<PAGE>
- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report for the period ended June 30, 1999 pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 1-6157
Heller Financial, Inc.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 36-1208070
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 W. Monroe Street, Chicago, Illinois 60661
--------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(312) 441-7000
--------------
(Registrant's telephone number, including area code)
None
----
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
45,997,892 shares of Class A Common Stock, $.25 par value, outstanding at
July 29, 1999.
51,050,000 shares of Class B Common Stock, $.25 par value, outstanding at
July 29, 1999.
- ------------------------------------------------------------------------------
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HELLER FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in millions, except for information on shares)
<TABLE>
<CAPTION>
ASSETS June 30, December 31,
1999 1998
------------ -------------
<S> <C> <C>
(unaudited)
Cash and cash equivalents................................................... $ 840 $ 529
Receivables (Note 3)
Commercial loans
Term loans............................................................. 3,701 3,233
Revolving loans........................................................ 1,872 1,832
Real estate loans......................................................... 1,484 1,718
Factored accounts receivable.............................................. 3,004 2,543
Equipment loans and leases................................................ 2,735 2,528
------- -------
Total receivables...................................................... 12,796 11,854
Less: Allowance for losses of receivables (Note 3)........................ 285 271
------- -------
Net receivables........................................................ 12,511 11,583
Equity and real estate investments.......................................... 670 652
Debt securities............................................................. 466 365
Operating leases............................................................ 389 321
Investments in international joint ventures................................. 217 235
Other assets................................................................ 685 681
------- -------
Total assets........................................................... $15,778 $14,366
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Senior debt
Commercial paper and short-term borrowings................................ $ 4,291 $ 3,681
Notes and debentures (Note 4)............................................. 7,590 6,768
------- -------
Total senior debt...................................................... 11,881 10,449
Credit balances of factoring clients........................................ 1,292 1,441
Other payables and accruals................................................. 578 504
------- -------
Total liabilities...................................................... 13,751 12,394
Minority interest........................................................... 9 10
Stockholders' equity
Cumulative Perpetual Senior Preferred Stock, Series A..................... 125 125
Noncumulative Perpetual Senior Preferred Stock, Series C.................. 150 150
Noncumulative Perpetual Senior Preferred Stock, Series D.................. 125 125
Class A Common Stock ($.25 par; 500,000,000 shares authorized;
39,034,019 shares issued and 38,826,601 shares outstanding)............. 10 10
Class B Common Stock ($.25 par; 300,000,000 shares authorized;
51,050,000 shares issued and outstanding)............................... 13 13
Additional paid in capital................................................ 1,438 1,435
Retained earnings......................................................... 197 111
Treasury stock (207,418 shares) (Note 6).................................. (6) (8)
Accumulated other comprehensive income.................................... (34) 1
------- -------
Total stockholders' equity............................................. 2,018 1,962
------- -------
Total liabilities and stockholders' equity............................. $15,778 $14,366
======= =======
</TABLE>
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these statements.
2
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in millions, except for per share information)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Interest income......................................... $ 274 $ 252 $ 536 $ 506
Interest expense........................................ 156 147 305 302
----- ----- ----- -----
Net interest income................................... 118 105 231 204
Fees and other income................................... 69 50 143 103
Factoring commissions................................... 30 32 58 59
Income of international joint ventures.................. 8 7 16 14
----- ----- ----- -----
Operating revenues.................................... 225 194 448 380
Operating expenses...................................... 107 99 215 193
Provision for losses.................................... 30 17 59 32
----- ----- ----- -----
Income before taxes and minority interest............. 88 78 174 155
Income tax provision.................................... 29 26 58 53
Minority interest....................................... 1 1 1 3
----- ----- ----- -----
Net income............................................ $ 58 $ 51 $ 115 $ 99
===== ===== ===== =====
Dividends on preferred stock.......................... $ 7 $ 5 $ 14 $ 10
===== ===== ===== =====
Net income applicable to common stock................. $ 51 $ 46 $ 101 $ 89
===== ===== ===== =====
Basic and diluted net income applicable to
common stock per share (Note 7)..................... $0.57 $0.60 $1.12 $1.39
===== ===== ===== =====
Pro forma basic and diluted net income applicable to
common stock per share (Note 7)..................... $0.57 $0.51 $1.12 $0.99
===== ===== ===== =====
</TABLE>
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these statements.
3
<PAGE>
CONSOLIDATED CONDENSED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
(in millions)
(unaudited)
<TABLE>
<CAPTION>
Noncum.
Perpetual Perpetual. Perpetual
Sr. Pref. Sr. Pref. Sr. Pref. Class A Class B Treasury Add'l
Stock Stock Stock Common Common Stock Paid In
Series A Series C Series D Stock Stock (Note 6) Capital
--------- ---------- --------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997............ $125 $150 $ -- $ -- $13 $ -- $ 672
Comprehensive Income:
Net income.............................. -- -- -- -- -- -- --
Other comprehensive income,
net of tax:
Unrealized gain on securities,
net of tax of $6..................... -- -- -- -- -- -- --
Foreign currency translation
adjustments, net of tax of $(1)...... -- -- -- -- -- -- --
Other comprehensive income............. -- -- -- -- -- -- --
Comprehensive income.................... -- -- -- -- -- -- --
Issuance of Class A Common Stock........ -- -- -- 10 -- -- 976
Preferred stock dividends............... -- -- -- -- -- -- --
Common stock dividends.................. -- -- -- -- -- -- (215)
--------- ---------- --------- ------- ------- -------- ------
BALANCE AT JUNE 30, 1998................ $125 $150 -- $10 $13 -- $1,433
========= ========== ========= ======= ======= ======== ======
BALANCE AT DECEMBER 31, 1998............ $125 $150 $125 $10 $13 $(8) $1,435
Comprehensive Income:
Net income.............................. -- -- -- -- -- -- --
Other comprehensive income,
net of tax:
Unrealized loss on securities,
net of tax of $(5)................... -- -- -- -- -- -- --
Foreign currency translation
adjustments, net of tax of $(12)..... -- -- -- -- -- -- --
Other comprehensive income............. -- -- -- -- -- -- --
Comprehensive income.................... -- -- -- -- -- -- --
Reissuance of Class A Common Stock...... -- -- -- -- -- 2 --
Vesting of restricted shares............ -- -- -- -- -- -- 3
Preferred stock dividends............... -- -- -- -- -- -- --
Common stock dividends.................. -- -- -- -- -- -- --
--------- ---------- --------- ------- ------- -------- ------
BALANCE AT JUNE 30, 1999................ $125 $150 $125 $10 $13 $(6) $1,438
========= ========== ========= ======= ======= ======== ======
<CAPTION>
Accum.
Other
Compre- Compre-
hensive Retained hensive
Income Earnings Total Income
-------- --------- -------- ---------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997............ $(12) $ 730 $1,678
Comprehensive Income:
Net income.............................. -- 99 99 $ 99
Other comprehensive income,
net of tax:
Unrealized gain on securities,
net of tax of $6..................... -- -- 11 11
Foreign currency translation
adjustments, net of tax of $(3)..... -- -- (2) (2)
----
Other comprehensive income............. 9 -- -- 9
----
Comprehensive income.................... -- -- -- $108
====
Issuance of Class A Common Stock........ -- -- 986
Preferred stock dividends............... -- (10) (10)
Common stock dividends.................. -- (783) (998)
---- ----- ------
BALANCE AT JUNE 30, 1998................ $ (3) $ 36 $1,764
==== ===== ======
BALANCE AT DECEMBER 31, 1998............ $ 1 $ 111 $1,962
Comprehensive Income:
Net income.............................. -- 115 115 $115
Other comprehensive income,
net of tax:
Unrealized loss on securities,
net of tax of $(5)................... -- -- (11) (11)
Foreign currency translation
adjustments, net of tax of $(46).... -- -- (23) (23)
----
Other comprehensive income............. (34) -- -- (34)
----
Comprehensive income.................... -- -- -- $ 81
====
Reissuance of Class A Common Stock...... -- -- 2
Vesting of Restricted Shares............ -- -- 3
Preferred stock dividends............... -- (14) (14)
Common stock dividends.................. -- (16) (16)
---- ----- ------
BALANCE AT JUNE 30, 1999................ $(33) $ 196 $2,018
==== ===== ======
</TABLE>
The accumulated other comprehensive income balance included $11 million and
$19 million of unrealized gains on securities available for sale at June 30,
1999 and 1998, respectively. Accumulated other comprehensive income also
included deferred foreign currency translation adjustments, net of tax, of $(44)
million and $(22) million at June 30, 1999 and 1998, respectively.
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these statements.
4
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in millions)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
1999 1998
------- -------
OPERATING ACTIVITIES (unaudited)
<S> <C> <C>
Net income.............................................................. $ 115 $ 99
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for losses................................................ 59 32
Amortization and depreciation....................................... 15 13
Losses from equity investments...................................... 12 21
Provision for deferred taxes........................................ 15 9
Increase (decrease) in accounts payable and accrued liabilities..... 56 (13)
Undistributed income of international joint ventures................ (10) (9)
Increase in interest payable....................................... 3 20
Other.............................................................. 11 (1)
------- -------
Net cash provided by operating activities........................ 276 171
INVESTING ACTIVITIES
Longer-term loans funded.............................................. (2,654) (3,415)
Collections of principal.............................................. 1,536 1,416
Securitizations, participations, syndications and loan sales.......... 1,034 1,816
Net increase in short-term loans and advances to factoring clients.... (1,014) (690)
Investment in operating leases........................................ (130) (26)
Investment in equity interests and other investments.................. (252) (256)
Sales of investments and equipment on lease........................... 185 163
Other................................................................. (68) 45
------- -------
Net cash used for investing activities........................... (1,363) (947)
FINANCING ACTIVITIES
Senior note issues.................................................... 2,289 1,402
Retirement of notes and debentures.................................... (1,465) (1,047)
Increase in commercial paper and other short-term borrowings.......... 610 38
Net increase (decrease) in advances from affiliates................... 3 (26)
Net proceeds from common stock issuance............................... - 986
Reissuance of Class A Common Stock for executive deferred
compensation plan................................................... 2 -
Cash dividends paid on preferred and common stock..................... (30) (1,008)
Other............................................................... (11) (10)
------- -------
Net cash provided by financing activities........................ 1,398 335
------- -------
Increase (decrease) in cash and cash equivalents........................ 311 (441)
Cash and cash equivalents at the beginning of the period................ 529 821
------- -------
Cash and cash equivalents at the end of the period...................... $ 840 $ 380
======= =======
</TABLE>
The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these statements.
5
<PAGE>
HELLER FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
(1) Basis of Presentation
These consolidated condensed financial statements should be read in
conjunction with the financial statements and notes included in the annual
report on Form 10-K/A of Heller Financial, Inc. (including its consolidated
subsidiaries, Heller or the Company, which may be referred to as we, us or our)
for the year ended December 31, 1998. In management's opinion, all adjustments
considered necessary for a fair presentation are included in these financial
statements and were of a normal, recurring nature. Certain prior year amounts
have been reclassified to conform to the current year's presentation.
(2) Acquisition of Dealer Products Group
On November 30, 1998, we acquired, through our subsidiaries, the U.S.
assets of the Dealer Products Group of Dana Commercial Credit Corporation and
the stock of the Dealer Products Group's international subsidiaries
(collectively, Dealer Products Group).
The following table presents the unaudited pro forma combined income
statements of Heller and the Dealer Products Group for the six months ended June
30, 1999 and 1998. The pro forma combined income statements are presented as if
the acquisition had been effective January 1, 1998. The combined historical
results of operations of Heller and the Dealer Products Group for 1999 and 1998
have been adjusted to reflect the amortization of goodwill and the costs of
financing for the transaction. We have presented the following information for
informational purposes only. It does not necessarily indicate the future results
of our operations or the results of our operations that would have occurred had
the acquisition been effective in the periods presented.
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
------------------
1999 1998
---- ----
(in millions)
<S> <C> <C>
Interest income........................................ $536 $544
Interest expense....................................... 305 325
---- ----
Net interest income.................................. 231 219
Fees and other income.................................. 143 108
Factoring commissions.................................. 58 59
Income of international joint ventures................. 16 14
---- ----
Operating revenues................................... 448 400
Operating expenses..................................... 215 211
Provision for losses................................... 59 36
---- ----
Income before income taxes and minority interest..... 174 153
Income tax provision................................... 58 52
Minority interest...................................... 1 3
---- ----
Net income........................................... $115 $ 98
==== ====
</TABLE>
6
<PAGE>
(3) Impaired Receivables and Repossessed Assets
We do not recognize interest and fee income on impaired receivables or
repossessed assets, both of which are classified as nonearning, as set forth in
the following table:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- -----------
(in millions)
<S> <C> <C>
Impaired receivables............................................ $ 209 $ 208
Repossessed assets.............................................. 12 3
----- -----
Total nonearning assets....................................... $ 221 $ 211
===== =====
Ratio of total nonearning assets to total lending assets......... 1.7% 1.8%
===== =====
Ratio of allowance for losses of receivables to
nonearning impaired receivables............................... 136% 130%
===== =====
</TABLE>
Nonearning assets included $29 million at June 30, 1999 and $26 million at
December 31, 1998 for our International Factoring and Asset Based Finance
Segment.
The average investment in nonearning impaired receivables was $217 million
for the six months ended June 30, 1999 and $152 million for the six months ended
June 30, 1998.
Loan Modifications--
We had $13 million of loans that are considered troubled debt restructures
at June 30, 1999, a decrease of $1 million from December 31, 1998. At June 30,
1999 there were no loans that were restructured and returned to earning status.
Allowance for Losses--
The change in the allowance for losses of receivables during the six month
period included an additional provision of $59 million and gross writedowns and
recoveries of $52 million and $7 million, respectively. Impaired receivables
with identified reserve requirements were $138 million at June 30, 1999 and $136
million at December 31, 1998.
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
(in millions)
<S> <C> <C>
Identified reserve requirement for impaired receivables... $ 41 $ 44
Additional allowance for losses of receivables............ 244 227
----- -----
Total allowance for losses of receivables............... $ 285 $ 271
===== =====
</TABLE>
7
<PAGE>
(4) Senior Debt - Notes and Debentures
We issued and retired the following notes and debentures during the six
months ended June 30, 1999 (excluding unamortized premium and discount):
<TABLE>
<CAPTION>
Principal
Amount
-------------
(in millions)
<S> <C>
Issuances:
Variable rate medium-term notes due on various dates ranging from
January 12, 2001 to June 17, 2004................................. $1,386
Fixed rate medium-term notes with interest rates ranging from
5.48% to 6.95% due on various dates ranging from
January 16, 2001 to May 18, 2006.................................. 903
------
$2,289
======
Retirements:
Variable rate medium-term notes due on various dates ranging from
January 7, 1999 to May 19, 1999................................... $ 882
Fixed rate medium-term notes with interest rates ranging from
5.25% to 8.20% due on various dates ranging from
January 15, 1999 to April 2, 2002................................. 583
------
$1,465
======
</TABLE>
We have approximately $3.9 billion in available liquidity support under
three facilities. The longest facility is a 5-year agreement for $1.6 billion
which expires April 8, 2002. Our 364-day bank credit facilities will expire on
October 26, 1999 and April 4, 2000.
We have committed foreign bank credit facilities totaling $976 million
(U.S. dollar equivalent) for our international subsidiaries and $36 million
under foreign currency revolving credit facilities. As of June 30, 1999, there
was approximately $783 million available under these facilities.
We have a factored accounts receivable sale facility of our domestic
accounts receivable which allows us to sell an undivided interest of up to $503
million in a designated pool of factored accounts receivable to five bank-
sponsored conduits, on a limited recourse basis. As of June 30, 1999, there were
no receivables sold under this facility.
We have an additional factored accounts receivable sale facility through
our wholly-owned subsidiary Factofrance. This facility allows Factofrance to
sell an undivided interest of up to 1 billion French francs in a designated pool
of its factored accounts receivable to one bank-sponsored conduit, on a limited
recourse basis. As of June 30, 1999, approximately 1 billion French francs (or
$165 million) of receivables were sold under this facility.
We have a 364-day facility, expiring December 7, 1999, which allows us to
sell up to $550 million of our equipment receivables to two bank-sponsored
conduits, on a limited recourse basis. As of June 30, 1999, receivables sold
under this facility totaled less than $1 million.
We have a shelf registration statement, filed with the Securities and
Exchange Commission, permitting the offering of up to $5 billion in debt
securities, senior preferred stock and Class A Common Stock. As of June 30,
1999, there was $1.8 billion available under this shelf registration.
8
<PAGE>
(5) Derivative Financial Instruments Used for Risk Management Purposes
We utilize interest rate swaps to modify the interest rate and currency
characteristics of our debt and assets to control the overall level of financial
risk arising from our normal business operations. During the six months ended
June 30, 1999, we entered into $1.9 billion of interest rate swaps while $2.5
billion of our interest rate swaps were terminated or matured. These instruments
had the effect of converting $683 million of fixed rate assets to a variable
rate, $200 million of variable rate assets to a fixed rate, $983 million of
fixed rate debt to a vari able rate and $60 million of variable rate debt to
another variable rate index. At June 30, 1999, we held $5.1 billion in interest
rate swap agreements, $510 million in cross-currency interest rate swap
agreements and $1.5 billion of basis swap agreements.
We utilize interest rate futures to hedge the interest rate risk of a
portion of our receivables portfolio. At June 30, 1999 we held 10-year interest
rate futures contracts with an equivalent notional amount of $387 million.
We also periodically enter into forward currency exchange contracts or
purchase options. These instruments serve as hedges of our investment in
international subsidiaries and joint ventures or effectively hedge the
translation of the related foreign currency income. We held $986 million of
forward currency exchange contracts at June 30, 1999.
(6) Treasury Stock
We have an executive deferred compensation plan (the Plan), in which
certain of our employees may elect to defer a portion of their annual
compensation on a pre-tax basis. The amount deferred remains an asset of Heller
and is invested in several mutual funds and in Class A Common Stock of Heller.
Investments in our Class A Common Stock under this Plan are reported as treasury
stock and are included in the calculation of basic and diluted earnings per
share. At June 30, 1999, we held 191,110 shares of treasury stock through the
Plan.
9
<PAGE>
(7) Basic and Diluted Net Income Per Share and Pro Forma Net Income Per Share
The following table shows the calculation of net income applicable to
common stock per share on a basic and diluted basis for the periods indicated:
<TABLE>
<CAPTION>
Quarter Ended June 30, Six Months Ended June 30,
--------------------------------------------- --------------------------------------------
Basic Diluted Basic Diluted
------------------- ------------------- ------------------- --------------------
1999 1998 1999 1998 1999 1998 1999 1998
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Income applicable
to common stock
(in millions)........... $ 51 $ 46 $ 51 $ 46 $ 101 $ 89 $ 101 $ 89
======= ======= ======= ======= ======= ======= ======= =======
Average equivalent
shares of common
stock outstanding
(in thousands).......... 90,067 77,027 90,067 77,027 90,072 64,110 90,072 64,110
Treasury stock.......... - - 17 - - - 12 -
Stock options........... - - 43 16 - - 25 8
------- ------- ------- ------- ------- ------- ------- -------
Total average
equivalent shares..... 90,067 77,027 90,127 77,043 90,072 64,110 90,109 64,118
======= ======= ======= ======= ======= ======= ======= =======
Net income per share...... $ 0.57 $ 0.60 $ 0.57 $ 0.60 $ 1.12 $ 1.39 $ 1.12 $ 1.39
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The table below presents the pro forma net income applicable to common
stock per share on a basic and diluted basis. Pro forma information adjusts for
the impact of our initial public offering (the Offering) of Class A Common Stock
that occurred in May 1998 and assumes that shares issued in conjunction with the
Offering have been outstanding since the beginning of 1998. Pro forma basic net
income applicable to common stock per share is computed based on net income
applicable to common stock divided by the average number of shares outstanding
during the period. 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 during the period plus the dilutive effect
of stock options.
<TABLE>
<CAPTION>
Quarter Ended June 30, Six Months Ended June 30,
---------------------------------------------- ----------------------------------------------
Basic Diluted Basic Diluted
----------------------- -------------------- ----------------------- --------------------
1999 1998 1999 1998 1999 1998 1999 1998
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income applicable
to common stock
(in millions)........... $ 51 $ 46 $ 51 $ 46 $ 101 $ 89 $ 101 $ 89
======= ======= ======= ======= ======= ======= ======= =======
Pro forma shares of
common stock
outstanding (in
thousands).............. 90,067 90,071 90,067 90,071 90,072 90,071 90,072 90,071
Treasury stock.......... - - 17 - - - 12 -
Stock options........... - - 43 53 - - 25 53
------- ------- ------- ------- ------- ------- ------- -------
Total pro forma shares.. 90,067 90,071 90,127 90,124 90,072 90,071 90,109 90,124
======= ======= ======= ======= ======= ======= ======= =======
Pro forma net income
per share............... $ 0.57 $ 0.51 $ 0.57 $ 0.51 $ 1.12 $ 0.99 $ 1.12 $ 0.99
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
10
<PAGE>
(8) Statement of Cash Flows
Noncash investing activities that occurred during the six month period ended
June 30, 1999 included $9 million of receivables classified as repossessed
assets. We paid income taxes of $35 million and $33 million during the six month
periods ended June 30, 1999 and 1998, respectively.
(9) Operating Segments
The following table summarizes financial information concerning our reportable
segments:
<TABLE>
<CAPTION>
International
Domestic Factoring and
Commercial Asset Based Consolidated
Finance Finance Company
---------- ------------- ------------
<S> <C> <C> <C>
Total assets:
June 30, 1999............... $12,825 $2,953 $15,778
December 31, 1998........... 11,278 3,088 14,366
Total revenues:
June 30, 1999............... $ 626 $ 127 $ 753
June 30, 1998............... 567 115 682
Net income:
June 30, 1999............... $ 98 $ 17 $ 115
June 30, 1998............... 86 13 99
</TABLE>
(10) HealthCare Financial Acquisition
On April 19, 1999 we agreed to merge with HealthCare Financial Partners, Inc.
(HCF). With assets of approximately $600 million, HCF is a rapidly growing
commercial finance company exclusively focused on providing secured financing to
small- and mid-sized health care providers throughout the United States.
HCF shareholders approved the merger agreement on July 20, 1999 and the
transaction subsequently closed on July 28, 1999. The purchase price was $35 per
share and totaled approximately $485 million. We paid 41% of the purchase price
in the form of our Class A Common Stock and 59% in cash. We issued approximately
7.3 million Class A Common Shares for the transaction, which reduced the
ownership interest in Heller of our majority shareholder, The Fuji Bank,
Limited, from 57% to approximately 52%. In addition, we issued options to
purchase 1.1 million shares of Heller's Class A Common Stock at prices ranging
from approximately $2 to $37 per share to replace stock options previously held
by HCF employees for HCF common stock.
We will account for the merger using the purchase method of accounting.
Goodwill from the merger totaled approximately $230 million, on a preliminary
basis, and will be amortized over 25 years.
11
<PAGE>
(11) Subsequent Events
Declaration of Dividends
On July 12, 1999, we declared a quarterly dividend of $0.09 on each
outstanding share of our Class A Common Stock and Class B Common Stock, payable
on or before August 16, 1999 to the holders of record thereof on July 21, 1999.
We also declared quarterly dividends of $0.5078125, $1.67175 and $1.7375 on each
outstanding share of our Cumulative Perpetual Senior Preferred Stock, Series A,
Fixed Rate Noncumulative Perpetual Senior Preferred Stock, Series C and Fixed
Rate Noncumulative Perpetual Senior Preferred Stock, Series D, respectively,
payable on August 16, 1999 to the holders of record thereof on July 30, 1999.
(12) Accounting Developments
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS No. 133), Accounting for Derivative
Instruments and Hedging Activities, as amended by Statement of Financial
Accounting Standards No. 137, Deferral of the Effective Date of FASB Statement
No. 133 (collectively referred to as SFAS No. 133). 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, 2000. We are assessing the impact of this
statement and will adopt it in our 2001 interim financial statements.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview. Net income for the six months ended June 30, 1999 totaled $115 million
compared to $99 million for the prior year period, an increase of 16%. Net
income for the second quarter of 1999 totaled $58 million and increased 14% from
$51 million in the second quarter of 1998. Net income applicable to common stock
was $101 million for the six months ended June 30, 1999, an increase of 13% from
$89 million for the six months ended June 30, 1998. Net income applicable to
common stock totaled $51 million for the second quarter of 1999, an increase of
$5 million or 11% over the second quarter of 1998.
The growth in earnings was due to an increase of $68 million or 18% in operating
revenues for the six months ended June 30, 1999 and an increase of $31 million
or 16% for the second quarter of 1999. These increases were driven by growth in
both net interest income and fees and other income. Operating revenues as a
percentage of average funds employed (AFE) rose to 7.2% for the first six months
of 1999, an improvement from 6.8% for the first six months of 1998. For the
second quarter of 1999, operating revenues as a percentage of average funds
employed (AFE) improved to 7.0% from 6.9% for the prior year period. Our
results for the first six months of 1999 include the Dealer Products Group on a
consolidated basis. This increased operating revenues and operating expenses by
$28 million and $23 million, respectively.
Operating Revenues. The following table summarizes our operating revenues for
the six and three months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
-----------------------------------------
1999 Percent 1998 Percent
Amount of AFE Amount of AFE
------ -------- ------ ------------
(annualized) (annualized)
(dollars in millions)
<S> <C> <C> <C> <C>
Net interest income....................... $ 231 3.7% $ 204 3.6%
Non-interest income:
Fees and other income.................... 143 2.3 103 1.8
Factoring commissions.................... 58 0.9 59 1.1
Income of international joint ventures... 16 0.3 14 0.3
----- --- ----- ---
Total operating revenues............... $ 448 7.2% $ 380 6.8%
===== === ===== ===
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended
June 30,
-----------------------------------------
1999 Percent 1998 Percent
Amount of AFE Amount of AFE
------ -------- ------ ------------
(annualized) (annualized)
(dollars in millions)
<S> <C> <C> <C> <C>
Net interest income....................... $ 118 3.7% $ 105 3.7%
Non-interest income:
Fees and other income.................... 69 2.1 50 1.8
Factoring commissions.................... 30 0.9 32 1.1
Income of international joint ventures... 8 0.3 7 0.3
----- --- ----- ---
Total operating revenues............... $ 225 7.0% $ 194 6.9%
===== === ===== ===
</TABLE>
Net Interest Income: Net interest income increased by $27 million or 13% for the
first six months of 1999. Net interest margin as a percentage of AFE improved to
3.7% at June 30, 1999 from 3.6% at June 30, 1998. The increase in net interest
income as a percentage of AFE reflects the impact of the higher yielding Dealer
Products Group assets combined with a reduced level of lower yielding CMBS
receivables held in our portfolio during the first six months of 1999 versus
1998. Net interest income for the second quarter of 1999 increased $13 million,
or 12% and remained at 3.7% of AFE. The $13 million increase in net interest
income in the second quarter of 1999 versus 1998 is due to growth in average
funds employed.
Non-Interest Income: The following table summarizes our non-interest income for
the six and three months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
--------------- Increase/(Decrease)
1999 1998 Amount Percent
------- ------ -------- ---------
(dollars in millions)
<S> <C> <C> <C> <C>
Factoring commissions......................... $ 58 $ 59 $ (1) (2)%
Income of international joint ventures........ 16 14 2 14
Fees and other income:
Fee income and other (1)..................... 89 66 23 35
Net investment gains......................... 44 22 22 100
Securitization income........................ 10 15 (5) (33)
------- ------ --------
Total fees and other income................ $ 143 $ 103 $ 40 39%
======= ====== ========
Total non-interest income.................. $ 217 $ 176 $ 41 23%
======= ====== ========
Non-interest income as a percentage of AFE
(annualized)................................ 3.5% 3.2%
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
For the Three Months
Ended June 30,
------------------- Increase/(Decrease)
1999 1998 Amount Percent
------- ------ -------- ---------
(dollars in millions)
<S> <C> <C> <C> <C>
Factoring commissions......................... $ 30 $ 32 $ (2) (6)%
Income of international joint ventures........ 8 7 1 14
Fees and other income:
Fee income and other (1)..................... 48 41 7 17
Net investment gains......................... 11 5 6 120
Securitization income........................ 10 4 6 150
----- ----- ----
Total fees and other income................ $ 69 $ 50 $ 19 38%
===== ===== ====
Total non-interest income.................. $ 107 $ 89 $ 18 20%
===== ===== ====
Non-interest income as a percentage of AFE
(annualized)................................ 3.3% 3.2%
</TABLE>
(1) Fee income and other consists primarily of loan servicing income, late
fees, prepayment fees, early termination fees, other miscellaneous income
and equipment residual gains.
Factoring commissions decreased $1 million and $2 million for the six months
and quarter ended June 30, 1999 as compared to the same prior year periods due
to lower volume of our domestic factoring business combined with compression of
factoring commission rates of Factofrance. Total factoring volume increased 7%
and 5% for the first half and second quarter of 1999, respectively, as compared
to the prior year. Factofrance factoring volume increased 15% for the year to
date and 11% for the second quarter of 1999.
Income of international joint ventures increased $2 million or 14% for the
six months ended June 30, 1999 and increased $1 million or 14% for the second
quarter as compared to the prior year. These increases are primarily due to
higher income from our European joint ventures partially offset with decreases
in income from our Latin American joint ventures.
Fees and other income totaled $143 million and increased $40 million or 39%
for the first six months of 1999 as compared to the prior year period as
increases in fee income and other and net investment gains more than offset a
modest reduction in securitization income. Fee income and other for the first
six months of 1999 increased by $23 million or 35% in comparison to 1998. For
the second quarter of 1999, fee income and other totaled $48 million and
represented an increase of $7 million from the same prior year period. These
increases are due to higher fee income in Leasing Services as a result of the
Dealer Products Group acquisition and higher income on asset sales in Small
Business Finance.
Net investment gains for the six months ended June 30, 1999 increased $22
million or 100% to $44 million. For the second quarter of 1999, net
investment gains totaled $11 million and represented an increase of $6 million
from the same prior year period. These increases were due to larger net gains
recognized on sales of several equity investments. In addition, during the
first quarter of 1999, we recognized higher income from our limited partnership
investments as compared to the prior year period.
During the second quarter, we recognized $10 million in securitization income
related to two securitization transactions. Real Estate Finance securitized
approximately $400 million in CMBS receivables resulting in $4 million of
securitization income. Leasing Services securitized approximately $380 million
15
<PAGE>
of receivables, which resulted in $6 million of securitization income. All
securitization income in the second quarter of 1999 was recognized on a cash
basis. During the first half of 1998, we recognized $15 million in income
relating to the securitization of CMBS assets during the first quarter and the
securitization of the unguaranteed portion of loans in the SBA 7(a) program
during the second quarter.
Operating Expenses. The following table summarizes our operating expenses for
the six and three months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
------------------ Increase/(Decrease)
1999 1998 Amount Percent
------ -------- -------- ---------
(dollars in millions)
<S> <C> <C> <C> <C>
Salaries and other compensation.............................. $114 $ 115 $(1) (1)%
General and administrative expenses.......................... 101 78 23 29
------ -------- --------
Total operating expenses................................. $215 $ 193 $22 11%
====== ======== ========
Total operating expenses as a percentage of Average
Managed Assets (annualized).......................... 3.1% 3.1%
Ratio of operating expenses to operating revenues........ 48% 51%
For the Three Months
Ended June 30,
------------------ Increase/(Decrease)
1999 1998 Amount Percent
------ -------- -------- ---------
(dollars in millions)
<S> <C> <C> <C> <C>
Salaries and other compensation.............................. $ 57 $ 58 $(1) (2)%
General and administrative expenses.......................... 50 41 9 22
------ -------- --------
Total operating expenses................................. $107 $ 99 $ 8 8%
====== ======== ========
Total operating expenses as a percentage of Average
Managed Assets (annualized).......................... 3.0% 3.2%
Ratio of operating expenses to operating revenues........ 48% 51%
</TABLE>
Operating expenses, excluding the impact of the acquisition of the Dealer
Products Group, decreased by $1 million, or 1% for the first six months of 1999,
as compared to the prior year period. Second quarter operating expenses,
excluding the Dealer Products Group, totaled $95 million, and represented a
decrease of $4 million, or 4% from the same prior year period. The lower level
reflects decreases in salaries and other compensation resulting from our
restructuring effort in the second half of 1998, offset by increases in
technology spending, space costs and certain professional fees. Our ratio of
operating expenses to operating revenues for both the first six months and
second quarter improved to 48% compared to 51% during the same periods in 1998.
Our ratio of operating expenses to average managed assets improved to 3.0% from
3.2% for the second quarter of 1999 as compared to the prior year. These
improvements are reflective of our focus on increasing revenues and controlling
expense growth.
16
<PAGE>
Allowance for Losses. The following table summarizes the changes in our
allowance for losses of receivables, including our provision for losses of
receivables and repossessed assets, for the six and three months ended June 30,
1999 and 1998:
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
---------------- Increase/(Decrease)
1999 1998 Amount Percent
------- ------ -------- ---------
(dollars in millions)
<S> <C> <C> <C> <C>
Balance at beginning of period...... $ 271 $ 261 $ 10 4%
Provision for losses............... 59 32 27 84
Writedowns......................... (52) (43) (9) 21
Recoveries......................... 7 27 (20) (74)
----- ----- ----
Balance at end of period............ $ 285 $ 277 $ 8 3%
===== ===== ====
Allowance as a % of receivables.... 2.2% 2.4%
For the Three Months
Ended June 30,
-------------------- Increase/(Decrease)
1999 1998 Amount Percent
----- ----- ------- --------
(dollars in millions)
<S> <C> <C> <C> <C>
Balance at beginning of period...... $ 277 $ 261 $ 16 6%
Provision for losses............... 30 17 13 76
Writedowns......................... (25) (23) (2) 9
Recoveries......................... 2 22 (20) (91)
Other.............................. 1 -- 1 N/M
----- ----- ----
Balance at end of period............ $ 285 $ 277 $ 8 3%
===== ===== ====
Allowance as a % of receivables... 2.2% 2.4%
</TABLE>
Our provision for losses was higher during the first six months and second
quarter of 1999 compared to the same prior year period due to a significantly
higher level of recoveries recorded during 1998 as compared to 1999. Net
writedowns for the first six months of 1999 totaled $45 million, or 0.7% of
average lending assets. Net writedowns during the second quarter of 1999 totaled
$23 million, or 0.7% of average lending assets. Writedown levels for both the
first half and second quarter are consistent with our targeted level. At June
30, 1999 the allowance for losses of receivables represented 2.2% of
receivables, a decline from 2.4% of receivables at June 30, 1998. This reduction
reflects the continued strong credit quality of our receivables portfolio.
Income Taxes. Our effective tax rate decreased to 33% for the six months ended
June 30, 1999 from 34% for the same period in 1998. Our effective tax rate for
the second quarter of 1999 remained unchanged at 33% as compared to the prior
year period. The effective rate for 1999 and 1998 remained below federal and
state combined statutory rates due to the effect of earnings from international
joint ventures, the use of foreign tax credits and a reduction in the state
effective tax rate.
17
<PAGE>
LENDING ASSETS AND INVESTMENTS
Lending assets and investments grew 8%, to $14.6 billion, since the prior year
end, primarily as a result of new business volume of $3 billion for the six
months ended June 30, 1999. Second quarter new business volume totaled $1.8
billion. New business volume in the first half and second quarter of 1999 was
driven by Corporate Finance, Leasing Services and Small Business Finance. The
acquisition of the Dealer Products Group increased Leasing Services new business
volume by approximately $220 million and $110 million during the first six
months and second quarter of 1999, respectively. Total new business volume for
the first six months and second quarter of 1999 decreased compared to the same
prior year periods due to the anticipated lower volume of the CMBS product in
Real Estate Finance. New business volume was partially offset by normal levels
of portfolio runoff and loan sales, syndications and securitizations totaling $1
billion. The following table presents our lending assets and investments by
business category and asset type as of June 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
Lending Assets and Investments as of
June 30, December 31,
--------------- ----------------
1999 Percent 1998 Percent
------- ------- ------ -------
By Business Category: (dollars in millions)
<S> <C> <C> <C> <C>
Domestic Commercial Finance Segment
Corporate Finance......................... $ 4,439 31% $ 3,784 28%
Leasing Services.......................... 3,110 21 2,840 21
Real Estate Finance....................... 1,919 13 2,044 15
Small Business Finance.................... 1,047 7 1,013 8
Commercial Services (1)................... 922 6 401 3
Other..................................... 569 4 687 5
------- --- ------ ---
Total Domestic Commercial Finance Segment... 12,006 82 10,769 80
International Factoring and Asset
Based Finance Segment (2)................. 2,544 18 2,661 20
------- --- ------- ---
Total lending assets and investments....... $14,550 100% $13,430 100%
======= === ======= ===
By Asset Type:
Receivables................................. $12,796 88% $11,854 88%
Repossessed assets.......................... 12 -- 3 --
------- --- ------- ---
Total lending assets....................... 12,808 88 11,857 88
Equity and real estate investments.......... 670 5 652 5
Debt securities............................. 466 3 365 3
Operating leases............................ 389 3 321 2
International joint ventures................ 217 1 235 2
------- --- ------- ---
Total lending assets and investments....... $14,550 100% $13,430 100%
======= === ======= ===
Funds employed (3)......................... $13,258 $11,989
======= =======
Average funds employed (3)................. $12,512 $11,814
======= =======
Total managed assets (4)................... $14,434 $13,664
======= =======
Average managed assets (4)................. $13,924 $13,007
======= =======
</TABLE>
(1) Lending assets and investments at December 31, 1998 were reduced by $475
million of factored accounts receivable sold to bank-supported conduits.
18
<PAGE>
(2) Includes $213 million and $231 million of investments in international
joint ventures at June 30, 1999 and December 31, 1998, respectively, which
represent 1% and 2% of total lending assets and investments.
(3) Funds employed include lending assets and investments, less credit balances
of factoring clients.
(4) Total managed assets include funds employed, plus receivables previously
securitized or sold that we currently manage.
Growth in Corporate Finance lending assets and investments of $655 million
during the first six months of 1999 was driven by new business volume of $1.3
billion and increased borrowings under existing lines of over $100 million.
Asset growth was partially offset by syndications and payoffs during the period.
New business volume for the second quarter of 1999 exceeded $800 million and
represented an increase of 9% from the prior year period.
Leasing Services lending assets and investments grew by $270 million during
the first half of 1999 as strong new business volume of $900 million was
partially offset by runoff, utilization, syndications and loan sales of over
$600 million. Year to date new business volume exceeded the prior year by 15%.
This increase was primarily due to the impact of the Dealer Products Group which
was acquired in the fourth quarter of 1998.
Real Estate Finance lending assets and investments decreased by $125 million
since 1998 as new business volume of nearly $400 million was more than offset by
securitizations and runoff during the first half of 1999. New business volume
during the second quarter totaled $300 million. Year to date and second quarter
Real Estate Finance new business volume was significantly reduced from the same
prior year periods due to an anticipated decline in CMBS volume. This decline
was the result of a strategic reduction of origination activities within the
CMBS market during the first half of 1999 following the significant volatility
experienced by this market during the second half of 1998. During the second
quarter, Real Estate Finance securitized approximately $400 million of CMBS
receivables. We recognized $4 million in securitization income on this
transaction. We did not retain any residual risk from this securitization as all
of the commercial mortgage pass-through certificates were sold to third parties
on a non-recourse basis. We are continuing to provide financing in the CMBS
market and may sell or securitize existing and newly originated CMBS assets
during the second half of 1999, depending on market conditions.
Lending assets and investments of Small Business Finance increased from 1998
due to new business volume in excess of $300 million which exceeded the prior
year by 59%. New business volume for the second quarter totaled $200 million
which represented an increase of 60% from the second quarter of 1998. Asset
growth due to this new business volume was partially offset by loan sales and
runoff during the first half of 1999. Sales of guaranteed 7(a) loans during the
quarter totaled approximately $120 million generating income of $8 million.
Growth in Commercial Services lending assets and investments was primarily due
to a reduced level of receivables sold to our bank supported conduits at June
30, 1999 as compared to the prior year end. These conduits are used for
liquidity purposes in normal business operations.
19
<PAGE>
International Factoring and Asset Based Finance lending assets and investments
decreased by $117 million as a result of foreign currency exchange rate
movements during the first half of 1999.
At June 30, 1999, we had contractually committed to finance an amount in
excess of $2 billion to new and existing borrowers. Our obligation to fund
commitments is generally contingent upon the maintenance of specific credit
standards by our borrowers. Since we expect many of the commitments to remain
unused, the total commitment amounts do not necessarily represent future cash
requirements. We do not have any significant commitments to provide additional
financing related to nonearning assets.
Revenues
Total revenues include:
. interest income;
. fees and other income from domestic and consolidated international
operations; and
. our share of the net income of our international joint ventures.
The following table shows our total revenues for the six months ended June
30,1999 and 1998:
<TABLE>
<CAPTION>
Total Revenues
For the Six Months Ended June 30,
------------------------------------
1999 Percent 1998 Percent
----- --------- ----- --------
(dollars in millions)
<S> <C> <C> <C> <C>
Domestic Commercial Finance Segment
Corporate Finance................... $ 200 27% $ 182 27%
Leasing Services.................... 161 21 108 16
Real Estate Finance................. 110 15 128 19
Small Business Finance.............. 65 9 54 8
Commercial Services................. 48 6 59 9
Other............................... 42 5 36 4
----- --- ----- ---
Total Domestic Commercial Finance
Segment............................. 626 83 567 83
International Factoring and Asset
Based Finance Segment............... 127 17 115 17
----- --- ----- ---
Total revenues....................... $ 753 100% $ 682 100%
===== === ===== ===
</TABLE>
Total revenues increased $71 million or 10% from the prior year principally
reflecting increases in interest income and fees and other income. Corporate
Finance experienced an $18 million increase in revenues due to an increase in
interest income resulting from a higher level of AFE and an increase in net
equity gains as compared to the prior year period. Leasing Services revenues
increased $53 million, of which $50 million related to the acquisition of the
Dealer Products Group. Real Estate Finance revenues decreased $18 million due to
lower interest income resulting from a reduced level of AFE and lower
securitization income recorded in the first half of 1999 as compared to 1998.
Small Business Finance revenues increased $11 million as a result of a higher
level of AFE combined with an increase in income from the sale of the guaranteed
portion of 7(a) loans during the first half of 1999 versus 1998. Commercial
Services revenues decreased $11 million due to a reduced level of AFE and lower
factoring commissions
20
<PAGE>
as compared to the prior year period. International revenues increased $12
million from the first half of 1998 due to increases in interest income and fees
and other income.
21
<PAGE>
PORTFOLIO Quality
The credit quality of our portfolio continues to reflect the effectiveness of
our credit strategies, underwriting and portfolio management and disciplined
credit approval process. As of June 30, 1999, nonearning assets were $221
million or 1.7% of lending assets. This level is favorable to our targeted range
of 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 June 30, 1999. The following table presents certain information with
respect to the credit quality of our portfolio:
<TABLE>
<CAPTION>
June 30, December 31,
--------- -------------
1999 1998
--------- -------------
(dollars in millions)
<S> <C> <C>
Lending Assets and Investments:
Receivables........................................................ $12,796 $11,854
Repossessed assets................................................. 12 3
------- -------
Total lending assets............................................. 12,808 11,857
Equity and real estate investments................................. 670 652
Debt securities.................................................... 466 365
Operating leases................................................... 389 321
Investments in joint ventures...................................... 217 235
------- -------
Total lending assets and investments............................. $14,550 $13,430
======= =======
Nonearning Assets:
Impaired receivables............................................... $ 209 $ 208
Repossessed assets................................................. 12 3
------- -------
Total nonearning assets.......................................... $ 221 $ 211
======= =======
Ratio of nonearning impaired receivables to receivables............ 1.6% 1.8%
======= =======
Ratio of total nonearning assets to total lending assets........... 1.7% 1.8%
======= =======
Allowances for Losses:
Allowance for losses of receivables................................ $ 285 $ 271
======= =======
Ratio of allowance for losses of receivables to:
Receivables........................................................ 2.2% 2.3%
======= =======
Nonearning impaired receivables.................................... 136% 130%
======= =======
Net writedowns (annualized)........................................ 3.1x 3.3x
======= =======
Delinquencies:
Earning loans delinquent 60 days or more........................... $ 195 $ 184
======= =======
Ratio of earning loans delinquent 60 days or more to receivables... 1.5% 1.6%
======= =======
For The Six Months
Ended June 30,
-----------------------
1999 1998
------- -------
Net writedowns of lending assets: (dollars in millions)
Total net writedowns............................................... $ 45 $ 16
======= =======
Ratio of net writedowns to average lending assets (annualized)..... 0.7% 0.3%
======= =======
</TABLE>
22
<PAGE>
Nonearning Assets. Our nonearning assets were $221 million or 1.7% of lending
assets at June 30, 1999. Nonearning assets remain favorable to our targeted
range of 2-4% of lending assets. Included in nonearning assets are repossessed
assets of $12 million at June 30, 1999 and $3 million at December 31, 1998.
Allowance for Losses. The allowance for losses of receivables totaled $285
million or 2.2% of receivables at June 30, 1999, down from 2.3% at December 31,
1998. The ratio of allowance for losses of receivables to nonearning impaired
receivables totaled 136% at June 30, 1999 and 130% at December 31, 1998.
Loan Modifications. We had $13 million of loans that are considered troubled
debt restructures at June 30, 1999, a decrease of $1 million from December 31,
1998. At June 30, 1999, there were no loans that were restructured and returned
to earning status.
Writedowns. Net writedowns were consistent with our stated targeted range at
0.7% of average lending assets for the six months ended June 30, 1999 as
compared to 0.3% for the same prior year period. Net writedowns for the first
half of 1999 are higher than the prior year period due to a higher level of
recoveries recorded in 1998 versus the current year. Gross writedowns totaled
$52 million during the first six months of 1999 versus $43 million for the prior
year period while recoveries were $7 million in 1999 versus $27 million in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The following table presents information regarding our capital structure:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------- -------------
(in millions)
<S> <C> <C>
Commercial paper and short-term borrowings........................ $ 4,291 $ 3,681
Notes and debentures.............................................. 7,590 6,768
------- -------
Total senior debt................................................ 11,881 10,449
Minority interest................................................. 9 10
Stockholders' equity.............................................. 2,018 1,962
------- -------
Total capitalization............................................. $13,908 $12,421
======= =======
Leverage (net of short-term investments).......................... 5.6x 5.2x
Commercial paper and short-term borrowings to total senior debt... 36% 35%
</TABLE>
During the first six months of 1999, our major funding requirements included:
. $3 billion of longer-term loans, leases and investments funded;
. a net increase in short-term loans of $1 billion;
. the retirement of approximately $1.5 billion of senior notes; and
. common and preferred dividends of $30 million.
23
<PAGE>
Our major sources of funding these requirements included:
. cash flows from operations of $276 million;
. loan repayments and proceeds from the sale of investments and equipment on
lease of over $1.7 billion;
. the securitization, sale or syndication of over $1 billion of loans;
. the issuance of nearly $2.3 billion of senior notes; and
. the increase in short-term debt of $610 million.
Senior note issuances include $600 million relating to our global bond
offering that occurred in March 1999. This offering of notes has expanded our
international investor base, thereby extending potential sources of liquidity.
Our ratio of commercial paper and short-term borrowings to total senior debt
was 36% at June 30, 1999 and at December 31, 1998. Leverage (based on senior
debt net of short-term investments) was 5.6x at June 30, 1999 and 5.2x at
December 31, 1998. The level of commercial paper and short-term borrowings
remains within our targeted range.
Our committed bank credit and asset sale facilities totaled approximately $6
billion at June 30, 1999 and included $3.9 billion in available liquidity
support under three facilities. The longest of these facilities is a 5-year
agreement for approximately $1.6 billion which expires April 8, 2002. Our 364-
day bank credit facilities will expire on October 26, 1999 and April 4, 2000.
Also included in our total committed facilities are foreign bank credit
facilities of $976 million (U.S. dollar equivalent) for our international
subsidiaries and $36 million under foreign currency revolving credit facilities.
Committed credit and sale facilities from unaffiliated financial institutions
represent 142% of outstanding commercial paper and short-term borrowings at June
30, 1999.
At the end of the second quarter, we were in a highly liquid position, with a
large cash balance and availability under our domestic factoring and equipment
receivables sale facilities. This positioning anticipates the financing required
to close the HCF acquisition in July and refinance HCF assets at more attractive
levels as well as position us for any potential illiquidity in the debt markets
during the remainder of the year.
24
<PAGE>
Risk Management - Asset/Liability Management
We entered into derivative contracts during the first six months of 1999 to
accomplish our risk management objective of controlling the overall level of
financial risk arising from normal business operations. During the first six
months of 1999, we entered into interest rate swap agreements with aggregate
notional amounts of $1.9 billion. In addition, $2.5 billion of interest rate
swaps were terminated or matured during the six month period. At June 30, 1999,
we held $5.1 billion in interest rate swaps, $510 million in cross-currency
interest rate swap agreements and $1.5 billion of basis swap agreements.
We held 10-year interest rate futures contracts with an equivalent notional
amount of $387 million at June 30, 1999. We use these instruments to hedge the
interest rate risk of a portion of our receivables portfolio.
As of June 30, 1999, we held $986 million of forward currency exchange
contracts. These instruments serve as hedges of our investment in international
subsidiaries and joint ventures or effectively hedge the translation of the
related foreign currency income.
Accounting Developments
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS No. 133), Accounting for Derivative
Instruments and Hedging Activities, as amended by Statement of Financial
Accounting Standards No. 137, Deferral of the Effective Date of FASB Statement
No. 133 (collectively referred to as SFAS No. 133). 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, 2000. We are assessing the impact of this
statement and will adopt it in our 2001 interim financial statements.
Other Developments
HealthCare Financial Acquisition
On April 19, 1999 we agreed to merge with HealthCare Financial Partners, Inc.
(HCF). With assets of approximately $600 million, HCF is a rapidly growing
commercial finance company exclusively focused on providing secured financing to
small- and mid-sized health care providers throughout the United States.
HCF shareholders approved the merger agreement on July 20, 1999 and the
transaction subsequently closed on July 28, 1999. The purchase price was $35 per
share and totaled approximately $485 million. We paid 41% of the purchase price
in the form of our Class A
25
<PAGE>
Common Stock and 59% in cash. We issued approximately 7.3 million Class A Common
Shares for the transaction, which reduced the ownership interest in Heller of
our majority shareholder, The Fuji Bank, Limited, from 57% to approximately 52%.
In addition, we issued options to purchase 1.1 million shares of Heller's Class
A Common Stock at prices ranging from approximately $2 to $37 per share to
replace stock options previously held by HCF employees for HCF common stock.
We will account for the merger using the purchase method of accounting.
Goodwill from the merger totaled approximately $230 million, on a preliminary
basis, and will be amortized over 25 years.
Declaration of Dividends
On July 12, 1999, we declared a quarterly dividend of $0.09 on each
outstanding share of our Class A Common Stock and Class B Common Stock, payable
on or before August 16, 1999 to the holders of record thereof on July 21, 1999.
We also declared quarterly dividends of $0.5078125, $1.67175 and $1.7375 on each
outstanding share of our Cumulative Perpetual Senior Preferred Stock, Series A,
Fixed Rate Noncumulative Perpetual Senior Preferred Stock, Series C and Fixed
Rate Noncumulative Perpetual Senior Preferred Stock, Series D, respectively,
payable on August 16, 1999 to the holders of record thereof on July 30, 1999.
Year 2000 Compliance
We have adopted a phased approach to assessing and, where necessary,
remediating or otherwise addressing, year 2000 issues. Phases include:
. awareness, which, while ongoing, is substantially complete;
. assessment, which was substantially completed in 1998 with respect to
information technology systems and potential issues relating to borrowers,
vendors, international affiliates and environmental factors, and
substantially completed in the first half of 1999 for similar matters
relating to acquired assets;
. remediation or implementation of contingency solutions, which is
substantially complete for all but one of the information technology
systems deemed mission-critical, and is scheduled for completion in 1999
for all other matters. With respect to the one remaining mission-critical
information technology system, certain program issues necessitating
additional testing arose during April 1999 and completion is now scheduled
for the third quarter rather than the second quarter of 1999; and
. validation, which is scheduled for completion on the final mission-
critical information technology system and certain information technology
infrastructure in the third quarter of 1999, will continue throughout 1999
for all other matters. As part of the validation process, we are also
assessing the need for any re-verification of client server hardware and
software represented as compliant by the vendor.
We have completed the assessment of year 2000 risk relating to the Dealer
Products Group leasing assets and subsidiaries acquired in late 1998. We have
engaged a third party to complete remediation and validation activities, which
are underway and scheduled for completion during 1999. We have also received the
third party's assessment of Year 2000 readiness of HealthCare
26
<PAGE>
Financial Partners, Inc., which Heller acquired in late July 1999. Remediation
for that company is scheduled for completion by September 30, 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. Including systems that service the Dealer Products
Group, we have (1) three loan processing systems, (2) four lease processing
systems, (3) a factoring system, and (4) systems for general ledger processing,
payroll, accounts payable, fixed assets, treasury and other smaller
applications. We have established plans to modify, upgrade or replace each of
these systems for compliance and have established an overall plan to bring all
of these systems into compliance by the end of 1999.
We continue to address the impact of the year 2000 issue on our consolidated
international subsidiaries and our international joint venture companies. As a
result of the risk assessment substantially completed with respect to these
international companies in 1998, significant remediation activity and additional
readiness validation are underway for completion in 1999. During the first
quarter of 1999, we engaged an independent consultant to conduct site visits and
a limited scope review of overall year 2000 preparedness activities, including
testing protocols and country risk, at certain of our international companies.
Reviews were completed for selected European companies during the first quarter
and for selected other international companies during the second quarter. With
respect to the reviewed companies, no areas of material concern were reported.
In addition to information technology systems, we continue to assess and
monitor potential year 2000 impacts on our material vendors and borrowers, as
well as year 2000 issues relating to environmental factors such as facilities
and general utilities.
With respect to vendors, we have categorized vendors with reference to
materiality and availability of other sources for the provided services and
supplies. We have made inquiry of those vendors deemed material. Responses are
reviewed to assess the need for any follow-up action. This assessment and any
resulting remediation or contingency solutions are scheduled for completion
during 1999.
With respect to borrowers, a year 2000 risk assessment has been incorporated
into our underwriting and portfolio management activities in order to evaluate
exposure due to any lack of compliance on the part of borrowers. We categorize
prospective and existing borrowers by level of year 2000 risk, and are
underwriting new transactions and managing portfolio accounts accordingly.
Finally, we have incorporated year 2000 contingency planning into our overall
business resumption program in consideration of facilities and other
environmental factors as well as with respect to mission-critical processes. The
planning component of this effort has been completed, with implementation
underway and scheduled for completion by December 1, 1999.
We have incurred approximately $13 million to date of expenses related to the
year 2000 issue and estimate that we will incur an additional amount of
approximately $5 million through
27
<PAGE>
the end of the project. We will expense remediation, compliance, maintenance and
modification costs as incurred.
We continue to bear some risk related to the year 2000 issue and could be
materially adversely affected if our own remediation and contingency planning
efforts fall behind schedule or if third parties with whom we have material
relationships (e.g., vendors, including those providing contingency plans or
outsourced technology services such as mainframe and application support,
borrowers and power companies) do not appropriately address their own year 2000
compliance issues.
28
<PAGE>
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On July 12, 1999, the Board of Directors of the Company elected as directors
each of Taizo Ishikawa and Takaaki Kato to fill the vacancies left by the
resignations of Tsutomu Hayano and Terumasa Yamasaki. Messers. Ishikawa and
Kato were also elected to the Executive Committee of the Company's Board of
Directors. Mr. Ishikawa was elected to the Compensation Committee of the Board
of Directors in replacement of Tetsuo Kumon and Masahiro Sawada was elected to
the Special Financing Committee of the Board of Directors in replacement of
Kenichiro Tanaka.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(12) Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends
(27) Financial Data Schedule
(b) Current Reports on Form 8-K:
<TABLE>
<CAPTION>
Date of Report Item Description
- -------------- ---- -----------
<S> <C> <C>
July 12, 1999 5, 7 A report filing a press release announcing the declaration of
dividends on the Company's common and preferred stocks.
July 20, 1999 5, 7 A report filing a press release announcing the Company's
earnings for the quarter ended June 30, 1999.
July 21, 1999 5, 7 A report filing a press release announcing shareholder
approval of the merger of HealthCare Financial Partners, Inc.
(HCF) with a subsidiary of the Company.
July 23, 1999 5, 7 A report filing a press release announcing certain elections
by the shareholders of HCF.
July 28, 1999 5, 7 A report filing a press release announcing the closing of the
acquisition of HCF.
</TABLE>
29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this quarterly report to be signed on its behalf by
the undersigned thereunto duly authorized.
HELLER FINANCIAL, INC.
By: /s/ Lauralee E. Martin
--------------------------------------
Lauralee E. Martin
Executive Vice President and
Chief Financial Officer
By: /s/ Lawrence G. Hund
--------------------------------------
Lawrence G. Hund
Executive Vice President, Controller and
Chief Accounting Officer
Date: August 4, 1999
30
<PAGE>
EXHIBIT (12)
HELLER FINANCIAL, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS
TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(unaudited)
(dollars in millions)
<TABLE>
<CAPTION>
For the Six
Months Ended
June 30, 1999
-------------
<S> <C>
Net income before income taxes and minority interest................ $174
Add-Fixed charges
Interest and debt expense......................................... 305
One-third of rentals.............................................. 5
-----
Total fixed charges.......................................... 310
-----
Net income, as adjusted............................................. $484
-----
Ratio of earnings to fixed charges.................................. 1.56x
=====
Preferred stock dividends on a pre-tax basis........................ 21
Total combined fixed charges and preferred stock dividends... $331
-----
Ratio of earnings to combined fixed charges and
preferred stock dividends......................................... 1.46x
=====
</TABLE>
For purposes of computing the ratio of earnings to combined fixed charges and
preferred stock dividends, "earnings" includes income before income taxes, the
minority interest 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.
31
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HELLER
FINANCIAL, INC. ANNUAL REPORT FORM 10Q FOR THE PERIOD ENDING JUNE 30, 1999
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 0
<INT-BEARING-DEPOSITS> 840
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 537
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 12,796
<ALLOWANCE> (285)
<TOTAL-ASSETS> 15,778
<DEPOSITS> 0
<SHORT-TERM> 4,291
<LIABILITIES-OTHER> 1,870
<LONG-TERM> 7,590
0
400
<COMMON> 1,455
<OTHER-SE> 163
<TOTAL-LIABILITIES-AND-EQUITY> 15,778
<INTEREST-LOAN> 536
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 536
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 305
<INTEREST-INCOME-NET> 231
<LOAN-LOSSES> 59
<SECURITIES-GAINS> 0<F1>
<EXPENSE-OTHER> 215
<INCOME-PRETAX> 174
<INCOME-PRE-EXTRAORDINARY> 174
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 115<F2>
<EPS-BASIC> 1.12
<EPS-DILUTED> 1.12
<YIELD-ACTUAL> 3.81
<LOANS-NON> 209
<LOANS-PAST> 120
<LOANS-TROUBLED> 13
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 271
<CHARGE-OFFS> 52
<RECOVERIES> 7
<ALLOWANCE-CLOSE> 285
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 285
<FN>
<F1> THE COMPANY IS A FINANCE COMPANY WHOSE NORMAL OPERATIONS DO NOT INCLUDE THE
TRADING OF INVESTMENT SECURITIES.
<F2> NET INCOME IS NET OF $58 MILLION INCOME TAX PROVISION.
</FN>
</TABLE>
