<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report for the period ended September 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.
46,040,621 shares of Class A Common Stock, $.25 par value, outstanding at
November 5, 1999.
51,050,000 shares of Class B Common Stock, $.25 par value, outstanding at
November 5, 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 September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
(unaudited)
Cash and cash equivalents....................................................... $ 649 $ 529
Receivables (Note 4)
Commercial loans
Term loans................................................................ 4,302 3,233
Revolving loans........................................................... 2,277 1,832
Real estate loans............................................................ 2,026 1,718
Factored accounts receivable................................................. 3,258 2,543
Equipment loans and leases................................................... 2,728 2,528
------- -------
Total receivables......................................................... 14,591 11,854
Less: Allowance for losses of receivables (Note 4)........................... 310 271
------- -------
Net receivables........................................................... 14,281 11,583
Equity and real estate investments.............................................. 722 652
Debt securities................................................................. 512 365
Operating leases................................................................ 404 321
Investments in international joint ventures..................................... 225 235
Other assets.................................................................... 900 681
------- -------
Total assets.............................................................. $17,693 $14,366
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Senior debt
Commercial paper and short-term borrowings................................ $ 5,159 $ 3,681
Notes and debentures (Note 5)............................................. 8,253 6,768
------- -------
Total senior debt......................................................... 13,412 10,449
Credit balances of factoring clients............................................ 1,385 1,441
Other payables and accruals..................................................... 624 504
------- -------
Total liabilities......................................................... 15,421 12,394
Minority interest............................................................... 11 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 ($.25 par; 500,000,000 shares authorized;
46,320,888 shares issued and 46,014,033 shares outstanding)............... 12 10
Class B Common Stock ($.25 par; 300,000,000 shares authorized;
51,050,000 shares issued and outstanding)................................. 13 13
Additional paid in capital.................................................. 1,627 1,435
Retained earnings........................................................... 240 111
Treasury stock (306,855 shares) (Note 7).................................... (8) (8)
Accumulated other comprehensive income...................................... (23) 1
------- -------
Total stockholders' equity................................................ 2,261 1,962
------- -------
Total liabilities and stockholders' equity................................ $17,693 $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 Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Interest income......................................... $ 309 $ 270 $ 846 $ 776
Interest expense........................................ 176 161 481 463
----- ----- ----- -----
Net interest income.............................. 133 109 365 313
Fees and other income................................... 66 48 209 151
Factoring commissions................................... 31 31 89 90
Income of international joint ventures.................. 9 8 25 22
----- ----- ----- -----
Operating revenues............................... 239 196 688 576
Operating expenses...................................... 110 97 326 290
Provision for losses.................................... 37 27 95 59
----- ----- ----- -----
Income before taxes and minority interest........ 92 72 267 227
Income tax provision.................................... 33 25 91 78
Minority interest....................................... - - 1 3
----- ----- ----- -----
Net income....................................... $ 59 $ 47 $ 175 $ 146
===== ===== ===== =====
Dividends on preferred stock..................... $ 7 $ 5 $ 21 $ 15
===== ===== ===== =====
Net income applicable to common stock............ $ 52 $ 42 $ 154 $ 131
===== ===== ===== =====
Basic and diluted net income applicable to
common stock per share (Note 8)............... $0.55 $0.47 $1.68 $1.80
===== ===== ===== =====
Pro forma basic net income applicable to
common stock per share (Note 8)............... $0.55 $0.47 $1.68 $1.46
===== ===== ===== =====
Pro forma diluted net income applicable to
common stock per share (Note 8)............... $0.55 $0.47 $1.68 $1.45
===== ===== ===== =====
</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
Stock Stock Stock Common Common Stock
Series A Series C Series D Stock Stock (Note 7)
--------- ---------- --------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997.................. $ 125 $ 150 $ -- $ -- $ 13 $ --
Comprehensive Income:
Net income.................................... -- -- -- -- -- --
Other comprehensive income,
net of tax:
Unrealized gain on securities,
net of tax of $4........................... -- -- -- -- -- --
Foreign currency translation
adjustments, net of tax of $13............. -- -- -- -- -- --
Other comprehensive income................... -- -- -- -- -- --
Comprehensive income.......................... -- -- -- -- -- --
Issuance of Class A Common Stock.............. -- -- -- 10 -- --
Repurchase of Class A Common Stock............ -- -- -- -- -- (9)
Preferred stock dividends..................... -- -- -- -- -- --
Common stock dividends........................ -- -- -- -- -- --
--------- ---------- --------- ------- ------- --------
BALANCE AT SEPTEMBER 30, 1998................. $ 125 $ 150 -- $ 10 $ 13 (9)
========= ========== ========= ======= ======= ========
BALANCE AT DECEMBER 31, 1998.................. $ 125 $ 150 $ 125 $ 10 $ 13 $ (8)
Comprehensive Income:
Net income.................................... -- -- -- -- -- --
Other comprehensive income,
net of tax:
Unrealized loss on
securities, net of tax of $(8)........... -- -- -- -- -- --
Foreign currency translation
Adjustments, net of tax of $(38)......... -- -- -- -- -- --
Other comprehensive income.................... -- -- -- -- -- --
Comprehensive income.......................... -- -- -- -- -- --
Issuance of Class A Common Stock.............. -- -- -- 2 -- --
Reissuance of Class A Common Stock............ -- -- -- -- -- --
Vesting of restricted shares.................. -- -- -- -- -- --
Preferred stock dividends..................... -- -- -- -- -- --
Common stock dividends........................ -- -- -- -- -- --
--------- ---------- --------- ------- ------- --------
BALANCE AT SEPTEMBER 30, 1999................. $ 125 $ 150 $ 125 $ 12 $ 13 $ (8)
========= ========== ========= ======= ======= ========
<CAPTION>
Accum.
Other
Add'l Compre- Compre-
Paid In hensive Retained hensive
Capital Income Earnings Total Income
--------- ---------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997.................. $ 672 $ (12) $ 730 $ 1,678
Comprehensive Income:
Net income.................................... -- -- 146 146 $ 146
Other comprehensive income,
net of tax:
Unrealized gain on securities,
net of tax of $4........................... -- -- -- 8 8
Foreign currency translation
adjustments, net of tax of $(13)........... -- -- -- (5) (5)
Other comprehensive income................... -- 3 -- -- 3
-------
Comprehensive income.......................... -- -- -- -- $ 149
=======
Issuance of Class A Common Stock.............. 976 -- -- 986
Repurchase of Class A Common Stock............ -- -- -- (9)
Preferred stock dividends..................... -- -- (15) (15)
Common stock dividends........................ (215) -- (783) (998)
--------- ---------- --------- -------
BALANCE AT SEPTEMBER 30, 1998................. $ 1,433 $ (9) $ 78 $ 1,791
========= ========== ========= =======
BALANCE AT DECEMBER 31, 1998.................. $ 1,435 $ 1 $ 111 $ 1,962
Comprehensive Income:
Net income.................................... -- -- 175 175 $ 175
Other comprehensive income,
net of tax:
Unrealized loss on
securities, net of tax of $(8)........... -- -- -- (15) (15)
Foreign currency translation
Adjustments, net of tax of $(38)......... -- -- -- (9) (9)
Other comprehensive income.................... -- (24) -- -- (24)
-------
Comprehensive income.......................... -- -- -- -- $ 151
=======
Issuance of Class A Common Stock.............. 189 -- -- 191
Reissuance of Class A Common Stock............ -- -- (1) (1)
Vesting of restricted shares.................. 3 -- -- 3
Preferred stock dividends..................... -- -- (21) (21)
Common stock dividends........................ -- -- (24) (24)
--------- ---------- --------- -------
BALANCE AT SEPTEMBER 30, 1999................. $ 1,627 $ (23) $ 240 $ 2,261
========= ========== ========= =======
</TABLE>
The accumulated other comprehensive income balance included $7 million and
$16 million of unrealized gains, net of tax, on securities available for sale at
September 30, 1999 and 1998, respectively. Accumulated other comprehensive
income also included deferred foreign currency translation adjustments, net of
tax, of $(30) million and $(25) million at September 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 Nine Months Ended
September 30,
1999 1998
---- ----
OPERATING ACTIVITIES (unaudited)
<S> <C> <C>
Net income $ 175 $ 146
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for losses................................................ 95 59
Amortization and depreciation....................................... 31 15
Losses from equity investments...................................... 12 33
Provision for deferred taxes........................................ 27 5
Increase in accounts payable and accrued liabilities................ 95 18
Undistributed income of international joint ventures................ (18) (17)
Increase in interest payable........................................ - 33
Other............................................................... 18 2
------- -------
Net cash provided by operating activities.......................... 435 294
INVESTING ACTIVITIES
Increase in longer-term loans
Due to fundings....................................................... (4,868) (5,302)
Due to the HealthCare Financial Partners, Inc. acquisition............ (535) -
Collections of principal................................................ 1,943 2,276
Securitizations, participations, syndications and loan sales............ 1,688 2,194
Net increase in short-term loans and advances to factoring clients...... (1,231) (1,168)
Investment in operating leases.......................................... (163) (45)
Investment in equity interests and other investments.................... (367) (362)
Sales of investments and equipment on lease............................. 269 290
HealthCare Financial Partners, Inc. goodwill............................ (234) -
Other................................................................... 94 (27)
------- -------
Net cash used for investing activities............................. (3,404) (2,144)
FINANCING ACTIVITIES
Senior note issues...................................................... 3,730 2,295
Retirement of notes and debentures...................................... (2,240) (1,107)
Increase in commercial paper and other short-term borrowings............ 1,478 415
Net increase (decrease) in advances from affiliates..................... 6 (26)
Net proceeds from common stock issuance................................. 191 986
Repurchase of Class A Common Stock for executive deferred compensation
plan............................................................ - (9)
Cash dividends paid on preferred and common stock....................... (45) (1,013)
Other................................................................... (31) (26)
------- -------
Net cash provided by financing activities.......................... 3,089 1,515
------- -------
Increase (decrease) in cash and cash equivalents.......................... 120 (335)
Cash and cash equivalents at the beginning of the period.................. 529 821
------- -------
Cash and cash equivalents at the end of the period........................ $ 649 $ 486
======= =======
</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 nine months ended
September 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
table 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 Nine Months
Ended September 30,
-------------------
1999 1998
---- ----
(in millions)
<S> <C> <C>
Interest income.......................................... $ 846 $ 833
Interest expense......................................... 481 497
------ ------
Net interest income.................................... 365 336
Fees and other income.................................... 209 160
Factoring commissions.................................... 89 90
Income of international joint ventures................... 25 22
------ ------
Operating revenues..................................... 688 608
Operating expenses....................................... 326 317
Provision for losses..................................... 95 65
------ ------
Income before income taxes and minority interest....... 267 226
Income tax provision..................................... 91 76
Minority interest........................................ 1 3
------ ------
Net income............................................. $ 175 $ 147
====== ======
</TABLE>
6
<PAGE>
(3) HealthCare Financial Partners, Inc. Acquisition
On July 28, 1999 we acquired HealthCare Financial Partners, Inc. (HCF) for
approximately $475 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 52%. In
addition, we issued options to purchase 1.1 million shares of Heller's Class A
Common Stock at prices ranging from $2 to $37 per share to replace stock options
previously held by HCF employees for HCF common stock. 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. The HCF
business will be operated as a business unit known as Healthcare Finance within
our Domestic Commercial Finance segment.
The acquisition was accounted for using the purchase method of accounting in
accordance with Accounting Principles Board Opinion No. 16, Business
Combinations. Goodwill from the transaction totaled approximately $230 million,
on a preliminary basis, and will be amortized over 25 years. Heller's September
30, 1999 consolidated statement of income includes HCF's operating results since
the acquisition date.
The following table presents the unaudited pro forma combined income
statements of Heller and HCF for the nine months ended September 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
operating results of Heller and HCF for 1999 and 1998 have been adjusted to
reflect goodwill amortization and financing costs for the transaction. We have
presented the following table for informational purposes only. It does not
necessarily indicate our future operating results or the operating results that
would have occurred had the acquisition been effective in the periods presented.
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
-------------------
1999 1998
---- ----
(in millions)
<S> <C> <C>
Interest income..................................... $ 888 $ 819
Interest expense.................................... 490 475
----- -----
Net interest income............................... 398 344
Fees and other income............................... 212 154
Factoring commissions............................... 89 90
Income of international joint ventures.............. 25 22
----- -----
Operating revenues................................ 724 610
Operating expenses.................................. 347 307
Provision for losses................................ 101 62
----- -----
Income before income taxes and minority interest.. 276 241
Income tax provision................................ 94 84
Minority interest................................... 1 3
----- -----
Net income $ 181 $ 154
===== =====
</TABLE>
7
<PAGE>
(4) 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>
September 30, December 31,
1999 1998
-------- -------
(in millions)
<S> <C> <C>
Impaired receivables...................................... $ 217 $ 208
Repossessed assets........................................ 13 3
----- -----
Total nonearning assets................................. $ 230 $ 211
===== =====
Ratio of total nonearning assets to total lending assets.. 1.6% 1.8%
===== =====
Ratio of allowance for losses of receivables to
nonearning impaired receivables......................... 143% 130%
===== =====
</TABLE>
Nonearning assets included $26 million at September 30, 1999 and December 31,
1998 for our International Factoring and Asset Based Finance Segment.
The average investment in nonearning impaired receivables was $215 million
for the nine months ended September 30, 1999 and $152 million for the nine
months ended September 30, 1998.
Loan Modifications--
We had $12 million of loans that are considered troubled debt restructures
at September 30, 1999, a decrease of $2 million from December 31, 1998. At
September 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 nine month
period included an additional provision of $95 million and gross writedowns and
recoveries of $80 million and $13 million, respectively. Impaired receivables
with identified reserve requirements were $192 million at September 30, 1999 and
$136 million at December 31, 1998.
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(in millions)
<S> <C> <C>
Identified reserve requirement for impaired receivables.. $ 48 $ 44
Additional allowance for losses of receivables........... 262 227
----- -----
Total allowance for losses of receivables........... $ 310 $ 271
===== =====
</TABLE>
8
<PAGE>
(5) Senior Debt - Notes and Debentures
We issued and retired the following notes and debentures during the nine
months ended September 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
November 15, 1999 to July 6, 2004................................ $2,127
Fixed rate medium-term notes with interest rates ranging from
5.48 % to 7.13% due on various dates ranging from
January 16, 2001 to May 18, 2006................................. 1,603
------
$3,730
======
Retirements:
Variable rate medium-term notes due on various dates ranging from
January 7, 1999 to September 13, 1999............................ $1,197
Fixed rate medium-term notes with interest rates ranging from
5.25% to 9.13% due on various dates ranging from
January 15, 1999 to April 2, 2002................................ 1,043
------
$2,240
======
</TABLE>
We have approximately $4 billion in available liquidity support under three
bank credit facilities. The longest facility is a 5-year agreement for $1.6
billion which expires April 8, 2002. Our two separate 364-day bank credit
facilities expire on April 4, 2000 and September 27, 2000.
We have committed foreign bank credit facilities totaling $937 million (U.S.
dollar equivalent) for our international subsidiaries and $36 million under
foreign currency revolving credit facilities. As of September 30, 1999, there
was approximately $680 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 September 30, 1999, there were no
receivables sold under this facility. See Note 11 for additional information
related to 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 September 30, 1999, approximately 1 billion French francs
(or $176 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 $400 million of our equipment receivables to two bank-sponsored
conduits, on a limited recourse
9
<PAGE>
basis. As of September 30, 1999, approximately $230 million of receivables were
sold under this facility.
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 September 30,
1999, there was $536 million available under this shelf registration.
In August 1999, we filed with the Securities and Exchange Commission a shelf
registration statement covering the sale of up to $10 billion in debt securities
(including medium term notes), senior preferred stock and Class A Common Stock.
In October 1999, we established a Euro Medium-Term Note Program for the
issuance of up to $2 billion in notes to be listed on the Luxembourg Stock
Exchange, increased the size of our Euro commercial paper program to $1 billion
and established a $250 million Canadian commercial paper program.
On November 8, 1999 we issued $600 million of 7.375% notes due November 1,
2009 in a privately placed transaction under SEC Rule 144 A and Regulation S.
(6) 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 nine months ended
September 30, 1999, we entered into $3.8 billion of interest rate swaps while
$3.7 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, $615 million of variable rate assets to a fixed rate, $1.9
billion of fixed rate debt to a variable rate and $60 million of variable rate
debt to another variable rate index. At September 30, 1999, we held $5.6 billion
in interest rate swap agreements, $510 million in cross-currency interest rate
swap agreements and $1.7 billion of basis swap agreements.
We utilize interest rate futures to hedge the interest rate risk of a
portion of our receivables portfolio. At September 30, 1999 we held 10-year
interest rate futures contracts with an equivalent notional amount of $479
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 $1.3 billion of
forward currency exchange contracts at September 30, 1999.
10
<PAGE>
(7) 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
September 30, 1999, we held 190,260 shares of treasury stock through the Plan.
In addition, we held 116,595 shares of our Class A Common Stock for use in
meeting the requirements of our current stock incentive compensation plans. The
number of shares includes 115,700 shares repurchased in the third quarter of
1999.
On October 18, 1999, we announced the authorization to repurchase up to 2
million shares of our Class A Common Stock to provide stock for issuance under
our stock option and restricted stock plans, as well as for other corporate
purposes.
(8) 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 September 30, Nine Months Ended September 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)......... $ 52 $ 42 $ 52 $ 42 $ 154 $ 131 $ 154 $ 131
======= ======= ======== ======= ======= ======= ======= =======
Average equivalent
shares of common
stock outstanding
(in thousands)........ 95,059 89,738 95,059 89,738 91,753 72,618 91,753 72,618
Treasury stock........ -- -- 94 333 -- -- 39 241
Stock options......... -- -- 129 -- -- -- 60 5
------- ------- ------- ------- ------- ------- ------- -------
Total average
Equivalent shares. 95,059 89,738 95,282 90,071 91,753 72,618 91,852 72,864
======= ======= ======= ======= ======= ======= ======= =======
Net income per share $ 0.55 $ 0.47 $ 0.55 $ 0.47 $ 1.68 $ 1.80 $ 1.68 $ 1.80
======= ======= ======= ======= ======= ======= ======= =======
</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
11
<PAGE>
1998. We compute pro forma basic net income applicable to common stock per share
based on net income applicable to common stock divided by the average number of
shares outstanding during the period. We compute pro forma diluted net income
applicable to common stock per share 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 September 30, Nine Months Ended September 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)......... $ 52 $ 42 $ 52 $ 42 $ 154 $ 131 $ 154 $ 131
======= ======== ======= ======= ======= ======= ======= =======
Pro forma shares of
common stock
outstanding (in
thousands).............. 95,059 89,744 95,059 89,744 91,753 89,702 91,753 89,702
Treasury stock.......... -- -- 94 327 -- -- 39 369
Stock options......... -- -- 129 -- -- -- 60 17
------- ------- ------- ------- ------- ------- ------- -------
Total pro forma shares 95,059 89,744 95,282 90,071 91,753 89,702 91,852 90,088
======= ======= ======= ======= ======= ======= ======= =======
Pro forma net income
per share............... $ 0.55 $ 0.47 $ 0.55 $ 0.47 $ 1.68 $ 1.46 $ 1.68 $ 1.45
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
(9) Statement of Cash Flows
Noncash investing activities that occurred during the nine month period
ended September 30, 1999 included $10 million of receivables classified as
repossessed assets. We paid income taxes of $47 million and $30 million during
the nine month periods ended September 30, 1999 and 1998, respectively.
(10) 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:
September 30, 1999........ $14,646 $3,047 $17,693
December 31, 1998......... 11,278 3,088 14,366
Total revenues:
September 30, 1999........ $ 978 $ 191 $ 1,169
September 30, 1998........ 863 176 1,039
Net income:
September 30, 1999........ $ 149 $ 26 $ 175
September 30, 1998........ 123 23 146
</TABLE>
12
<PAGE>
(11) Commercial Services Sale
On October 4, 1999, we agreed to sell the assets of our Commercial Services
business unit, part of our Domestic Commercial Finance segment, to The CIT
Group, Inc. (CIT) for approximately $560 million in cash. The sale consists of
$953 million of factored accounts receivable and the assumption of $518 million
of liabilities due to factoring clients and results in a premium of $125 million
over the net assets sold. Commercial Services provides factoring, asset-based
revolving credit facilities, and accounts receivable management services to
clients in the U.S. textile and apparel industries.
The sale will be accounted for as an asset sale. Completion of the sale,
which is subject to customary regulatory approvals, is expected to occur during
the fourth quarter of 1999. The after-tax gain associated with the transaction
will be determined after closing and will ultimately include final adjustments
for transaction costs, obligations to employees, and the resolution of third
party contracts such as facility leases and vendor contracts. Upon completion of
the sale, we will terminate our domestic factored accounts receivable sale
facility.
(12) Subsequent Events
Declaration of Dividends --
On October 18, 1999, we increased the quarterly dividend on each share of our
Class A and Class B Common Stock to $0.10 per share from $0.09 per share. The
dividend, which represents an 11% increase from the prior quarter, is payable on
November 15, 1999 to the holders of record thereof on November 1, 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. The
dividends on our preferred stocks are payable on November 15, 1999 to the
holders of record thereof on November 1, 1999.
(13) 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.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview. Net income for the nine months ended September 30, 1999 was a record
$175 million compared to $146 million for the prior year period, an increase of
20%. Net income for the third quarter of 1999 totaled $59 million and increased
26% from $47 million in the third quarter of 1998. Net income applicable to
common stock was $154 million for the nine months ended September 30, 1999, an
increase of 18% from $131 million for the nine months ended September 30, 1998.
Net income applicable to common stock totaled $52 million for the third quarter
of 1999, an increase of $10 million or 24% over the third quarter of 1998.
The growth in earnings was due to an increase of $112 million or 19% in
operating revenues for the nine months ended September 30, 1999 and an increase
of $43 million or 22% for the third quarter of 1999. Growth in both net interest
income and fees and other income drove these increases. Operating revenues as a
percentage of average funds employed (AFE) rose to 7.1% for the first nine
months of 1999, an improvement from 6.6% for the first nine months of 1998. For
the third quarter of 1999, operating revenues as a percentage of AFE improved to
6.7% from the same prior year period of 6.4%. Our results include the Dealer
Products Group for the first nine months of 1999 and HCF since July 28, 1999,
the date of acquisition, on a consolidated basis. These acquisitions increased
operating revenues and operating expenses by $49 million and $40 million,
respectively.
Operating Revenues. The following tables summarize our operating revenues for
the nine and three months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
--------------------------------------
1999 Percent 1998 Percent
Amount of AFE Amount of AFE
------ -------- ------ -------
(annualized) (annualized)
(dollars in millions)
<S> <C> <C> <C> <C>
Net interest income...................... $ 365 3.8% $ 313 3.6%
Non-interest income:
Fees and other income................... 209 2.1 151 1.7
Factoring commissions................... 89 0.9 90 1.0
Income of international joint ventures.. 25 0.3 22 0.3
------ ----- ------ -----
Total operating revenues.............. $ 688 7.1% $ 576 6.6%
====== ===== ====== =====
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended
September 30,
-------------------------------------
1999 Percent 1998 Percent
Amount of AFE Amount of AFE
------ -------- ------ -------
(annualized) (annualized)
(dollars in millions)
<S> <C> <C> <C> <C>
Net interest income...................... $ 133 3.7% $ 109 3.5%
Non-interest income:
Fees and other income................... 66 1.8 48 1.6
Factoring commissions................... 31 0.9 31 1.0
Income of international joint ventures.. 9 0.3 8 0.3
------ -------- ------ -------
Total operating revenues.............. $ 239 6.7% $ 196 6.4%
====== ======== ====== =======
</TABLE>
Net Interest Income: Net interest income increased by $52 million or 17% for the
first nine months of 1999. Net interest margin as a percentage of AFE improved
to 3.8% at September 30, 1999 from 3.6% at September 30, 1998. Net interest
income for the third quarter of 1999 increased $24 million, or 22% from the
prior year period. Net interest income as a percentage of AFE increased to 3.7%
for the third quarter of 1999 from 3.5% in the prior year period. The increase
in net interest income for the first nine months of 1999 and the third quarter
of 1999 versus the same prior year periods is due to improvement in our net
interest margins and growth in average funds employed. 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 nine months of
1999 versus 1998. This increase is partially offset by the interest expense
related to the purchase price premiums of the Dealer Products Group and HCF
acquisitions.
Non-Interest Income: The following tables summarize our non-interest income for
the nine and three months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30, Increase/(Decrease)
-------------------
1999 1998 Amount Percent
---- ---- ------ -------
(dollars in millions)
<S> <C> <C> <C> <C>
Factoring commissions.................................. $ 89 $ 90 $ (1) (1)%
Income of international joint ventures................. 25 22 3 14
Fees and other income:
Fee income and other (1).............................. 121 98 23 23
Net investment gains.................................. 77 38 39 103
Securitization income................................. 11 15 (4) (27)
---------- ---------- ----------
Total fees and other income......................... $ 209 $ 151 $ 58 38%
========== ========== ==========
Total non-interest income........................... $ 323 $ 263 $ 60 23%
========== ========== ==========
Non-interest income as a percentage of AFE (annualized) 3.3% 3.0%
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
For the Three Months
Ended September 30, Increase/(Decrease)
-------------------
1999 1998 Amount Percent
---- ---- ------ -------
(dollars in millions)
<S> <C> <C> <C> <C>
Factoring commissions......................... $ 31 $ 31 $ -- --%
Income of international joint ventures........ 9 8 1 13
Fees and other income:
Fee income and other (1)..................... 32 33 (1) (3)
Net investment gains......................... 33 15 18 120
Securitization income........................ 1 -- 1 N/M
---------- ---------- ----------
Total fees and other income................ $ 66 $ 48 $ 18 38%
========== ========== ==========
Total non-interest income.................. $ 106 $ 87 $ 19 22%
========== ========== ==========
Non-interest income as a percentage of AFE (annualized) 3.0% 2.9%
</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 for the nine months ended
September 30, 1999 and remained the same for the third quarter of 1999, as
compared to the same prior year periods. The decrease is due to lower volume of
our domestic factoring business combined with lower factoring commission rates
of Factofrance. Total factoring volume increased 7% for the first nine months
and third quarter of 1999 as compared to the prior year. Factofrance's factoring
volume increased 15% for the year to date period and the third quarter of 1999.
Income of international joint ventures increased $3 million or 14% for the
nine months ended September 30, 1999 and $1 million or 13% for the third quarter
of 1999 as compared to the prior year. These increases are primarily due to
higher income from our European joint ventures partially offset by lower income
from our Latin American joint ventures.
Fees and other income totaled $209 million and increased $58 million or 38%
for the first nine months of 1999 as compared to the prior year period due to
increases in fee income and other and net investment gains. Fees and other
income also increased 38% to $66 million for the third quarter of 1999 over 1998
due to an increase in net investment gains. Fee income and other for the first
nine months of 1999 increased by $23 million or 23% compared to 1998. This
increase is due to higher fee income in Leasing Services related to the Dealer
Products Group and higher income on asset sales in Small Business Finance.
Net investment gains for the nine months ended September 30, 1999 of $77
million more than doubled over the previous year. For the third quarter of 1999,
net investment gains totaled $33 million, a 120% increase from the same prior
year period. These increases were primarily due to larger gains recognized on
our portfolio of limited partnership investments and on our real estate
investments. In addition, we recognized larger net gains on the sales of our
equity investments over the same prior year period.
Securitization income totaled $11 million during the first nine months of
1999. This income resulted from three securitization transactions. Leasing
Services sold approximately $230 million of equipment receivables to a conduit
in the third quarter resulting in a net gain of $1 million. In the second
quarter, Real Estate Finance securitized approximately $400 million in CMBS
16
<PAGE>
receivables resulting in $4 million of securitization income. Leasing Services
securitized approximately $380 million of receivables in the second quarter,
resulting in $6 million of securitization income. We did not retain any risk on
the term securitizations in 1999. During the first nine months of 1998, we
recognized $15 million in income from the first quarter CMBS securitization and
the second quarter securitization of the unguaranteed portion of loans in the
SBA 7(a) program.
Operating Expenses. The following tables summarize our operating expenses for
the nine and three months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30, Increase/(Decrease)
-------------------
1999 1998 Amount Percent
---- ---- ------ -------
(dollars in millions)
<S> <C> <C> <C> <C>
Salaries and other compensation........................ $ 171 $ 169 $ 2 1%
General and administrative expenses.................... 155 121 34 28
---------- ---------- ----------
Total operating expenses.............................. $ 326 $ 290 $ 36 12%
========== ========== ==========
Total operating expenses as a percentage of average
managed assets (annualized).......................... 3.0% 3.0%
Ratio of operating expenses to operating revenues..... 47% 50%
<CAPTION>
For the Three Months
Ended September 30, Increase/(Decrease)
-------------------
1999 1998 Amount Percent
---- ---- ------ -------
(dollars in millions)
<S> <C> <C> <C> <C>
Salaries and other compensation........................ $ 57 $ 54 $ 3 6%
General and administrative expenses.................... 53 43 10 23
---------- ---------- ----------
Total operating expenses.............................. $ 110 $ 97 $ 13 13%
========== ========== ==========
Total operating expenses as a percentage of average
managed assets (annualized).......................... 2.9% 2.9%
Ratio of operating expenses to operating revenues..... 46% 50%
</TABLE>
Operating expenses, excluding the impact of the acquisitions of the Dealer
Products Group and HCF, decreased by $4 million, or 1%, for the first nine
months of 1999, as compared to the same prior year period. Third quarter
operating expenses, excluding the Dealer Products Group and HCF acquisitions,
totaled $93 million, and represented a decrease of $4 million, or 4%, from the
same prior year period. The lower level of operating expenses reflects decreases
in total salaries and other compensation resulting from our restructuring effort
in 1998, offset by increases in technology spending, space costs and certain
professional fees. Total operating expenses as a percentage of operating
revenues decreased to 47% and 46% for the first nine months and quarter ended
September 30, 1999 from 50% for the same prior year periods and are slightly
better than our 1999 goal of 48%. These decreases reflect improved leveraging of
the Company's cost base.
17
<PAGE>
Allowance for Losses. The following tables summarize the changes in our
allowance for losses of receivables, including our provision for losses of
receivables and repossessed assets, for the nine and three months ended
September 30, 1999 and 1998:
<TABLE>
<CAPTION>
For the Nine Months
Ended September 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................................. 95 59 36 61
Writedowns........................................... (80) (70) (10) (14)
Recoveries........................................... 13 59 (46) (78)
HCF acquisition...................................... 7 -- 7 N/M
Other................................................ 4 3 1 N/M
---------- ---------- ----------
Balance at end of period.............................. $ 310 $ 312 $ (2) (1)%
========== ========== ==========
Allowance as a % of receivables...................... 2.1% 2.4%
<CAPTION>
For the Three Months
Ended September 30, Increase/(Decrease)
-------------------
1999 1998 Amount Percent
---- ---- ------ -------
(dollars in millions)
<S> <C> <C> <C> <C>
Balance at beginning of period........................ $ 285 $ 277 $ 8 3%
Provision for losses................................. 36 27 9 33
Writedowns........................................... (29) (28) (1) (4)
Recoveries........................................... 7 33 (26) (79)
HCF acquisition...................................... 7 -- 7 N/M
Other................................................ 4 3 1 N/M
---------- ---------- ----------
Balance at end of period.............................. $ 310 $ 312 $ (2) (1)%
========== ========== ==========
Allowance as a % of receivables..................... 2.1% 2.4%
</TABLE>
Our provision for losses was higher during the first nine months and third
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 nine months of 1999 totaled $67 million, or 0.70% of
average lending assets. Net writedowns during the third quarter of 1999 totaled
$22 million, or 0.64% of average lending assets. Writedown levels for both the
first nine months and third quarter are favorable to our targeted level of
0.75%. At September 30, 1999 the allowance for losses of receivables represented
2.1% of receivables, a decline from 2.4% at September 30, 1998. This reduction
reflects the continued strong credit quality of our receivables portfolio.
Income Taxes. Our effective tax rate remained unchanged at 34% for the nine
months ended September 30, 1999 compared to the same period in 1998. Our
effective tax rate for the third quarter of 1999 increased to 36% compared to
35% in 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.
18
<PAGE>
LENDING ASSETS AND INVESTMENTS
Lending assets and investments grew 23%, to $16.5 billion, from their December
31, 1998 level. This increase is primarily a result of new business volume of
$5.4 billion for the nine months ended September 30, 1999 and the HCF
acquisition, which contributed lending assets and investments totaling $535
million on the date of acquisition. Third quarter new business volume totaled
$2.4 billion and represents an increase of 18% over the third quarter of 1998.
Strong new business volume in all of our domestic product groups drove this
increase. The acquisition of the Dealer Products Group increased Leasing
Services new business volume by approximately $350 million and $130 million
during the first nine months and third quarter of 1999, respectively. Total new
business volume for the first nine months of 1999 is down 5.3% from the same
prior year period due to the anticipated lower volume of the Real Estate CMBS
product. Excluding CMBS, new business volume for the first nine months of 1999
totaled $5.1 billion, an increase of 24% from $4.1 billion in 1998, while new
business volume excluding CMBS for the third quarter of 1999 was over $2
billion, up 60% over compared to the same prior year period. New business volume
for the nine months ended September 30, 1999 was partially offset by portfolio
runoff and syndications, securitizations and loan sales of approximately $3
billion. The following tables present our lending assets and investments by
business category and asset type as of September 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
Lending Assets and Investments as of
September 30, December 31,
------------------- ------------------
1999 Percent 1998 Percent
------- ------- ------- -------
(dollars in millions)
<S> <C> <C> <C> <C>
By Business Category:
Domestic Commercial Finance Segment
Corporate Finance........................ $ 4,871 30% $ 3,784 28%
Leasing Services......................... 3,110 19 2,840 21
Real Estate Finance...................... 2,479 15 2,044 15
Small Business Finance................... 1,165 7 1,013 8
Commercial Services (1).................. 977 6 401 3
Healthcare Finance....................... 587 3 -- --
Other.................................... 516 3 687 5
------- ------- ------- -------
Total Domestic Commercial Finance Segment.. 13,705 83 10,769 80
International Factoring and Asset
Based Finance Segment (2)................ 2,762 17 2,661 20
------- ------- ------- -------
Total lending assets and investments...... $16,467 100% $13,430 100%
======= ======= ======= =======
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Lending Assets and Investments as of
September 30, December 31,
------------------- ------------------
1999 Percent 1998 Percent
------- ------- ------- -------
(dollars in millions)
<S> <C> <C> <C> <C>
By Asset Type:
Receivables............................ $14,591 89% $11,854 88%
Repossessed assets..................... 13 -- 3 --
------- ------- ------- -------
Total lending assets.................. 14,604 89 11,857 88
Equity and real estate investments..... 722 4 652 5
Debt securities........................ 512 3 365 3
Operating leases....................... 404 3 321 2
International joint ventures........... 225 1 235 2
------- ------- ------- -------
Total lending assets and investments.. $16,467 100% $13,430 100%
======= ======= ======= =======
Average lending assets................ $12,839 $11,506
======= =======
Funds employed (3).................... $15,082 $11,989
======= =======
Average funds employed (3)............ $13,047 $11,814
======= =======
Total managed assets (4).............. $16,429 $13,664
======= =======
Average managed assets (4)............ $14,383 $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.
(2) Includes $221 million and $231 million of investments in international
joint ventures at September 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 nearly $1.1
billion during the first nine months of 1999 was driven by new business volume
of $2.3 billion and increased borrowings under existing lines of over $245
million. Asset growth was partially offset by syndications and payoffs during
the period totaling $1.5 billion. New business volume for the third quarter of
1999 was nearly $1 billion and represented an increase of 38% from the prior
year period.
Leasing Services lending assets and investments grew by $270 million during
the first nine months of 1999 as new business volume of $1.4 billion was
partially offset by runoff, utilization, syndications and loan sales of $885
million. New business volume was also offset by the sale of approximately $230
million of equipment receivables to a conduit in the third quarter of 1999. A $1
million gain was recognized on the transaction. Year to date new business volume
exceeded the prior year by 28%. This increase was primarily due to the impact of
the Dealer Products Group acquisition.
Real Estate Finance lending assets and investments increased $435 million
since 1998 as new business volume of nearly $1 billion was partially offset by
$566 million in securitizations, payoffs and syndications, including a $400
million securitization in the second quarter. We recognized $4 million of
securitization income on this transaction. We did not retain any
20
<PAGE>
residual risk from this securitization as all of the commercial mortgage pass-
through certificates were sold to third parties on a non-recourse basis. Year to
date new business volume was significantly reduced from the same prior year
period due to an anticipated decline in CMBS volume. New business volume during
the third quarter totaled $605 million. Excluding CMBS, new business volume for
the third quarter of 1999 was $405 million, an increase of $283 million, or
232%, from the same prior year period. We are continuing to provide financing in
the CMBS market and may sell or securitize existing and newly originated CMBS
assets depending on market conditions.
Lending assets and investments of Small Business Finance increased $152
million from 1998 due to new business volume of nearly $510 million, an increase
of 42% over the prior year. New business volume for the first nine months of
1999 was partially offset by approximately $360 million of loan sales and
runoff. New business volume for the third quarter totaled $173 million and
represents an increase of 17% from the third quarter of 1998. The increases in
new business volume enabled us to become the largest SBA lender in the nation
based upon volume numbers for the SBA's fiscal year ended September 30, 1999.
Growth in Commercial Services lending assets and investments of $576
million was primarily due to a reduced level of receivables sold to our bank
supported conduits at September 30, 1999 as compared to the prior year end.
These conduits are used for liquidity purposes in normal business operations. In
October 1999, we agreed to sell the assets of our Commercial Services business
unit, part of our Domestic Commercial Finance segment, to CIT for approximately
$560 million in cash. The sale consists of $953 million of factored accounts
receivable and the assumption of $518 million of liabilities due to factoring
clients and results in a premium of $125 million over the net assets sold. The
completion of the sale, which is subject to customary regulatory approvals, is
expected to occur during the fourth quarter of 1999.
Healthcare Finance was formed when we acquired HCF in July 1999. The
transaction added $535 million in lending assets and investments on the date of
acquisition. Since then, Healthcare Finance recorded new business volume
totaling $67 million which was partially offset by approximately $15 million in
runoff.
At September 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.
21
<PAGE>
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 nine months ended
September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Total Revenues
For the Nine Months Ended September 30,
---------------------------------------
1999 Percent 1998 Percent
-------- ------- -------- -------
(dollars in millions)
<S> <C> <C> <C> <C>
Domestic Commercial Finance Segment
Corporate Finance.................. $ 332 29% $ 290 28%
Leasing Services................... 246 21 164 16
Real Estate Finance................ 166 14 198 19
Small Business Finance............. 90 8 75 7
Commercial Services................ 74 6 89 9
Healthcare Finance................. 14 1 -- --
Other.............................. 56 5 47 4
-------- ------- -------- -------
Total Domestic Commercial Finance
Segment............................ 978 84 863 83
International Factoring and Asset
Based Finance Segment.............. 191 16 176 17
-------- ------- -------- -------
Total revenues...................... $ 1,169 100% $ 1,039 100%
======== ======= ======== =======
</TABLE>
Total revenues increased $130 million or 13% from the prior year
principally reflecting increases in interest income and fees and other income.
Corporate Finance experienced a $42 million increase in revenues over the prior
year period due to an increase in interest income resulting from a higher level
of AFE and an increase in net investment gains. Leasing Services revenues
increased $82 million, of which $75 million relates to the Dealer Products
Group. Real Estate Finance revenues decreased $32 million due to lower interest
income resulting from a reduced level of AFE and lower securitization income
recorded in the first nine months of 1999 as compared to 1998. Small Business
Finance revenues increased $15 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 nine months of 1999 versus 1998. Commercial Services
revenues decreased $15 million due to lower factoring volume as compared to the
prior year period. International revenues increased $15 million from the first
nine months of 1998 due to increases in interest income and fees and other
income primarily from our wholly owned Mexican subsidiary.
22
<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 September 30, 1999, nonearning assets were $230
million or 1.6% 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 September 30, 1999. The following tables present certain information with
respect to the credit quality of our portfolio:
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
1999 1998
---- ----
(dollars in millions)
<S> <C> <C>
Lending Assets and Investments:
Receivables....................................................... $14,591 $11,854
Repossessed assets................................................ 13 3
------- -------
Total lending assets......................................... 14,604 11,857
Equity and real estate investments............................... 722 652
Debt securities................................................... 512 365
Operating leases.................................................. 404 321
Investments in joint ventures..................................... 225 235
------- -------
Total lending assets and investments......................... $16,467 $13,430
======= =======
Nonearning Assets:
Impaired receivables.............................................. $ 217 $ 208
Repossessed assets................................................ 13 3
------- -------
Total nonearning assets...................................... $ 230 $ 211
======= =======
Ratio of nonearning impaired receivables to receivables........... 1.5% 1.8%
======= =======
Ratio of total nonearning assets to total lending assets.......... 1.6% 1.8%
======= =======
Allowances for Losses:
Allowance for losses of receivables............................... $ 310 $ 271
======= =======
Ratio of allowance for losses of receivables to:
Receivables....................................................... 2.1% 2.3%
======= =======
Nonearning impaired receivables................................... 143% 130%
======= =======
Net writedowns (annualized)....................................... 3.5x 3.3x
======= =======
Delinquencies:
Earning loans delinquent 60 days or more.......................... $ 182 $ 184
======= =======
Ratio of earning loans delinquent 60 days or more to receivables.. 1.3% 1.6%
======= =======
</TABLE>
<TABLE>
<CAPTION>
For The Nine Months
Ended September 30,
------------------
1999 1998
---- ----
Net writedowns of lending assets: (dollars in millions)
<S> <C> <C>
Total net writedowns.............................................. $ 67 $ 11
======= =======
Ratio of net writedowns to average lending assets (annualized).... 0.7% 0.1%
======= =======
</TABLE>
23
<PAGE>
Nonearning Assets. Our nonearning assets were $230 million or 1.6% of lending
assets at September 30, 1999. Nonearning assets remain favorable to our targeted
range of 2-4% of lending assets. Included in nonearning assets are repossessed
assets of $13 million at September 30, 1999 and $3 million at December 31, 1998.
Allowance for Losses. The allowance for losses of receivables totaled $310
million or 2.1% of receivables at September 30, 1999, down from 2.3% at December
31, 1998. This reduction reflects the continued strong credit quality of our
receivables portfolio. The ratio of allowance for losses of receivables to
nonearning impaired receivables totaled 143% at September 30, 1999 and 130% at
December 31, 1998.
Loan Modifications. We had $12 million of loans that are considered troubled
debt restructures at September 30, 1999, a decrease of $2 million from December
31, 1998. At September 30, 1999, there were no loans that were restructured and
returned to earning status.
Writedowns. Net writedowns equaled 0.70% of average lending assets and
investments for the nine months ended September 30, 1999 and were favorable to
our stated target of 0.75%. Net writedowns for the first nine months 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 $80 million during the
first nine months of 1999 versus $70 million for the prior year period while
recoveries were $13 million in 1999 versus $59 million in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The following table presents information regarding our capital structure:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
(in millions)
<S> <C> <C>
Commercial paper and short-term borrowings....................... $ 5,159 $ 3,681
Notes and debentures............................................. 8,253 6,768
------- -------
Total senior debt............................................ 13,412 10,449
Minority interest................................................ 11 10
Stockholders' equity............................................. 2,261 1,962
------- -------
Total capitalization......................................... $15,684 $12,421
======= =======
Leverage (net of short-term investments)......................... 5.7x 5.2x
Commercial paper and short-term borrowings to total senior debt.. 38% 35%
</TABLE>
During the first nine months of 1999, our major funding requirements
included:
. $5.4 billion of longer-term loans, leases and investments funded;
. a net increase in short-term loans and advances to factoring clients
of $1.2 billion;
. the retirement of $2.2 billion of senior notes;
. common and preferred dividends of $45 million; and
. the HCF acquisition for approximately $475 million.
24
<PAGE>
Our major sources of funding these requirements included:
. cash flows from operations of $435 million;
. loan repayments and proceeds from the sale of investments and equipment
on lease of over $2.2 billion;
. the syndication, securitization or sale of nearly $1.7 billion of loans;
. the issuance of $3.7 billion of senior notes;
. the increase in short-term debt of $1.5 billion; and
. the issuance of $191 million of Class A Common Stock.
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 38% at September 30, 1999 and 35% at December 31, 1998. Leverage (based on
senior debt net of short-term investments) was 5.7x at September 30, 1999 and
5.2x at December 31, 1998. Our leverage continues to be below our expected
medium term run rate of 6.0x. The level of commercial paper and short-term
borrowings remains within our targeted range.
Our committed bank credit and asset sale facilities totaled approximately $5.6
billion at September 30, 1999 and included $4 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 two
separate 364-day bank credit facilities will expire on April 4, 2000 and
September 27, 2000. Also included in our total committed facilities are foreign
bank credit facilities of $937 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 109% of outstanding commercial paper and short-
term borrowings at September 30, 1999.
Risk Management - Asset/Liability Management
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 nine months ended
September 30, 1999, we entered into $3.8 billion of interest rate swaps while
$3.7 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, $615 million of variable rate assets to a fixed rate, $1.9
billion of fixed rate debt to a variable rate and $60 million of variable rate
debt to another variable rate index. At September 30, 1999, we held $5.6 billion
in interest rate swap agreements, $510 million in cross-currency interest rate
swap agreements and $1.7 billion of basis swap agreements.
We utilize interest rate futures to hedge the interest rate risk of a portion
of our receivables portfolio. At September 30, 1999 we held 10-year interest
rate futures contracts with an equivalent notional amount of $479 million.
25
<PAGE>
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 $1.3 billion of
forward currency exchange contracts at September 30, 1999.
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
Commercial Services Sale--
On October 4, 1999, we agreed to sell the assets of our Commercial Services
business unit, part of our Domestic Commercial Finance segment, to The CIT
Group, Inc. (CIT) for approximately $560 million in cash. The sale consists of
$953 million of factored accounts receivable and the assumption of $518 million
of liabilities due to factoring clients and results in a premium of $125 million
over the net assets sold. Commercial Services provides factoring, asset-based
revolving credit facilities, and accounts receivable management services to
clients in the U.S. textile and apparel industries.
The sale will be accounted for as an asset sale. Completion of the sale, which
is subject to customary regulatory approvals, is expected to occur during the
fourth quarter of 1999. The after-tax gain associated with the transaction will
be determined after closing and will ultimately include final adjustments for
transaction costs, obligations to employees, and the resolution of third party
contracts such as facility leases and vendor contracts. Upon completion of the
sale, we will terminate our domestic factored accounts receivable sale facility.
Declaration of Dividends--
On October 18, 1999, we increased the quarterly dividend on each share of our
Class A and Class B Common Stock to $0.10 per share from $0.09 per share. The
dividend, which represents an 11% increase from the prior quarter, is payable on
November 15, 1999 to the holders of record thereof on November 1, 1999. We also
declared quarterly dividends of $0.5078125, $1.67175
26
<PAGE>
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. The dividends on our preferred stocks are payable on
November 15, 1999 to the holders of record thereof on November 1, 1999.
Repurchase of Common Stock--
On October 18, 1999, we announced the authorization to repurchase up to 2
million shares of our Class A Common Stock to provide stock for issuance under
our stock option and restricted stock plans, as well as for other corporate
purposes.
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 nine months of 1999
for similar matters relating to acquired assets;
. remediation or implementation of contingency solutions, which is
substantially complete for all information technology systems deemed
mission-critical, and is scheduled for completion in 1999 for all
other matters; and
. validation, which is substantially complete for the mission-critical
information technology systems and information technology
infrastructure, and will continue throughout 1999 for all other
matters. As part of the validation process, we continue to assess 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.
Remediation and validation activities have been substantially completed. We have
also received a third party assessment of year 2000 readiness of HCF, which
Heller acquired in late July 1999. Remediation for that company has also been
substantially completed.
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 and HCF, we have (1) four loan processing systems, (2) three 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 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
27
<PAGE>
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 third 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 is
substantially complete, and all 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. Implementation is
underway and remains scheduled for completion by December 1, 1999.
We have incurred approximately $15 million to date of expenses related to the
year 2000 issue and estimate that we will incur an additional amount of
approximately $4 million through the end of the project. We will expense
remediation, compliance, maintenance and modification costs as incurred.
We continue to bear some risk related to the year 2000 issue and could be
materially adversely affected if our own remediation and contingency planning
efforts fall behind schedule or if third parties with whom we have material
relationships (e.g., vendors, including those providing contingency plans or
outsourced technology services such as mainframe and 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
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(4) Third Supplemental Indenture dated as of August 16, 1999 to the
Indenture dated September 1, 1995 between the Company and State Street
Bank and Trust Company, as Trustee, with respect to Senior Securities
(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:
Date of Report Item Description
- -------------- ---- -----------
October 5, 1999 5, 7 A report filing a press release announcing that the
Company has agreed to sell its domestic factoring
business, Commercial Services, to The CIT Group.
October 6, 1999 5, 7 A report announcing the commencement of an offering
under Registration Statement on Form S-3 No. 333-84725,
and pursuant to a Prospectus Supplement dated October
6, 1999, of up to $10,000,000,000 of Medium Term Notes,
Series J, due from 9 months to 30 years from the date
of issue.
October 18, 1999 5, 7 A report filing two press releases announcing (i) an
increase in the quarterly dividend on the Company's
common stock and the declaration of dividends on the
Company's common and preferred stocks, and (ii) the
Board of Directors' authorization of the repurchase of
up to two million shares of the Company's Class A
Common Stock to provide stock for issuance under the
Company's stock option and restricted stock plans, as
well as for other corporate purposes.
October 20, 1999 5, 7 A report filing a press release announcing the
Company's earnings for the quarter ended September 30,
1999.
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: November 10, 1999
30
<PAGE>
===============================================================
HELLER FINANCIAL, INC.
AND
STATE STREET BANK AND TRUST COMPANY
Trustee
______________________
THIRD SUPPLEMENTAL INDENTURE
______________________
Dated as of August 16, 1999
______________________
Senior Securities
===============================================================
<PAGE>
THIRD SUPPLEMENTAL INDENTURE dated as of August 16, 1999 between HELLER
FINANCIAL, INC., a Delaware corporation (the "Company"), and STATE STREET BANK
AND TRUST COMPANY, as Trustee (the "Trustee").
PRELIMINARY STATEMENTS
A. The Company and the Trustee, as the successor trustee to Shawmut Bank
Connecticut, National Association, have entered into an Indenture dated as of
September 1, 1995, as amended by a First Supplemental Indenture dated as of
October 13, 1995 and a Second Supplemental Indenture dated as of November 17,
1997, pursuant to which the Company, from time to time, has issued and will
issue Senior Securities (as amended, the "Indenture").
B. On August 15, 1997, the Company issued under the Indenture $200,000,000
in aggregate principal amount of 6.35% Notes due August 15, 2009 (the "Notes").
The Notes constitute Senior Securities of the Company.
C. The Company and Trustee now wish to amend and restate the Notes by
entering into this Third Supplemental Indenture. All things necessary to make
this Third Supplemental Indenture a valid agreement of the Company, in
accordance with its terms, have been done.
In consideration of the above statements, and other good and valuable
consideration, the receipt and adequacy of which is hereby acknowledged, the
parties agree that all amended and restated Notes (the "Amended and Restated
Notes") are to be executed, authenticated and delivered subject to the terms,
covenants and conditions set forth in the Indenture and this Third Supplemental
Indenture; and the Company, for itself and its successors, does hereby covenant
to, and agree with, the Trustee and its successors in such trust, for the
benefit of those who shall hold the Amended and Restated Notes, or any of them,
as follows:
TERMS AND CONDITIONS
1. Amendments to the Notes. The terms of the Notes are hereby amended and
restated in the form of the Amended and Restated Note attached as Annex A
hereto.
2. Additional Provisions.
a. All capitalized terms used but not defined herein shall have the
meanings ascribed to such terms in the Indenture.
b. Except for the amendment and restatement of the Notes as provided
herein, the terms of the Indenture shall remain unchanged.
c. This Agreement may be executed by any one of the parties hereto in any
number of counterparts, each of which when so executed shall be deemed an
original and all of which taken together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, HELLER FINANCIAL, INC. has caused this Third
Supplemental Indenture to be signed in its corporate name by its authorized
officer, and its corporate seal to be affixed hereto, and the same to be
attested by the signature of its Secretary or an Assistant Secretary, and
<PAGE>
STATE STREET BANK AND TRUST COMPANY, in evidence of its acceptance of the trust
hereby created, has caused this Third Supplemental Indenture to be signed in its
corporate name by one of its Authorized Officers, as of the day and year first
above written.
HELLER FINANCIAL, INC.
By: /s/ Kurt J. Roemer
Its: Sr. Vice President & Asst. Treasurer
[SEAL]
Attest: /s/ Mark J. Ohringer
Assistant Secretary
STATE STREET BANK AND TRUST COMPANY, as Trustee
By: /s/ Mark A. Forgetta
Its: Vice President
<PAGE>
STATE OF ILLINOIS )
) ss.:
COUNTY OF COOK )
On the 12th day of August, 1999, before me personally came Kurt Roemer to
me known, who, being by me duly sworn, did depose and say that such person is an
authorized officer of HELLER FINANCIAL, INC., one of the corporations described
in and which executed the above instrument; that such person knows the seal of
such corporation; that the seal affixed to such instrument is such corporate
seal; that it was so affixed by authority of the Board of Directors of such
corporation; and that such person signed such person's name thereto by like
authority.
/s/Mary L. Riedesel
- -------------------
Notary Public
[SEAL]
STATE OF Connecticut )
) ss.:
COUNTY OF Hartford )
On the 13th day of August, 1999, before me personally came Mark A. Forgetta
to me known, who, being by me duly sworn, did depose and say that such person is
an authorized officer of STATE STREET BANK AND TRUST COMPANY, one of the
corporations described in and which executed the above instrument; and that such
person signed such person's name thereto by like authority.
/s/ Melissa A. DuMont
- ---------------------
Notary Public
[SEAL]
<PAGE>
EXHIBIT A
THE NOTE EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE
SECURITIES LAWS. NEITHER THIS NOTE NOR ANY INTEREST OR PARTICIPATION HEREIN MAY
BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS
EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION.
THE HOLDER OF THIS NOTE BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR
OTHERWISE TRANSFER SUCH NOTE (1) PRIOR TO NOVEMBER 15, 1999, ONLY (A) TO THE
COMPANY OR (B) TO AN AFFILIATE OF SUCH HOLDER PURSUANT TO AN AVAILABLE EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, AND (2) ON OR AFTER
SUCH DATE, ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT
WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, OR (C) PURSUANT TO
AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.
No. 2 US $200,000,000
HELLER FINANCIAL, INC.
AMENDED AND RESTATED FLOATING RATE NOTE DUE AUGUST 15, 2009
HELLER FINANCIAL, INC., a Delaware corporation (hereinafter called the
"Company," which term shall include any successor corporation under the
Indenture referred to herein), for value received, hereby promises to pay to
Warburg Dillon Read LLC, or its registered assigns, the principal sum of
$200,000,000 (TWO HUNDRED MILLION DOLLARS), at the office or agency of the
Company maintained for such purpose in the Borough of Manhattan, The City of New
York, on August 15, 2009 (the "Maturity Date") in such coin or currency of the
United States of America as at the time of payment shall be legal tender for the
payment of public and private debts, and to pay interest (on the dates and at
the rate per annum from time to time in effect as described below) at such
office or agency of the Company in the Borough of Manhattan, The City of New
York, in like coin or currency; provided, however, that at the option of the
Company, interest may be paid by check to the Holder hereof entitled thereto at
such Holder's last address as it appears on the Securities Register, and
principal may be paid by check to the Holder hereof or other Person entitled
thereto against surrender of this Note. This Note was originally issued on
August 17, 1997 and has been amended pursuant to (1) the Note Amendment
Agreement dated as of August 13, 1999 between the Company and Warburg Dillon
Read LLC and (2) the Third Supplemental Indenture dated as of August 16, 1999
between the Company and State Street Bank and Trust Company (the "Trustee,"
which term shall include any successor entity under the Indenture referred to
herein).
<PAGE>
From and including August 16, 1999 to (but not including) November 15,
1999, this Note will bear interest at a rate per annum, subject to adjustment on
each Payment Date (as defined below, each such day a "Reset Date"), equal to
LIBOR (as defined below) for the applicable Interest Period (as defined below)
plus 0.125%, as determined by the calculation agent appointed by the Company,
which shall initially be the Company (the "Calculation Agent"). Interest will
be payable on each Monday (each such day, together with the other payment dates
subsequent to November 15, 1999 referred to in the next paragraph, a "Payment
Date"), commencing on August 23, 1999 to and including November 15, 1999, for
the period commencing on and including August 16, 1999 or the immediately
preceding Payment Date, as the case may be, and ending on and including the day
next preceding the Payment Date on which such interest is payable (each such
period, together with the other periods commencing on and after November 15,
1999 referred to in the next paragraph, an "Interest Period").
From and including November 15, 1999 to (but not including) the Maturity
Date, this Note will bear interest at a rate per annum, subject to adjustment on
each Reset Date, equal to LIBOR for the applicable Interest Period plus 2.50%,
as determined by the Calculation Agent. After November 15, 1999, interest will
be payable on February 15, May 15, August 15 and November 15 of each year,
commencing on February 15, 2000 to and including August 15, 2009, for the period
commencing on and including the immediately preceding Payment Date and ending
on and including the day next preceding the Payment Date on which such interest
is payable.
If any Payment Date does not fall on a London and New York Business Day (as
defined below), the interest payment shall be postponed to the next day that is
a London and New York Business Day, and no interest on such payment shall accrue
for the period from and after such Payment Date. However, if such London and
New York Business Day is in the next succeeding calendar month, such Payment
Date shall be the immediately preceding day that is a London and New York
Business Day.
"London and New York Business Day" is any day which is not a Saturday or
Sunday or a day on which banking institutions in New York, New York or London,
England are authorized or obligated by law or executive order to close.
Interest shall accrue on the basis of the actual number of days elapsed
divided by a 360-day year. The interest so payable, and punctually paid or duly
provided for, on any Payment Date will be paid to the Person in whose name this
Note is registered at the close of business on the day (whether or not a London
and New York Business Day) immediately preceding such Payment Date. Any such
interest not so punctually paid or duly provided for shall forthwith cease to be
payable to the Holder on such Payment Date and may be paid to the Person in
whose name this Note (or one or more Predecessor Securities) is registered at
the close of business on a record date not more than 15 days and not less than
10 days prior to the date fixed by the Trustee for payment of such defaulted
interest and not less than 10 days after the receipt by the Trustee from the
Company of notice of the proposed payment, notice of which record date shall be
given to Holders of Notes not less than 10 days prior to such record date, or
may be paid at any time in any other lawful manner not
<PAGE>
inconsistent with the requirements of any securities exchange on which the Notes
may be listed, and upon such notice as may be required by such exchange, all as
more fully provided in said Indenture.
If the Maturity Date is a day that is not a Business Day, payment of
principal and interest on the Maturity Date shall be postponed to the next
Business Day and, if paid on that Business Day, such payment shall be deemed
timely made.
LIBOR shall be determined by the Calculation Agent for each Interest Period
on the Determination Date (as defined below) relating to the Reset Date that is
the first day of such Interest Period. The Calculation Agent shall calculate
LIBOR on each Determination Date as follows:( a) with respect to any Reset Date
on or prior to November 8, 1999, LIBOR shall be the rate (expressed as a
percentage per annum) for deposits in United States Dollars having a maturity of
one week or (b) with respect to any Reset Date on or after November 15, 1999,
LIBOR shall be the rate (expressed as a percentage per annum) for deposits in
United States Dollars having a maturity of three months, in either case
beginning on the first day of the applicable Interest Period, that appears on
Telerate Page 3750 (as defined below) as of 11:00 a.m., London time on the
Determination Date. If Telerate Page 3750 does not include such a rate or is
unavailable on a Determination Date, LIBOR for the Interest Period shall be the
arithmetic mean of the offered rates (expressed as a percentage per annum) for
deposits in a Representative Amount (as defined below) in United States Dollars
having a maturity of either one week or three months, as the case may be,
beginning on the first day of the applicable Interest Period, that appears on
Reuters Screen LIBO Page (as defined below) as of 11:00 a.m., London time on the
Determination Date. If Reuters Screen LIBO Page does not include two or more
rates or is unavailable on a Determination Date, the Calculation Agent will
request the principal London office of each of four major banks in the London
interbank market, as selected by the Calculation Agent, to provide such bank's
offered quotation (expressed as a percentage per annum), as of approximately
11:00 a.m., London time on such Determination Date, to prime banks in the London
interbank market for deposits in a Representative Amount in United States
Dollars having a maturity of either one week or three months, as the case may
be, beginning on the first day of the applicable Interest Period. If at least
two such offered quotations are so provided, LIBOR for the Determination Date
will be the arithmetic mean of such quotations. If fewer than two such
quotations are so provided, the Calculation Agent will request each of three
major banks in New York City, as selected by the Calculation Agent, to provide
such bank's rate (expressed as a percentage per annum), as of approximately
11:00 a.m., New York City time on such Determination Date, for loans in a
Representative Amount in United States Dollars to leading European banks having
a maturity of either one week period or three months, as the case may be,
beginning on the first day of the applicable Interest Period. If at least two
such rates are so provided, LIBOR for the Determination Date will be the
arithmetic mean of such rates. If fewer than two such rates are so provided,
then LIBOR for the Determination Date will be LIBOR in effect with respect to
the immediately preceding Reset Date.
"Determination Date" with respect to a Reset Date will be the second London
Banking Day preceding such Reset Date.
<PAGE>
"London Banking Day" is any day in which dealings in United States Dollars
are transacted in the London interbank market.
"Representative Amount" means a principal amount of not less than U.S.
$1,000,000 for a single transaction in the relevant market at the relevant time.
"Telerate Page 3750" means the display designated as "Page 3750" on the Dow
Jones Telerate Service for the purpose of displaying the London interbank rates
of major banks for United States dollars (or such other page as may replace Page
3750 on that service or a successor service).
"Reuters Screen LIBO Page" means the display designated as page "LIBO" on
The Reuters Monitor Money Rates Service for the purpose of displaying the London
interbank rates of major banks for United States dollars (or such other page as
may replace the LIBO page on that service or a successor service).
All percentages resulting from any of the above calculations will be
rounded, if necessary, to the nearest one hundred-thousandth of a percentage
point, with five one-millionths of a percentage point rounded upwards (e.g.,
9.876545% (or .09876545) being rounded to 9.87655% (or .0987655)) and all dollar
amounts used in or resulting from such calculations will be rounded to the
nearest cent (with one-half cent being rounded upwards).
The interest rate on the Notes will in no event be higher than the maximum
rate permitted by New York law as the same may be modified by federal law of
general application.
The Notes shall be redeemable, in whole only, at the option of the Company
upon three London and New York Business Days notice on any Payment Date from and
including August 23, 1999 to and including November 15, 1999 (the "Redemption
Expiration Date") at a price equal to 100% of the principal amount thereof plus
accrued and unpaid interest thereon to the date of redemption. If the Company
does not redeem the Notes on or prior to the Redemption Expiration Date, the
Company is required, under the Registration Rights Agreement dated as of August
16, 1999 between the Company and Warburg Dillon Read LLC (the "Registration
Rights Agreement"), to use its reasonable best efforts to file, not later than
120 days after August 16, 1999, and cause to become effective, not later than
180 days after August 16, 1999, a registration statement with respect to an
exchange offer (the "Exchange Offer Registration Statement") and, under certain
circumstances, a registration statement with respect to resales of the Notes
(the "Shelf Registration Statement"). In the event the Exchange Offer
Registration Statement and, if required, the Shelf Registration Statement is not
declared effective on or prior to the date specified above for such
effectiveness, the per annum interest rate on the Securities will increase by
0.25% until the date that the Exchange Offer Registration Statement or the Shelf
Registration Statement, as the case may be, becomes effective. The Holder of
this Note is entitled to the benefits of the Registration Rights Agreement.
<PAGE>
The Calculation Agent will, upon the request of the Holder of the Note,
provide the interest rate then in effect. All calculations made by the
Calculation Agent in the absence of manifest error shall be conclusive for all
purposes and binding on the Company and the Holder of the Note. The Company may
appoint a successor Calculation Agent with the written consent of the Trustee,
which consent shall not be unreasonably withheld.
Additional provisions of this Note are set forth on the reverse hereof and
such provisions shall for all purposes have the same effect as though fully set
forth at this place.
This Note shall not be valid or become obligatory for any purpose, or be
entitled to any benefit under the Indenture or the Registration Rights
Agreement, until the certificate of authentication thereon shall have been
signed by the Trustee.
<PAGE>
WITNESS the Company has caused this instrument to be duly executed under
its corporate seal.
Dated: August 16, 1999
HELLER FINANCIAL, INC.
By: _____________________________
Name:
Title:
(Seal)
ATTEST:
__________________________
__________________________
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated and referred to in
the within-mentioned Indenture.
STATE STREET BANK AND TRUST COMPANY, as Trustee,
By: _____________________________
Name:
Title:
<PAGE>
(Reverse of Note)
HELLER FINANCIAL, INC.
AMENDED AND RESTATED FLOATING RATE NOTE DUE AUGUST 15, 2009
This Note is one of a duly authorized issue of debentures, notes or other
evidences of indebtedness (hereinafter call the "Securities") of the Company,
all such Securities issued and to be issued under the Indenture for Senior
Securities dated as of September 1, 1995 (herein, together with all indentures
supplemental thereof, called the "Indenture") between the Company and State
Street Bank and Trust Company, as successor to Shawmut Bank Connecticut,
National Association, as Trustee (the "Trustee," which term shall include any
successor entity under the Indenture). Reference is hereby made to the Indenture
for a specific explanation of the rights and limitation of rights thereunder of
the Holders of the Securities (including the Notes) and of the rights,
obligations, duties and immunities of the Trustee and the Company with respect
thereto. As provided in the Indenture, the Securities may be issued in one or
more series, which different series may be issued in various aggregate principal
amounts, may mature at different times, may bear interest, if any, at different
rates, may be subject to different redemption provisions, if any, may be subject
to different sinking, purchase or analogous funds, if any, may be subject to
different covenants and Events of Default and may otherwise vary as provided or
permitted in the Indenture. This Note is one of a series designated on the face
hereof (the "Notes").
All capitalized terms used but not defined in this Note have the meanings
assigned to them in the Indenture.
If any Event of Default with respect to the Notes, shall occur and be
continuing, the principal of the Notes may be declared due and payable in the
manner and with the effect provided in the Indenture.
This Note is subject to redemption prior to the Maturity Date at the option
of the Company as set forth on the front of this Note. The Notes do not provide
for any sinking fund.
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Securities under the Indenture at
any time by the Company with the consent of the Holders of a majority in
aggregate principal amount of the Securities at the time Outstanding of each
series of Securities to be affected thereby. The Indenture also contains
provisions permitting the Holders of specified percentages in aggregate
principal amount of the Securities of any series at the time Outstanding on
behalf of the Holders of all the Securities of such series, to waive compliance
by the Company with certain provisions of the Indenture and certain past
defaults under the Indenture and their consequences with respect to such series.
Any such consent or waiver by the Holder of this Note shall be conclusive and
binding upon such Holder and upon all future Holders of this Note and of any
Note issued upon the transfer herefor or in exchange or in lieu hereof, whether
or not notation of such consent or waiver is made upon this Note.
<PAGE>
No reference herein to the Indenture and no provision of this Note or of
the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of, and interest on, this Note
at the times, place and rate, and in the coin or currency, herein prescribed.
As provided in the Indenture and subject to certain limitations therein and
herein set forth, this Note is transferable on the Securities Register of the
Company, upon surrender of this Note for registration of transfer at the offices
or agencies of the Company to be maintained by the Trustee for that purpose in
the Borough of Manhattan, the City of New York, duly endorsed by, or accompanied
by an assignment in the form attached hereto and by such other documents
satisfactory to the Company and the Securities Registrar duly executed by the
Holder herefor or his attorney duly authorized in writing, and thereupon one or
more new Notes of the same class is authorized denominations evidencing the same
aggregate principal amount will be issued to the designated transferee or
transferees. The Securities Registrar initially appointed under the Indenture
for the Notes is State Street Bank and Trust Company.
The Notes are issuable only in fully registered form without coupons in
denominations of $100,000 and any integral multiples thereof. As provided in
the Indenture and subject to certain limitations therein set forth, the Notes
are exchangeable for certificates representing a like aggregate principal amount
of Notes of a like tenor and of a different authorized denominations, as
requested by the Holder surrendering the same.
No recourse under or upon any obligation, covenant or agreement of the
Company in the Indenture or in this Note, or because of the creation of any
indebtedness represented thereby, shall be had against any incorporator,
stockholder, officer or director, as such, past, present or future, of the
Company or of any successor corporation, either directly or indirectly through
the Company or any successor corporation, under any rule of law, statute or
constitutional provision or by the enforcement of any assessment, penalty or by
any legal or equitable proceeding or otherwise, all such liability being
expressly waived and released by the acceptance hereof and as a condition of and
as part of the consideration for the issue hereof.
The Company will be discharged from its obligations under the Notes and the
Notes will be canceled, subject to the terms of the Indenture, upon the payment
of all sums payable with respect to the Notes or upon the irrevocable deposit
with the Trustee of cash or Government Obligations (or a combination thereof)
sufficient for such payment in accordance with Article VI of the Indenture.
The Note shall for all purposes be governed by, and construed in accordance
with, the laws of the State of New York.
The Company, the Trustee and any agent of the Company or the Trustee may
deem and treat the Person in whose name this Note is registered as the owner
hereof for all purposes, whether or not this Note be overdue and notwithstanding
any notation of ownership or other writing hereon, and neither the Company, the
Trustee nor any such agent shall be affected by notice to the contrary.
<PAGE>
ABBREVIATIONS
The following abbreviations, when used in the inscription of the face of
this instrument, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship
and not as tenants in common
UNIF GIFT MIN ACT -
________________ Custodian ________________
(Cust) (Minor)
Under Uniform Gifts to Minors Act
______________________________________________
Additional abbreviations may also be used though not in the above list.
__________________________
FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and
transfer(s) unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF ASSIGNEE
- ------------------------------------
- ------------------------------------
- --------------------------------------------------------------------------
(Please Print or Typewrite Name and Address of Assignee)
the within instrument of HELLER FINANCIAL, INC. and does hereby irrevocably
constitute and appoint _____________________________________________________
Attorney to transfer said instrument on the books of the within-named Company,
with full power of substitution in the premises.
Dated: ___________ _______________________________
Signature
NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the within instrument in every particular, without
alteration by enlargement or any change whatever.
<PAGE>
EXHIBIT (12)
HELLER FINANCIAL, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS
TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(unaudited)
(dollars in millions)
<TABLE>
<CAPTION>
For the Nine
Months Ended
September 30, 1999
------------------
<S> <C>
Net income before income taxes and minority interest............... $ 267
Add-Fixed charges
Interest and debt expense........................................ 481
One-third of rentals............................................. 8
-----
Total fixed charges......................................... 489
-----
Net income, as adjusted............................................ $ 756
-----
Ratio of earnings to fixed charges................................. 1.55x
=====
Preferred stock dividends on a pre-tax basis....................... $ 32
Total combined fixed charges and preferred stock dividends.. 521
-----
Ratio of earnings to combined fixed charges and
preferred stock dividends 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,
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.
<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 SEPTEMBER 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
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 0
<INT-BEARING-DEPOSITS> 649
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 579
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 14,591
<ALLOWANCE> (310)
<TOTAL-ASSETS> 17,693
<DEPOSITS> 0
<SHORT-TERM> 5,159
<LIABILITIES-OTHER> 2,009
<LONG-TERM> 8,253
0
400
<COMMON> 1,644
<OTHER-SE> 217
<TOTAL-LIABILITIES-AND-EQUITY> 17,693
<INTEREST-LOAN> 846
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 846
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 481
<INTEREST-INCOME-NET> 365
<LOAN-LOSSES> 95
<SECURITIES-GAINS> 0<F1>
<EXPENSE-OTHER> 326
<INCOME-PRETAX> 267
<INCOME-PRE-EXTRAORDINARY> 267
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 175<F2>
<EPS-BASIC> 1.68
<EPS-DILUTED> 1.68
<YIELD-ACTUAL> 1.79
<LOANS-NON> 217
<LOANS-PAST> 99
<LOANS-TROUBLED> 12
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 271
<CHARGE-OFFS> 80
<RECOVERIES> 13
<ALLOWANCE-CLOSE> 310
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 310
<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 $91 million income tax provision.
</FN>
</TABLE>
