but not limited to a plan that provides health
(including medical, dental or both), life, accident or disability
benefits or insurance, or similar coverage, in which you were
participating at the time of the Change in Control."
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first written above.
HELLER FINANCIAL, INC.
By: /s/ D. H. Snider /s/ Frederick E. Wolfert
------------------------------ -----------------------------
Its: EVP Frederick E. Wolfert
----------------------------
-5-
<PAGE>
EXHIBIT (12)
HELLER FINANCIAL, INC.
COMPUTATION OF RATIO OF EARNINGS
TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(dollar amounts in
millions)
<S> <C> <C> <C> <C> <C>
Net income before income taxes and minority
interest........................................ $290 $233 $183 $181 $174
Add-Fixed charges
Interest and debt expense...................... 624 516 452 464 336
One-third of rentals........................... 11 8 7 7 6
---- ---- ---- ---- ----
Total fixed charges.......................... 635 524 459 471 342
---- ---- ---- ---- ----
Net income as adjusted........................... 925 757 642 652 516
---- ---- ---- ---- ----
Ratio of earnings to fixed charges............... 1.46x 1.44x 1.40x 1.38x 1.51x
==== ==== ==== ==== ====
Preferred stock dividends on a pre-tax basis..... $ 31 $ 21 $ 13 $ 14 $ 14
Total combined fixed charges and preferred
stock dividends............................. 666 545 472 485 356
---- ---- ---- ---- ----
Ratio of earnings to combined fixed charges and
preferred stock dividends....................... 1.39x 1.39x 1.36x 1.34x 1.45x
==== ==== ==== ==== ====
</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.
<PAGE>
EXHIBIT (21)
SUBSIDIARIES OF THE REGISTRANT
As of March 1, 1999
<TABLE>
<CAPTION>
Jurisdiction in
Which Incorporated
------------------
<S> <C>
Subsidiaries
- ------------
AmerSig Graphics, Inc......................................... Delaware
CHB Holdings, Inc............................................. Delaware
Country Harvest Buffet Restaurants, Inc....................... Delaware
D.I.B., L.L.C................................................. Delaware
DIB, Inc.................................................... Delaware
First Cove Investors, Inc..................................... Delaware
F.O. Building Corp............................................ Delaware
GlobaLease, Inc............................................... Delaware
Heller-ABB1, Inc.............................................. Delaware
Heller Advisory Corporation................................... Delaware
Heller Investimenti S.r.l................................... Italy
Heller Affordable Housing, Inc................................ Delaware
Heller Affordable Housing of Florida, Inc..................... Florida
Heller Air I, Inc............................................. Delaware
Heller Air IV, Ltd............................................ Bermuda
Heller Capital Markets Group, Inc............................. Delaware
Heller Capital Management, Inc................................ Delaware
Brand B Investments L.L.C................................... Delaware
Rio Negro Comercio e Participacoes Ltda................... Brazil
Heller do Brasil--Participacoes S/C, Ltda............... Brazil
Brazil Investment, L.L.C.................................... Delaware
Heller Capital Advisers, Inc................................ Delaware
Heller Current Asset Management, Inc.......................... Delaware
Heller Delaware Holdings, Inc................................. Delaware
Heller Equity Capital Corporation............................. Delaware
Amspec, L.P................................................. Delaware
Heller Investments, Inc..................................... Delaware
H.E. Two Corporation........................................ Delaware
H.E. One Corporation...................................... Delaware
TWC Holding Corp............................................ Delaware
WC Acquisition Corp....................................... Minnesota
Kroy Holding Company........................................ Delaware
Heller Financial Capital Funding, Inc......................... Delaware
Heller Financial Commercial Mortgage Asset Corp............... Delaware
Heller Financial Leasing, Inc................................. Delaware
NCM, L.P.................................................... Delaware
Carlos Murphy's, Inc...................................... Delaware
Heller Financial Real Estate Services, Inc.................... Delaware
Heller First Capital Corp..................................... Delaware
Heller SBA Funding Corp..................................... Delaware
Heller Funding Corporation.................................... Delaware
Heller Funding Corporation II................................. Delaware
Heller International Group, Inc............................... Delaware
Heller Asia Capital Ltd..................................... Singapore
Heller de Chile, S.A........................................ Chile
Heller Europe Limited....................................... United Kingdom
Heller Financial Limited.................................. United Kingdom
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Jurisdiction in
Which Incorporated
------------------
<S> <C>
Heller Global Vendor Finance Canada, Inc................. Canada
Heller Global Vendor Finance France, SNC................. France
Heller Global Vendor Finance Germany GmbH................ Germany
Heller Global Vendor Finance Switzerland, A.G............ Switzerland
Heller Global Vendor Finance U.K., Ltd................... United Kingdom
Heller Global Vendor Funding, Ltd........................ United Kingdom
Advance I.T. Limited..................................... United Kingdom
Heller Financial Services Limited.......................... Australia
S.H. Lock Acceptances Limited............................ Australia
Heller Equipment Finance Limited......................... Australia
Heller Commercial Services Pty. Limited.................. Australia
Heller Financial Services Superannuation Pty. Limited.... Australia
Heller Research Pty. Limited............................. Australia
Heller Holding France, S.A................................. France
Factofrance Heller, S.A.................................. France
Cofacredit............................................. France
Factobail, S.A......................................... France
Heller Thai Holding Company Limited........................ Thailand
Heller SGPS, Lda........................................... Portugal
HIG Asia Pacific Management Pte Ltd........................ Singapore
Heller Latin America Holdings, Inc........................... Delaware
Heller Operacion, S.A. de CV............................... Mexico
Heller Mezzanine Funding Corp................................ Delaware
Heller North America Holdings, Inc........................... California
Heller Financial (Mexico), S.A. de C.V..................... Mexico
Heller NFP, Inc.............................................. Illinois
Heller Orland Park, Inc...................................... Delaware
Heller Public Finance, L.L.C................................. Delaware
Heller Real Estate Holdings, Inc............................. Delaware
Heller Small Business Lending Corp........................... Delaware
Heller Trade Receivables Holding, Inc........................ Delaware
Heller Vacation Ownership Corp............................... Delaware
HF1, Inc..................................................... Delaware
HF2, Inc..................................................... Delaware
HF4, Inc..................................................... Delaware
HF5, Inc..................................................... Delaware
HF6, Inc..................................................... Delaware
KDM, LLC..................................................... Delaware
KDM, Inc................................................... Delaware
KDAM Properties, Inc....................................... Delaware
Lorch/Wedlo Financial, Inc................................... Delaware
NCMR, Inc.................................................... Delaware
Famous Restaurants, Inc.................................... Delaware
NFMR, Inc.................................................... Delaware
Realty Holdings Co., Inc..................................... Delaware
Electronic Real Estate Holdings, Inc....................... Delaware
Sharonville Hotel, Inc....................................... Delaware
SRHL, Inc.................................................... Delaware
Tallahassee Building Corp.................................... Delaware
</TABLE>
The names of all other subsidiaries of the Company are omitted because such
unnamed subsidiaries, considered in the aggregate as a single subsidiary, would
not constitute a significant subsidiary.
<PAGE>
EXHIBIT 23
HELLER FINANCIAL, INC. AND SUBSIDIARIES
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Heller Financial, Inc.
As independent public accountants, we hereby consent to the incorporation of
our report dated January 18, 1999 (except with respect to the matters
discussed in Note 25, as to which the date is February 15, 1999) included in
this Form 10-K at page 56, into the Company's previously filed Registration
Statement on Form S-3 No.
333-58723.
/s/ Arthur Andersen LLP
Chicago, Illinois
March 3, 1999
<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 AND 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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 0
<INT-BEARING-DEPOSITS> 529
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 488
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 11,854
<ALLOWANCE> (271)
<TOTAL-ASSETS> 14,366
<DEPOSITS> 0
<SHORT-TERM> 3,681
<LIABILITIES-OTHER> 1,945
<LONG-TERM> 6,768
0
400
<COMMON> 1,450
<OTHER-SE> 112
<TOTAL-LIABILITIES-AND-EQUITY> 14,366
<INTEREST-LOAN> 1,047
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 1,047
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 624
<INTEREST-INCOME-NET> 423
<LOAN-LOSSES> 77
<SECURITIES-GAINS> 0<F1>
<EXPENSE-OTHER> 399
<INCOME-PRETAX> 290
<INCOME-PRE-EXTRAORDINARY> 290
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 193<F2>
<EPS-PRIMARY> 2.23
<EPS-DILUTED> 2.23
<YIELD-ACTUAL> 3.73
<LOANS-NON> 207
<LOANS-PAST> 84
<LOANS-TROUBLED> 14
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 261
<CHARGE-OFFS> 145
<RECOVERIES> 64
<ALLOWANCE-CLOSE> 271
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 271
</TABLE>
