10-Q/A 1 h1qa2001.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A (Mark One) X Quarterly report for the period ended March 31, 2001 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. 51,050,000 shares of Class A Common Stock, $.25 par value, outstanding at April 26, 2001 45,858,511 shares of Class B Common Stock, $.25 par value, outstanding at April 26, 2001 1 EXPLANATORY NOTE The purpose of this Amendment to the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 2001 is to restate the consolidated condensed financial statements contained therein, to modify the notes to such financial statements, and to make conforming changes to other information contained elsewhere in the report to reflect increased provisions for loan losses as disclosed in note 12 to such financial statements. 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HELLER FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (in millions, except for information on shares)
ASSETS March 31, December 31, 2001 2000 Restated ----------- ------------ (unaudited) (audited) Cash and cash equivalents................................................. $ 1,260 $ 732 Receivables (Note 2) Commercial loans Term loans...................................................... 4,532 4,973 Revolving loans................................................. 2,053 2,052 Real estate loans.................................................... 2,771 2,686 Factored accounts receivable......................................... 2,249 2,615 Equipment loans and leases........................................... 3,590 3,640 ----------- ------------ Total receivables............................................... 15,195 15,966 Less: Allowance for losses of receivables (Note 2)................... 368 342 ----------- ------------ Net receivables................................................. 14,827 15,624 Equity and real estate investments ....................................... 751 795 Debt securities........................................................... 886 755 Operating leases.......................................................... 655 695 Investments in international joint ventures............................... 211 216 Lending partnerships...................................................... 328 267 Goodwill ................................................................. 448 458 Other assets.............................................................. 617 519 ----------- ------------ Total assets.................................................... $ 19,983 $ 20,061 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Senior debt Commercial paper and short-term borrowings........................... $ 4,138 $ 5,127 Notes and debentures (Note 3)........................................ 11,595 10,525 ----------- ------------ Total senior debt............................................... 15,733 15,652 Credit balances of factoring clients...................................... 827 982 Other payables and accruals............................................... 846 840 ----------- ------------ Total liabilities............................................... 17,406 17,474 Minority interest......................................................... 13 12 Stockholders' equity Non-redeemable Preferred Stock....................................... 400 400 Class A Common Stock ($.25 par; 500,000,000 shares authorized; 46,936,792 shares issued and 45,820,401 shares outstanding)....... 12 12 Class B Common Stock ($.25 par; 300,000,000 shares authorized; 51,050,000 shares issued and outstanding)......................... 13 13 Additional paid in capital........................................... 1,640 1,631 Retained earnings.................................................... 587 554 Treasury stock (1,116,391 shares) (Note 5)........................... (26) (19) Accumulated other comprehensive income............................... (62) (16) ----------- ------------ Total stockholders' equity...................................... 2,564 2,575 ----------- ------------ Total liabilities and stockholders' equity...................... $ 19,983 $ 20,061 =========== ============
The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these statements. 3 HELLER FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (in millions, except for per share information)
For the Three Months Ended March 31, -------------------- 2001 Restated 2000 ----- ----- (unaudited) Interest income...................................................... $ 403 $ 361 Interest expense..................................................... 249 215 ----- ----- Net interest income............................................. 154 146 Fees and other income................................................ 71 88 Factoring commissions................................................ 16 17 Income of international joint ventures............................... 12 10 ----- ----- Operating revenues.............................................. 253 261 Operating expenses................................................... 111 117 Provision for losses................................................. 60 30 Small Business Finance charge........................................ 12 - ----- ----- Income before taxes, minority interest, and cumulative effect of change in accounting for derivatives.............. 70 114 Income tax provision................................................. 20 38 Minority interest.................................................... - 1 ----- ----- Income before cumulative effect of change in accounting for derivatives................................. 50 75 ----- ----- Cumulative effect on prior years of change in accounting for derivatives (net of taxes)................................... (4) - ----- ----- Net income...................................................... $ 46 $ 75 ===== ===== Dividends on preferred stock.................................... $ 7 $ 7 ===== ===== Net income applicable to common stock........................... $ 39 $ 68 ===== ===== Basic net income applicable to common stock per share (Note 6)........................................... $ 0.40 $ 0.70 ===== ===== Diluted net income applicable to common stock per share (Note 6)........................................... $ 0.40 $ 0.70 ===== =====
The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these statements. 4 CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (in millions) (unaudited)
Non- Accum. Redeem- Other able Class A Class B Treasury Add'l Compre- Compre- PreferredCommon Common Stock Paid In hensive Retained hensiv Stock Stock Stock (Note 5) Capital Income Earnings Total Income -------- ------ ------- ------ ------ ----- ------- ------ ------- BALANCE AT DECEMBER 31, 1999........ $ 400 $ 12 $ 13 $ (9) $1,626 $ (27) $ 332 $2,347 Comprehensive Income: Net income.......................... - - - - - - 75 75 $ 75 Other comprehensive income, net of tax: Unrealized loss on securities, net of tax benefit of $3...... - - - - - - - (7) (7) Foreign currency translation adjustments, net of tax of $(16) ................. - - - - - - - 1 1 ------ Other comprehensive income........ - - - - - (6) - - (6) ------ Comprehensive income................ - - - - - - - - $ 69 ====== Repurchase of Class A Common Stock.. - - - (13) - - - (13) Vesting of restricted shares........ - - - - 1 - - 1 Preferred stock dividends........... - - - - - - (7) (7) Common stock dividends.............. - - - - - - (9) (9) -------- ------ ------- ------ ------ ------ -------- ------- BALANCE AT MARCH 31, 2000........... $ 400 $ 12 $ 13 $ (22) $1,627 $ (33) $ 391 $ 2,388 ======== ====== ======= ====== ====== ====== ======== ======= BALANCE AT DECEMBER 31, 2000........ $ 400 $ 12 $ 13 $ (19) $1,631 $ (16) $ 554 $ 2,575 Comprehensive Income: Net income before cumulative effect of change in accounting for derivatives....................... - - - - - - 50 50 $ 50 Other comprehensive income, net of tax: Transition adjustment related to change in accounting for derivatives, net of tax of $ ( 2) ............... - - - - - - - (4) (4) Unrealized loss on qualifying cash flow hedges, net of tax of $(1)................. - - - - - - - (2) (2) Unrealized loss on securities, net of tax benefit of $ 5... - - - - - - - (8) (8) Foreign currency translation adjustments, net of tax of $(7) ................. - - - - - - - (32) (32) ------ Other comprehensive income........ - - - - - (46) - - (46) ------ Comprehensive income................ - - - - - - - - $ 4 ====== Issuance of Class A Common Stock.... - - - - 8 - - 8 Repurchase of Class A Common Stock.. - - - (7) - - - (7) Vesting of restricted shares........ - - - - 1 - - 1 Preferred stock dividends........... - - - - - - (7) (7) Common stock dividends.............. - - - - - - (10) (10) -------- ----- ------- ------ ------ ------ -------- ------- BALANCE AT MARCH 31, 2001 Restated.. $ 400 $ 12 $ 13 $ (26) $1,640 $ (62) $ 587 $ 2,564 ======== ====== ======= ====== ====== ====== ======== =======
The accumulated other comprehensive income balance included $0 million of unrealized losses, net of tax, on securities available for sale at March 31, 2001 and 2000, and unrealized losses, net of tax, on qualifying cash flow hedges of $(1) million and $0 million at March 31, 2001 and March 31, 2000, respectively. Accumulated other comprehensive income also included deferred foreign currency translation adjustments, net of tax, of $(57) million and $(33) million at March 31, 2001 and March 31, 2000, respectively, and $(4), net of tax, for the transition adjustment related to the change in accounting for derivatives at March 31, 2001. The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these statements. 5 HELLER FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (in millions)
For the Three Months Ended March 31, 2001 Restated 2000 --------- ---------- OPERATING ACTIVITIES (unaudited) Income before cumulative effect of change in accounting for derivatives........ $ 50 $ 75 Adjustments to reconcile net income to net cash provided by operating activities: Provision for losses....................................................... 60 30 Amortization and depreciation.............................................. 14 18 Losses from equity investments............................................. 9 1 Provision for deferred tax (asset) liability............................... (4) 11 (Decrease) increase in accounts payable and accrued liabilities............ (17) 64 Undistributed income of international joint ventures....................... (8) (5) Decrease in interest payable............................................... (15) (6) Net decrease (increase) in other assets.................................... 14 (16) Other...................................................................... (15) (3) --------- ---------- Net cash provided by operating activities................................ 88 169 INVESTING ACTIVITIES Longer-term loans funded........................................................ (941) (1,420) Collections of principal........................................................ 389 714 Securitizations, participations, syndications and loan sales.................... 619 525 Net decrease (increase) in short-term loans and advances to factoring clients .. 512 (271) Investment in operating leases.................................................. (27) (298) Investment in equity interests and other investments............................ (149) (44) Sales of investments and equipment on lease..................................... 55 40 Other........................................................................... - (54) --------- ---------- Net cash provided by (used for) investing activities..................... 458 (808) FINANCING ACTIVITIES Senior note issuances........................................................... 1,787 1,357 Retirement of notes and debentures.............................................. (802) (409) Decrease in commercial paper and other short-term borrowings (989) (281) Net increase in advances from affiliates........................................ 2 - Issuance of Class A Common Stock................................................ 8 - Repurchase of Class A Common Stock ............................................. (7) (13) Cash dividends paid on preferred and common stock............................... (17) (16) Other........................................................................... - (1) --------- ---------- Net cash (used for) provided by financing activities..................... (18) 637 --------- ---------- Increase (decrease) in cash and cash equivalents................................... 528 (2) Cash and cash equivalents at the beginning of the period........................... 732 516 --------- ---------- Cash and cash equivalents at the end of the period................................. $ 1,260 $ 514 ========= ==========
The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these statements. 6 HELLER FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited) (1) Basis of Presentation These consolidated condensed financial statements should be read in conjunction with the financial statements and notes included in the annual report on Form 10-K of Heller Financial, Inc. (including its consolidated subsidiaries, Heller or the Company, which may be referred to as we, us or our) for the year ended December 31, 2000. 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) 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:
March 31, December 31, 2001 2000 ---------- ------------ (in millions) Impaired receivables........................................................... $ 294 $ 285 Repossessed assets............................................................. 21 22 ---------- ------------ Total nonearning assets...................................................... $ 315 $ 307 ---------- ------------ Ratio of total nonearning assets to total lending assets....................... 2.1% 1.9% ========== ============
Nonearning assets included $30 million and $37 million at March 31, 2001 and December 31, 2000, respectively, for our International Factoring and Asset Based Finance Segment. The average investment in nonearning impaired receivables was $291 million for the three months ended March 31, 2001 and $211 million for the three months ended March 31, 2000. Loan Modifications-- At March 31, 2001 and December 31, 2000, we did not have any loans that are considered troubled debt restructures. At March 31, 2001 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 first three months of 2001 included an additional provision of $60 million and gross writedowns and recoveries of $44 million and $13 million, respectively. Impaired receivables with identified reserve requirements totaled $274 million at March 31, 2001 and $260 million at December 31, 2000.
March 31, December 31, 2001 2000 Restated ---------- ----------- (in millions) Identified reserve requirement for impaired receivables........................ $ 109 $ 78 Additional allowance for losses of receivables................................. 259 264 ---------- ----------- Total allowance for losses of receivables.................................. $ 368 $ 342 ---------- ----------- Ratio of allowance for losses of receivables to nonearning impaired receivables .................................... 125% 120% ========== ===========
7 (3) Senior Debt - Notes and Debentures We issued and retired the following notes and debentures during the three months ended March 31, 2001 (excluding unamortized premium and discount):
Principal Amount ------------- (in millions) Issuances: Variable rate notes due on various dates ranging from July 17, 2001 to June 20, 2004......................................................... $ 168 Fixed rate notes with interest rates ranging from 5.58% to 6.40% due on various dates ranging from December 11, 2001 to March 15, 2006.................................................... 1,619 -------------- $ 1,787 ============== Retirements: Variable rate notes due on various dates ranging from January 12, 2001 to March 19, 2001..................................................... $ 290 Fixed rate notes with interest rates ranging from 5.48% to 7.27% due on various dates ranging from January 16, 2001 to March 1, 2001...................................................... 512 --------------- $ 802 ===============
At March 31, 2001, we have total committed credit and asset sale facilities totaling $5.7 billion, of which $5.6 billion was available for use at March 31, 2001. We have approximately $4.2 billion in available liquidity support, split equally between two bank credit facilities. One of these is a 5-year facility expiring in April 2005 and the other is a 364-day facility expiring in April 2001. See Note 10-Subsequent Events-for information on the renewal of our 364-day bank credit facility. Also included in committed facilities are foreign bank credit facilities totaling $1 billion (U.S. dollar equivalent) for our consolidated international subsidiaries and $15 million under foreign currency revolving credit facilities. As of March 31, 2001, there was approximately $950 million available under these facilities. Also included in committed facilities is approximately $240 million of additional alternative liquidity, which is available by discounting eligible French receivables with the French Central Bank since Factofrance is a registered financial institution in France. The entire facility was available for use at March 31, 2001. In addition to the above facilities, our wholly-owned subsidiary, Factofrance, has two factored accounts receivable sale facilities. These facilities allow us to sell an undivided interest of up to FRF 1.7 billion (approximately $250 million) in a designated pool of our factored accounts receivable to two bank-sponsored conduits, on a limited recourse basis. As of March 31, 2001, these facilities were fully utilized. We have an asset backed commercial paper conduit facility that allows us to sell participations in a designated pool of Corporate Finance cash-flow loans to bank-sponsored conduits, on a limited recourse basis. Liquidity support under this facility totals $1.4 billion, of which $1 billion was utilized at March 31, 2001. The underlying liquidity support for the conduits is provided by unaffiliated commercial banks. The commitment period of this liquidity support is 364 days and may be renewed annually by the banks, at their discretion. 8 We have a shelf registration statement, filed with the Securities and Exchange Commission, covering the sale of up to $10 billion in debt securities (including medium-term notes), senior preferred stock and Class A Common Stock. As of March 31, 2001, we had approximately $4.3 billion available under this shelf registration. We have a Euro Medium-Term Note Program for the issuance of up to $2 billion (U.S. dollar equivalent) in notes to be issued from time to time. As of March 31, 2001, approximately $1.2 billion (U.S. dollar equivalent) was available under this program. We have a Euro commercial paper program and a Canadian commercial paper program for the issuance of notes up to $1 billion and $250 million (U.S. dollar equivalent), respectively. As of March 31, 2001, there was $449 million and $211 million, respectively, available under these programs. (4) Derivative Financial Instruments Used for Risk Management Purposes We utilize derivatives, primarily interest rate swaps, to match more closely the interest rate and maturity characteristics of our assets and liabilities. Derivatives that qualify as fair value hedges include interest rate swaps that change the interest rate characteristics of fixed rate debt to that of variable rate debt and interest rate swaps that alter the interest rate characteristics of specific fixed rate asset pools to more closely match the interest rate terms of the underlying financing. Derivatives that qualify as cash flow hedges include interest rate swaps that change the interest rate characteristics of variable rate debt to that of fixed rate debt. We also use interest rate swaps to modify the variable rate basis of a liability to more closely match the variable rate basis used for variable rate receivables. At March 31, 2001, we had approximately $5.5 billion and $2.2 billion in notional amount of interest rate swaps and basis swap agreements, respectively. We also utilize interest rate futures, as fair value hedges, to hedge the interest rate risk of a portion of our fixed rate receivables portfolio and certain investment securities. At March 31, 2001 we held 10-year, 5-year, and 2-year interest rate futures contracts with equivalent notional amounts of $192 million, $58 million and $91 million, respectively. To minimize the effect of fluctuations in foreign currency exchange rates on our financial results, we periodically enter into forward currency exchange contracts, cross currency swap agreements or enter into currency options or currency option combinations. These financial instruments serve as hedges of our foreign investment in international subsidiaries and joint ventures or effectively hedge the translation of the related foreign currency income. We held $1.2 billion in notional amount of forward currency exchange contracts, and $725 million in notional amount of cross currency swap agreements at March 31, 2001. Included in the cross currency interest rate swap agreements were $523 million used to hedge debt instruments issued in foreign currencies as of March 31, 2001. The remaining cross currency interest rate swap agreements were primarily used to hedge foreign currency denominated intercompany receivables. Through these contracts, we effectively sell the local currency and buy U.S. dollars. We also periodically enter into forward contracts to hedge receivables denominated in foreign currencies or purchase foreign currencies in the spot market to settle a foreign currency denominated liability. During the three months ended March 31, 2001, we entered into $1.8 billion of interest rate swaps. These instruments had the effect of converting $1.6 billion of fixed rate debt to a variable rate, $119 million of variable rate debt to another variable rate index, $34 million of variable rate debt to a fixed rate and $12 million of fixed rate assets to a variable rate. During the same period, $1.2 billion of our interest rate swaps were terminated or matured. For the quarter ended March 31, 2001, the combined effect of a net gain of less than $1 million was driven primarily by a gain on fair value hedges of fixed rate assets of approximately $4 million, offset by a loss on the hedges of foreign currency intercompany debt of slightly less than $4 million. These amounts are classified as Other Income on the Consolidated Condensed Statements of Income. The income statement impact of cash flow hedges was not significant for the first quarter and is not expected to have a significant impact for the year. For forward contracts that qualify as hedges of the foreign currency exposure of our net investments in foreign operations, a gain of $6.5 million is included in the cumulative translation adjustment for the quarter ended March 31, 2001. 9 (5) Treasury Stock We have an executive deferred compensation plan (the Plan) in which certain of our employees may elect to defer a portion of their annual compensation on a pre-tax basis. The amount deferred remains an asset of Heller and is invested in several mutual funds and in Class A Common Stock of Heller. Investments in our Class A Common Stock under this Plan are reported as treasury stock and are included in the calculation of basic and diluted earnings per share. At March 31, 2001, we held 361,450 shares of treasury stock through the Plan. In addition, we held 754,941 shares of our Class A Common Stock for use in meeting the requirements of our current stock incentive compensation plans and for other corporate purposes. (6) 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:
Quarter Ended March 31, ----------------------- Basic Diluted ----- ------- 2001 2001 Restated 2000 Restated 2000 -------- ------- -------- -------- Net income applicable to common stock (in millions)............... $ 39 $ 68 $ 39 $ 68 ======== ======== ======== ========= Average equivalent shares of common stock outstanding (in thousands) 96,999 96,677 96,999 96,677 Stock options..................................................... -- -- 973 95 -------- ------- -------- -------- Total average equivalent shares................................ 96,999 96,677 97,972 96,772 ======== ======== ======== ========= Net income per share.............................................. $ 0.40 $ 0.70 $ 0.40 $ 0.70 ======== ======== ======== =========
The table below presents net income applicable to common stock per share on a basic and diluted basis, excluding the after-tax charge related to the discontinuation of the origination of Small Business Administration (SBA) loans through our Small Business Finance unit, and a one-time charge for the cumulative effect of a change in accounting for derivatives:
Quarter Ended March 31, ----------------------- Basic Diluted ----- ------- 2001 2001 Restated 2000 Restated 2000 -------- ------- -------- --------- Net income applicable to common stock, net of Small Business Finance charge and cumulative effect of a Change in accounting for derivatives (in millions)............ $ 51 $ 68 $ 51 $ 68 ======== ======== ======== ========= Average equivalent shares of common stock outstanding (in thousands) 96,999 96,677 96,999 96,677 -------- -------- -------- --------- Stock options..................................................... -- -- 973 95 Total average equivalent shares................................ 96,999 96,677 97,972 96,772 ======== ======== ======== ========= Net income per share.............................................. $ 0.53 $ 0.70 $ 0.52 $ 0.70 ======== ======== ======== =========
10 (7) Statement of Cash Flows Noncash investing activities that occurred during the three month period ended March 31, 2001 included $4 million of receivables classified as repossessed assets. We paid income taxes of $19 million and $34 million during the three month periods ended March 31, 2001 and 2000, respectively. (8) Operating Segments The following table summarizes financial information concerning our reportable segments:
International Domestic Factoring and Commercial Asset Based Consolidated Finance Finance Company ------------ ------------ ------------ (in millions) (in millions) (in millions) Total assets: March 31, 2001 Restated....................... $ 17,172 $ 2,811 $ 19,983 December 31, 2000............................. 16,792 3,269 20,061 Total revenues: March 31, 2001................................ $ 431 $ 71 $ 502 March 31, 2000................................ 390 86 476 Net income: March 31, 2001 Restated....................... $ 34 (1) $ 12 $ 46 March 31, 2000................................ 58 17 (2) 75
(1) includes a net after-tax charge of $8 million for the discontinuation of the origination of SBA loans and a net after-tax charge of $4 million for the cumulative effect of a change in accounting for derivatives. (2) includes a net after-tax gain of $7 million relating to the sale of one international investment and the liquidation of another. (9) Small Business Finance Charge In connection with the decision to discontinue the origination of SBA loans through the Small Business Finance unit, we incurred a one time pre-tax charge of approximately $12 million (approximately $8 million after-tax). This amount primarily relates to severance benefits and facility-related costs. Of the total costs incurred related to this transaction, approximately $5 million remains a liability as of March 31, 2001. (10) Subsequent Events Declaration of Dividends --
Dividend per Stock Declaration Date Share Record Date Payable Date --------- ----------------- ------------- ------------ -------------- Class A Common April 19, 2001 $0.10 May 1, 2001 May 15, 2001 Class B Common April 19, 2001 $0.10 May 1, 2001 May 15, 2001 Cumulative Perpetual Senior Preferred Stock, Series A April 12, 2001 $0.5078125 May 1, 2001 May 15, 2001 Fixed Rate Noncumulative Perpetual Senior Preferred Stock, Series C April 19, 2001 $1.67175 May 1, 2001 May 15, 2001 Fixed Rate Noncumulative Perpetual Senior Preferred Stock, Series D April 19, 2001 $1.7375 May 1, 2001 May 15, 2001
Preferred Stock Redemption- 11 In April 2001, we announced that all of the 5,000,000 outstanding shares of our 8-1/8% Cumulative Perpetual Senior Preferred Stock, Series A, will be redeemed on May 15, 2001. The redemption price will be $25.00 per share, plus accrued and unpaid dividends to the date of redemption, payable to holders of record thereof on May 1, 2001. Mandatory Enhanced Dividend Securities Offering- On May 1, 2001, the Company sold 7,000,000 units of Mandatory Enhanced Dividend Securities (MEDS) at $25 per unit, for total gross proceeds of $175 million. Each MEDS unit will be convertible to a variable number of shares of class A common stock in three years from the time of purchase. Bank Credit Facility Renewal- On April 26, 2001, we increased and renewed our 364-day bank credit facility for a total amount of $2.2 billion. (11) Accounting Developments Statement of Financial Accounting Standards No. 133 Effective January 1, 2001, the Company adopted the provisions of the Statement of Financial Accounting Standards 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 and Statement of Financial Accounting Standards No. 138, Accounting for Derivative Instruments and Hedging Activities - an amendment 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. Adoption of this new accounting standard resulted in: o cumulative before-tax reductions in net income of approximately $6 million (approximately $4 million after-tax) recorded in the first quarter of 2001; and o after-tax reductions through other comprehensive income, a component of stockholders' equity, of approximately $1 million in the first quarter of 2001. The adjustment to net income relates primarily to certain economic hedging relationships that do not qualify for special accounting treatment under the new standard as well as ineffectiveness arising from other hedging relationships. The one-time impact of implementing SFAS No. 133 is the effect of an accounting change and should, therefore, not be considered as part of our results of operations for 2001. Statement of Financial Accounting Standards No. 140 In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -a replacement of FASB Statement No. 125. This statement requires new disclosures about securitization transactions entered into during the period, and retained interests in securitized financial assets existing at the balance sheet date. Other provisions of SFAS No. 140, including a revision to the criteria for qualifying special purpose entities (QSPEs), must be applied prospectively to transfers of financial assets and extinguishments of liabilities occurring after March 31, 2001. We are incorporating the provisions of this statement to transactions beginning in the second quarter of 2001. The adoption of SFAS No. 140 did not have an impact on the financial results of the Company. 12 Proposed Statement on Business Combinations and Intangible Assets The FASB has reached a tentative agreement to modify the accounting for business combinations. Under the proposed modification, pooling-of-interests accounting would be eliminated. Additionally, the goodwill generated in a purchase acquisition transaction would no longer be amortized against earnings over an estimated life. Instead, goodwill would be recorded as a permanent asset and would be reviewed for impairment and expensed against earnings only in periods in which its recorded value exceeded its fair market value. There is no specific deadline for the completion of the FASB's review of this project. The earliest expected completion date is the end of the second quarter of 2001. FASB has indicated that all issues raised under this exposure draft remain open to continuing deliberation. The elimination of pooling-of-interests accounting will not impact the Company as we are majority-owned by Fuji America Holdings, Inc., and therefore do not qualify for pooling-of-interests accounting. (12) Restatement The consolidated condensed financial statements for the three months ended March 31, 2001, have been restated to reflect increased provisions for loan losses as follows: For the Three Months Ended March 31, 2001 --------------------------- Before After Restatement Restatement ------------- ------------ (in millions) Provision for losses 31 60 ============= ============ Net income 64 46 ============= ============ Allowance for losses of receivables 339 368 ============= ============ Retained earnings 605 587 ============= ============ 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Overview. Net income for the three months ended March 31, 2001 totaled $58 million, excluding the effect of a one-time charge of $8 million, net of tax, related to the discontinuation of the origination of SBA loans through our Small Business Finance unit, and a one-time charge of $4 million, net of tax, related to the adoption of the new accounting standard for derivatives. This compares to $75 million for the same prior year period. Prior to adjusting for these one-time charges in the first quarter of 2001, net income was $46 million. Net income applicable to common stock for the three months ended March 31, 2001 was $51 million, after adjusting for the two one-time charges in the first quarter of 2001. This compares to $68 million for the same prior year period. Including the two one-time charges in the first quarter of 2001, net income applicable to common stock was $39 million. Operating Revenues. The following table summarizes our operating revenues for the three months ended March 31, 2001 and 2000:
For the Three Months Ended March 31, ----------------------------------------- 2001 Percent 2000 Percent Amount of AFE Amount of AFE ------- -------- ------ ------- (annualized) (annualized) (dollars in millions) Net interest income.................................................. $ 154 3.6% $ 146 3.7% Non-interest income: Fees and other income............................................. 71 1.7 88 2.2 Factoring commissions............................................. 16 0.3 17 0.4 Income of international joint ventures............................ 12 0.3 10 0.3 ------- -------- ------ ------- Total operating revenues....................................... $ 253 5.9% $ 261 6.6% ======= ======== ====== =======
Net Interest Income: Net interest income increased by $8 million or 5% for the first three months of 2001 versus 2000. The increase in net interest income is due to growth in our portfolio of lending assets for the first quarter of 2001 over the prior year period. Net interest margin as a percentage of Average Funds Employed (AFE) was 3.6% for the quarter ended March 31, 2001, modestly lower than the prior year quarter. This decrease reflects the impact of wider market credit spreads, which caused our funding costs to increase relative to the rates we charge on our loans. Non-Interest Income: The following table summarizes our non-interest income for the three months ended March 31, 2001 and 2000: 13
For the Three Months Ended March 31, Increase/(Decrease) --------------- ------------------- 2001 2000 Amount Percent ------ ----- ------- -------- (dollars in millions) Factoring commissions................................................ $ 16 $ 17 $ (1) (6)% Income of international joint ventures............................... 12 10 2 20 Fees and other income: Investment and asset sale income (1).............................. 48 64 (16) (25) Fee income and other (2).......................................... 23 24 (1) (4) ------ ----- ------- Total fees and other income.................................... $ 71 $ 88 $ (17) (19)% ====== ===== ======= Total non-interest income...................................... $ 99 $ 115 $ (16) (14)% ====== ===== ======= Non-interest income as a percentage of AFE (annualized) .......... 2.3% 2.9%
(1) Investment and asset sale income includes gains on securitizations, syndications and loan sales, net investment income and gains, equipment residual gains and participation income. (2) Fee income and other consists primarily of loan servicing income, late fees, prepayment fees, early termination fees, residual rental income and other miscellaneous income. Factoring commissions decreased modestly by $1 million, or 6% for the three months ended March 31, 2001 compared to the same prior year period. The decrease is primarily due to changes in exchange rates which have negatively affected the U.S. dollar equivalent for our consolidated subsidiaries' factoring commissions. Factofrance's commission rates increased slightly but were more than offset by a 7% decrease in factoring volume for the first three months of 2001 compared to the same prior year period. In local currency, however, Factofrance's factoring volume remained essentially flat over the same prior year period. Income of international joint ventures increased $2 million or 20% for the three months ended March 31, 2001 as compared to the prior year. These increases are primarily due to higher income from our European and Latin American joint ventures. Fees and other income totaled $71 million and decreased $17 million, or 19% for the first quarter of 2001 as compared to the prior year period due to a decrease in investment and asset sale income. Higher residual gains and asset sale income for the quarter ended March 31, 2001 were more than offset by a decline in income from our investments in limited partnership funds. In addition, the first quarter of 2000 included a net gain from the sale of one international investment and the liquidation of another. 14 Operating Expenses. The following table summarizes our operating expenses for the three months ended March 31, 2001 and 2000:
For the Three Months Ended March 31, Increase/(Decrease) --------------- -------------------- 2001 2000 Amount Percent ------- ------ ------- ------- (dollars in millions) Salaries and other compensation...................................... $ 56 $ 62 $ (6) (9.7)% General and administrative expenses.................................. 49 49 - - Goodwill and non-compete amortization................................ 6 6 - - ------- ------ ------- Total operating expenses....................................... $ 111 $ 117 $ (6) (5.1)% ======= ====== ======= Total operating expenses as a percentage of average managed assets (annualized) ............................. 2.4% 2.7% Ratio of operating expenses to operating revenues.............. 44% 45% Ratio of operating expenses, excluding goodwill and non-compete amortization, as a percentage of operating revenues....................................... 42% 43%
Operating expenses totaled $111 million for the first quarter, a decrease of $6 million or 5% in comparison to the first quarter of 2000. The decrease is primarily due to staff reductions related to our decision to stop originating SBA loans and a reduction in compensation expense from our executive deferred compensation plan. The reduction in compensation expense for the executive deferred compensation plan is completely offset by a reduction in fees and other income. As a result, there is no net impact on our consolidated results of operations related to this item. Heller's efficiency ratio improved to 44% for the first quarter of 2001 from 45% from the prior year period, as we continue to focus on controlling expense growth. Operating expenses as a percentage of average managed assets also improved to 2.4% from 2.7% for the same prior year period. Small Business Finance Charge. We incurred a one time pre-tax charge of approximately $12 million (approximately $8 million after-tax) in connection with the decision to discontinue the origination of SBA loans through our Small Business Finance unit. This charge is primarily related to employee severance and facility related-costs. See Note 9 of our Consolidated Financial Statements. Allowance for Losses. The following table summarizes the changes in our allowance for losses of receivables, including our provision for losses of receivables and repossessed assets, for the three months ended March 31, 2001 and 2000:
For the Three Months Ended March 31, Increase/(Decrease) ------------------ ------------------- 2001 2000 Amount Percent Restated ------- ------ ------- ------- (dollars in millions) Balance at beginning of period....................................... $ 342 $ 316 $ 26 8% Provision for losses.............................................. 60 30 30 100 Writedowns........................................................ (44) (26) (18) (69) Recoveries........................................................ 13 3 10 333 Other............................................................. (3) (2) (1) (50) ------- ------ ------- ------- Balance at end of period............................................. $ 368 $ 321 $ 47 15% ======= ====== ======= ======= Allowance as a % of receivables................................... 2.4% 2.1%
Provisions for losses totaled $60 million and $30 million for the first quarters ended March 31, 2001 and 2000, respectively. The increase in provisions for losses in the first quarter of 2001 relative to the prior year period is due to the down-turn in the economy which negatively impacted our Small Business Finance and Corporate Finance portfolios. During the first quarter of 2001 net writedowns totaled $31 million, or 0.81% of average lending assets. Net writedowns for the first quarter of 2000 totaled $23 million or 0.62% of average lending assets. The increase in net writedowns in the first quarter of 2001 relative to the same prior year period is due to the considerably slower growth in the U.S. economy in 2001, which resulted in higher writedowns in our cash-flow financings within the Corporate Finance portfolio. At March 31, 2001 the allowance for losses of receivables represented 2.4% of receivables as compared with 2.1% of receivables for the prior period. 15 Income Taxes. Our effective tax rate totaled 29% for the three months ended March 31, 2001 compared to 33% for the same prior year period. The effective rate for 2001 and 2000 remained below federal and state combined statutory rates due to the effect of earnings from international joint ventures, the use of tax credits and the impact of state tax planning activities. LENDING ASSETS AND INVESTMENTS Lending assets and investments were $18.0 billion at March 31, 2001, down 4% from the December 31, 2000 level. Domestic new business volume of approximately $1.1 billion for the three months ended March 31, 2001 was more than offset by portfolio runoff, syndications and loan sales of nearly $1.4 billion. Domestic new business volume decreased from the same prior year period primarily as a result of a significant number of operating lease transactions within our Leasing Services unit in the first quarter of 2000, as well as our decision to stop originating SBA loans in the first quarter of 2001. International Factoring and Asset Based Finance experienced a decrease in lending assets and investments from the prior year-end as a result of cyclical declines and the negative effect of foreign currency exchange rate movements. The following tables present our lending assets and investments by business segment and asset type as of March 31, 2001 and December 31, 2000:
Lending Assets and Investments as of March 31, December 31, -------------------- -------------------- 2001 Percent 2000 Percent -------- -------- -------- ---------- By Business Segment: (dollars in millions) Domestic Commercial Finance Segment Corporate Finance (1)................................ $ 4,952 28 % $ 5,225 28% Leasing Services..................................... 4,344 24 4,434 24 Real Estate Finance.................................. 2,867 16 2,766 15 Healthcare Finance................................... 1,625 9 1,563 8 Small Business Finance............................... 1,333 7 1,440 8 Other................................................ 401 2 387 2 -------- -------- -------- -------- Total Domestic Commercial Finance Segment................. 15,522 86 15,815 85 International Factoring and Asset Based Finance Segment................................ 2,525 14 2,901 15 -------- -------- -------- -------- Total lending assets and investments................... $ 18,047 100 % $ 18,716 100 % ======== ======== ======== ========
16
Lending Assets and Investments as of March 31, December 31, ---------------------- ------------------ 2001 Percent 2000 Percent ---------- -------- -------- ------- (dollars in millions) By Asset Type: Receivables............................................... $ 15,195 84% $ 15,966 85% Repossessed assets........................................ 21 - 22 - ---------- -------- -------- ------ Total lending assets................................... 15,216 84 15,988 85 Debt securities........................................... 886 5 755 4 Equity and real estate investments........................ 751 4 795 4 Operating leases.......................................... 655 4 695 4 Lending partnerships...................................... 328 2 267 2 International joint ventures.............................. 211 1 216 1 ---------- -------- ----------- ------- Total lending assets and investments................... $ 18,047 100% $ 18,716 100% ========== ======== =========== ======= Average lending assets................................. $ 15,602 $ 15,456 ========== =========== Total managed assets (2)............................... $ 18,633 $ 18,877 ========== =========== Average managed assets (2)............................. $ 18,755 $ 17,516 ========== =========== Funds employed (3)..................................... $ 17,220 $ 17,734 ========== =========== Average funds employed (3)............................. $ 17,333 $ 16,978 ========== ===========
(1) Lending assets and investments at March 31, 2001 and December 31, 2000 were reduced by $1 billion and $700 million, respectively, of commercial cash flow loans sold to an asset backed commercial paper conduit facility. (2) Total managed assets include funds employed, plus receivables previously securitized or sold, for which we hold securities giving us an economic interest in the performance of these assets. (3) Funds employed include lending assets and investments, less credit balances of factoring clients. Corporate Finance lending assets and investments decreased by $273 million since the prior year-end as first quarter new business volume of approximately $370 million was more than offset by $300 million of commercial cash flow loans sold to an asset backed commercial paper conduit facility, combined with over $300 million of syndications and payoffs. Leasing Services lending assets and investments decreased by nearly $90 million during the first three months of 2001 as new business volume of over $300 million was more than offset by syndications, loan sales and payoffs of over $400 million. Growth in Real Estate Finance lending assets and investments of $101 million, or 4%, during the first quarter of 2001 was driven by new business volume of over $200 million and increased borrowings under existing lines of over $30 million. Asset growth was partially offset by $155 million in payoffs, syndications and loan sales. Healthcare Finance lending assets and investments increased $62 million, or 4% from the prior year-end and was driven by new business volume of $110 million, partially offset by payoffs of over $40 million. Lending assets and investments of Small Business Finance decreased by $107 million or 7% from 2000, primarily due to the decision to discontinue the origination of SBA loans. Loan sales and payoffs of $160 million more than offset new business volume of $55 million for the quarter ended March 31, 2001. See Note 9 of our Consolidated Financial Statements. Lending assets and investments of our International Factoring and Asset Based Financing Segment decreased approximately $400 million from the prior year-end due to cyclical declines and the negative effect of foreign currency exchange rate movements of approximately $170 million. 17 At March 31, 2001, we had contractually committed to finance approximately $2.7 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 amount does not necessarily represent future cash requirements. We do not have any significant commitments to provide additional financing related to nonearning assets. Revenues Total revenues include: o interest income, including rental income from operating leases; o fees and other income from domestic and consolidated international operations; o factoring commissions; and o our share of the net income of our international joint ventures. The following table shows our total revenues for the three months ended March 31, 2001 and 2000:
Total Revenues For the Three Months Ended March 31, ------------------------------------------ 2001 Percent 2000 Percent -------- ------- -------- ------- (dollars in millions) Domestic Commercial Finance Segment Corporate Finance............................... $ 130 26% $ 151 32% Leasing Services................................ 112 22 95 20 Real Estate Finance............................. 79 16 63 13 Healthcare Finance.............................. 49 10 34 7 Small Business Finance.......................... 40 8 33 7 Other........................................... 21 4 14 3 -------- ------- -------- ------- Total Domestic Commercial Finance Segment......................................... 431 86 390 82 International Factoring and Asset Based Finance Segment........................... 71 14 86 18 -------- ------- -------- ------- Total revenues.................................... $ 502 100% $ 476 100% ======== ======= ======== =======
Total revenues increased $26 million or 5% from the prior year period principally reflecting increases in interest income and income from international joint ventures, partially offset by lower fees and other income. Corporate Finance experienced a $21 million decrease in revenues primarily due to a decrease in interest income, resulting from a significantly lower level of AFE, as well as lower net investment income. This reduction in AFE is due to the sale of $700 million and $300 million of Corporate Finance cash-flow loans to an asset backed commercial paper conduit facility in the second half of 2000 and the first quarter of 2001, respectively. Leasing Services revenues increased $17 million due to an increase in interest income resulting from a higher level of AFE and higher residual gains. Real Estate Finance revenues increased $16 million due to an increase in interest income resulting from a higher level of AFE and higher net investment gains. Healthcare Finance revenues increased $15 million due to an increase in interest income resulting from a higher level of AFE and higher fees and other income. Small Business Finance revenues increased as a result of higher income recognized from the sale of $108 million of SBA 7(a) loans. International Factoring and Asset Based Finance experienced a $15 million decrease in revenues as higher interest income and income from international joint ventures were more than offset by lower investment and asset sale income, resulting primarily from a net gain on the sale of one international investment and the liquidation of another in the first quarter of the prior year. 18 Portfolio Quality As of March 31, 2001, nonearning assets were $315 million or 2.1% of lending assets. The following tables present certain information with respect to the credit quality of our portfolio:
March 31, December 31, ---------- ------------ 2001 Restated 2000 ---------- ------------ (dollars in millions) Lending Assets and Investments: Receivables.................................................................. $ 15,195 $ 15,966 Repossessed assets........................................................... 21 22 ---------- ------------ Total lending assets..................................................... 15,216 15,988 Equity and real estate investments........................................... 751 795 Debt securities.............................................................. 886 755 Operating leases............................................................. 655 695 Lending partnerships......................................................... 328 267 Investment in international joint ventures................................... 211 216 ---------- ------------ Total lending assets and investments..................................... $ 18,047 $ 18,716 ========== ============ Nonearning Assets: Impaired receivables......................................................... $ 294 $ 285 Repossessed assets........................................................... 21 22 ---------- ------------ Total nonearning assets.................................................. $ 315 $ 307 ========== ============ Ratio of nonearning impaired receivables to receivables...................... 1.9% 1.8% ========== ============ Ratio of total nonearning assets to total lending assets..................... 2.1% 1.9% ========== ============ Allowances for Losses: Allowance for losses of receivables.......................................... $ 368 $ 342 ========== ============ Ratio of allowance for losses of receivables to: Receivables.................................................................. 2.4% 2.1% ========== ============ Net writedowns (annualized).................................................. 3.0x 3.0x ========== ============ Nonearning impaired receivables.............................................. 125% 120% ========== ============ Delinquencies: Earning loans delinquent 60 days or more..................................... $ 259 $ 267 ========== ============ Ratio of earning loans delinquent 60 days or more to receivables............. 1.7% 1.7% ========== ============ For The Three Months Ended March 31, ------------------------------ 2001 2000 ---------- ------------ Net writedowns of lending assets: (dollars in millions) Total net writedowns......................................................... $ 31 $ 23 ========== ============ Ratio of net writedowns to average lending assets (annualized).............. 0.81% 0.62% ========== ============
Nonearning Assets. Our nonearning assets were $315 million or 2.1% of lending assets at March 31, 2001 as compared with $307 million or 1.9% of lending assets, at December 31, 2001. Nonearning assets remain at the low end of our targeted range of 2-4% of lending assets. Included in nonearning assets are repossessed assets of $21 million at March 31, 2001 and $22 million at December 31, 2000. 19 Allowance for Losses. The allowance for losses of receivables totaled $368 million representing 2.4% of receivables at March 31, 2001, a slight percentage increase from December 31, 2000. The Company considers this level of allowance for loan losses to be adequate to cover losses inherent in our loan portfolio at March 31, 2001. Loan Modifications. We did not have any loans that are considered troubled debt restructures at March 31, 2001 or December 31, 2000. At March 31, 2001, there were no loans that were restructured and returned to earning status. Writedowns. Net writedowns totaled $31 million, or 0.81% of average lending assets for the three months ended March 31, 2001. Net writedowns for the first quarter of 2000 totaled $23 million, or 0.62% of average lending assets. The increase in net writedowns in the first quarter of 2001 relative to the same prior year period is due to the considerably slower growth in the U.S. economy in 2001, which resulted in higher writedowns in our cash-flow financings within the Corporate Finance portfolio. Gross writedowns totaled $44 million during the first three months of 2001 versus $26 million for the prior year period while recoveries were $13 million in 2001 versus $3 million in 2000. LIQUIDITY AND CAPITAL RESOURCES The following table presents information regarding our capital structure:
March 31, 2001 December 31, Restated 2000 ---------- ------------- (in millions) Commercial paper and short-term borrowings................................... $ 4,138 $ 5,127 Notes and debentures......................................................... 11,595 10,525 --------- ------------ Total senior debt......................................................... 15,733 15,652 Minority interest............................................................ 13 12 Stockholders' equity......................................................... 2,564 2,575 ---------- ------------ Total capitalization...................................................... $ 18,310 $ 18,239 ========== ============ Leverage (net of short-term investments)..................................... 5.8x 5.9x Commercial paper and short-term borrowings to total senior debt.............. 26% 33%
During the first quarter of 2001, our major funding requirements included: o $1.1 billion of longer-term loans, leases and investments funded; o the retirement of $802 million of senior notes; o the decrease in short-term debt of $989 million; and o common and preferred dividends of $17 million. Our major sources of funding these requirements included: o cash flows from operations of $88 million; o a net decrease in short-term loans and advances to factoring clients of $512 million; o loan repayments and proceeds from the sale of investments and equipment on lease of $444 million; o the syndication, securitization or sale of $619 million of loans; and o the issuance of $1.8 billion of senior debt. 20 Our ratio of commercial paper and short-term borrowings to total senior debt was 26% at March 31, 2001 and 33% at December 31, 2000. The lower ratio at March 31, 2001 compared to the prior year-end is primarily a result of our decision to fund maturing commercial paper obligations through the issuance of term debt due to the volatility of the commercial paper market. Leverage (based on senior debt net of short-term investments) was 5.8x at March 31, 2001 and 5.9x at December 31, 2000. Our leverage and the level of commercial paper and short-term borrowings continued to remain within ranges we have targeted to maintain a strong financial position. Our committed bank credit and asset sale facilities totaled approximately $5.7 billion at March 31, 2001 and included $4.2 billion in available liquidity support under two bank credit facilities. One of these is a 5-year facility expiring in April 2005 and the other is a 364-day facility expiring in April 2001. See Subsequent Events for information on the renewal of our 364-day bank credit facility. Also included in our total committed facilities at March 31, 2001 are foreign bank credit facilities of $1 billion (U.S. dollar equivalent) for our international subsidiaries and $15 million under foreign currency revolving credit facilities. Committed credit and sale facilities from unaffiliated financial institutions represent 137% of outstanding commercial paper and short-term borrowings at March 31, 2001. Also included in committed facilities is approximately $240 million of additional alternative liquidity, which is available by discounting eligible French receivables with the French Central Bank since Factofrance is a registered financial institution in France. The entire facility was available for use at March 31, 2001. We have an asset backed commercial paper conduit facility that allows us to sell participations in a designated pool of Corporate Finance cash-flow loans to bank-sponsored conduits, on a limited recourse basis. Liquidity support under this facility totals $1.4 billion, of which $1 billion was utilized at March 31, 2001. The underlying liquidity support for the conduits is provided by unaffiliated commercial banks. The commitment period of this liquidity support is 364 days and may be renewed annually by the banks, at their discretion. Risk Management - Asset/Liability Management We utilize derivatives, primarily interest rate swaps, to match more closely the interest rate and maturity characteristics of our assets and liabilities. Derivatives that qualify as fair value hedges include interest rate swaps that change the interest rate characteristics of fixed rate debt to that of variable rate debt and interest rate swaps that alter the interest rate characteristics of specific fixed rate asset pools to more closely match the interest rate terms of the underlying financing. Derivatives that qualify as cash flow hedges include interest rate swaps that change the interest rate characteristics of variable rate debt to that of fixed rate debt. We also use interest rate swaps to modify the variable rate basis of a liability to more closely match the variable rate basis used for variable rate receivables. At March 31, 2001, we had approximately $5.5 billion and $2.2 billion in notional amount of interest rate swaps and basis swap agreements, respectively. We also utilize interest rate futures, as fair value hedges, to hedge the interest rate risk of a portion of our fixed rate receivables portfolio and certain investment securities. At March 31, 2001 we held 10-year, 5-year, and 2-year interest rate futures contracts with equivalent notional amounts of $192 million, $58 million and $91 million, respectively. To minimize the effect of fluctuations in foreign currency exchange rates on our financial results, we periodically enter into forward currency exchange contracts, cross currency swap agreements or enter into currency options or currency option combinations. These financial instruments serve as hedges of our foreign investment in international subsidiaries and joint ventures or effectively hedge the translation of the related foreign currency income. We held $1.2 billion in notional amount of forward currency exchange contracts, and $725 million in notional amount of cross currency swap agreements at March 31, 2001. Included in the cross currency interest rate swap agreements were $523 million used to hedge debt instruments issued in foreign currencies as of March 31, 2001. The remaining cross currency interest rate swap agreements were primarily used to hedge foreign currency denominated intercompany receivables. Through these contracts, we effectively sell the local currency and buy U.S. dollars. We also periodically enter into forward contracts to hedge receivables denominated in foreign currencies or purchase foreign currencies in the spot market to settle a foreign currency denominated liability. 21 During the three months ended March 31, 2001, we entered into $1.8 billion of interest rate swaps. These instruments had the effect of converting $1.6 billion of fixed rate debt to a variable rate, $119 million of variable rate debt to another variable rate index, $34 million of variable rate debt to a fixed rate and $12 million of fixed rate assets to a variable rate. During the same period, $1.2 billion of our interest rate swaps were terminated or matured. For the quarter ended March 31, 2001, the combined effect of a net gain of less than $1 million was driven primarily by a gain on fair value hedges of fixed rate assets of approximately $4 million, offset by a loss on the hedges of foreign currency intercompany debt of slightly less than $4 million. These amounts are classified as Other Income on the Consolidated Condensed Statements of Income. The income statement impact of cash flow hedges was not significant for the first quarter and is not expected to have a significant impact for the year. For forward contracts that qualify as hedges of the foreign currency exposure of our net investments in foreign operations, a gain of $6.5 million is included in the cumulative translation adjustment for the quarter ended March 31, 2001. Accounting Developments Statement of Financial Accounting Standards No. 133 Effective January 1, 2001, the Company adopted the provisions of the Statement of Financial Accounting Standards 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 and Statement of Financial Accounting Standards No. 138, Accounting for Derivative Instruments and Hedging Activities - an amendment 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. Adoption of this new accounting standard resulted in: o cumulative before-tax reductions in net income of approximately $6 million (approximately $4 million after-tax) recorded in the first quarter of 2001; and o after-tax reductions through other comprehensive income, a component of stockholders' equity, of approximately $1 million in the first quarter of 2001. The adjustment to net income relates primarily to certain economic hedging relationships that do not qualify for special accounting treatment under the new standard as well as ineffectiveness arising from other hedging relationships. The one-time impact of implementing SFAS No. 133 is the effect of an accounting change and should, therefore, not be considered as part of our results of operations for 2001. Statement of Financial Accounting Standards No. 140 In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a replacement of FASB Statement No. 125. This statement requires new disclosures about securitization transactions entered into during the period, and retained interests in securitized financial assets existing at the balance sheet date. Other provisions of SFAS No. 140, including a revision to the criteria for qualifying special purpose entities (QSPEs), must be applied prospectively to transfers of financial assets and extinguishments of liabilities occurring after March 31, 2001. We are incorporating the provisions of this statement to transactions beginning in the second quarter of 2001. The adoption of SFAS No. 140 did not have an impact on the financial results of the Company. 22 Proposed Statement on Business Combinations and Intangible Assets The FASB has reached a tentative agreement to modify the accounting for business combinations. Under the proposed modification, pooling-of-interests accounting would be eliminated. Additionally, the goodwill generated in a purchase acquisition transaction would no longer be amortized against earnings over an estimated life. Instead, goodwill would be recorded as a permanent asset and would be reviewed for impairment and expensed against earnings only in periods in which its recorded value exceeded its fair market value. There is no specific deadline for the completion of the FASB's review of this project. The earliest expected completion date is the end of the second quarter of 2001. FASB has indicated that all issues raised under this exposure draft remain open to continuing deliberation. The elimination of pooling-of-interests accounting will not impact the Company as we are majority- owned by The Fuji Bank, Limited, and therefore do not qualify for pooling-of-interests accounting.
Subsequent Events Declaration of Dividends -- Dividend per Stock Declaration Date Share Record Date Payable Date --------- ---------------- ------------ ------------ ------------ Class A Common April 19, 2001 $0.10 May 1, 2001 May 15, 2001 Class B Common April 19, 2001 $0.10 May 1, 2001 May 15, 2001 Cumulative Perpetual Senior Preferred Stock, Series A April 12, 2001 $0.5078125 May 1, 2001 May 15, 2001 Fixed Rate Noncumulative Perpetual Senior Preferred Stock, Series C April 19, 2001 $1.67175 May 1, 2001 May 15, 2001 Fixed Rate Noncumulative Perpetual Senior Preferred Stock, Series D April 19, 2001 $1.7375 May 1, 2001 May 15, 2001
Preferred Stock Redemption- In April 2001, we announced that all of the 5,000,000 outstanding shares of our 8-1/8% Cumulative Perpetual Senior Preferred Stock, Series A, will be redeemed on May 15, 2001. The redemption price will be $25.00 per share, plus accrued and unpaid dividends to the date of redemption payable to holders of record thereof on May 1, 2001. Mandatory Enhanced Dividend Securities Offering- On May 1, 2001, the Company sold 7,000,000 units of Mandatory Enhanced Dividend Securities at $25 per unit, for total gross proceeds of $175 million. Each MEDS unit will be convertible to a variable number of shares of class A common stock in three years from the time of purchase. Bank Credit Facility Renewal- On April 26, 2001, we increased and renewed our 364-day bank credit facility for a total amount of $2.2 billion. 23 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's Annual Meeting of Stockholders was held on May 3, 2001. The following directors were re-elected for a one-year term, each with the number of votes shown, to serve until the next annual meeting of stockholders or until his successor is elected and shall have qualified. Director For Withheld -------------------- ----------- --------- Richard J. Almeida 187,702,827 7,852,939 Michael A. Conway 195,247,859 307,907 Takaaki Kato 187,709,295 7,846,471 Mark Kessel 195,058,760 497,006 Tetsuo Kumon 187,729,257 7,826,509 Takashi Makimoto 185,792,981 9,762,785 Frank S. Ptak 195,246,828 308,938 Masahiro Sawada 187,738,195 7,817,571 Kenichiro Tanaka 187,830,303 7,725,463 Michio Ueno 185,660,895 9,894,871 Frederick E. Wolfert 187,735,652 7,820,114 In addition to electing the Board of Directors, the stockholders also ratified the appointment of Arthur Andersen LLP as independent auditors for 2001, with 195,370,667 votes for, 179,448 votes against, and 5,651 votes abstaining. 24 ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: (3ii) Amendment to By-Laws (10) Form of Amended and Restated Change in Control Agreement (12) Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends (99.1) Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002 (99.2) Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002 (b) Current Reports on Form 8-K: Date of Report Item Description ---------------- ----- ------------------------------------------ January 17, 2001 5,7 A report filing a press release announcing the declaration of dividends on the Company's common and preferred stocks. January 18, 2001 5,7 A report filing a press release announcing (i) the Company's earnings for the year ending December 31, 2000, (ii) that the Board of Directors determined that the Annual Meeting of Shareholders will be held on May 3, 2001, and (iii) that the record date for purposes of voting at the Annual Meeting of Shareholders will be March 9, 2001. February 20, 2001 5,7 A report filing a press release announcing the cessation of new business origination in the Company's Small Business Finance unit. April 11, 2001 5,7 A report filing a press release announcing that all outstanding shares of the Company's 8-1/8% Cumulative Perpetual Senior Preferred Stock, Series A, will be redeemed on May 15, 2001. April 18, 2001 5,7 A report filing a press release announcing the declaration of dividends on the Company's common and preferred stocks. April 19, 2001 5,7 A report filing a press release announcing the Company's earnings for the quarter ending March 31, 2001. 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this amended quarterly report to be signed on its behalf by the undersigned thereunto duly authorized. HELLER FINANCIAL, INC. By: /s/ Randolph T. Brown ------------------------------- Randolph T. Brown Chief Financial Officer By: /s/ Randolph T. Brown ------------------------------- Randolph T. Brown Chief Accounting Officer Date: August 2, 2002