-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QCOIYQb8i0KkNMrz9E7oQkD05FjpmYJMU9Cs82FzbO37LGrTH6A3Gr4z9UGddUH9 HWipFW4HQ8r9wXK9sxCAMw== 0000950131-95-002989.txt : 19951030 0000950131-95-002989.hdr.sgml : 19951030 ACCESSION NUMBER: 0000950131-95-002989 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951027 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HELLER FINANCIAL INC CENTRAL INDEX KEY: 0000046738 STANDARD INDUSTRIAL CLASSIFICATION: SHORT-TERM BUSINESS CREDIT INSTITUTIONS [6153] IRS NUMBER: 361208070 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06157 FILM NUMBER: 95585135 BUSINESS ADDRESS: STREET 1: 500 W MONROE ST CITY: CHICAGO STATE: IL ZIP: 60661 BUSINESS PHONE: 3124417000 MAIL ADDRESS: STREET 1: 500 W MONROE ST CITY: CHICAGO STATE: IL ZIP: 60661 FORMER COMPANY: FORMER CONFORMED NAME: HELLER WALTER E & CO /NEW/ DATE OF NAME CHANGE: 19850503 10-Q 1 FORM 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 1995 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. 100 shares of Common Stock, $.25 par value, outstanding at October 27, 1995. ================================================================================ PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HELLER FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (in millions, except for information on shares)
September 30, December 31, 1995 1994 ------------- ------------ (unaudited) ASSETS Cash and cash equivalents........................... $ 222 $ 99 Receivables (Note 2) Commercial loans Term loans........................................ 2,763 2,786 Revolving loans................................... 1,565 1,071 Real estate loans................................... 1,895 2,031 Equipment loans and leases.......................... 1,091 943 Factored accounts receivable........................ 871 785 ------ ------ Total receivables.............................. 8,185 7,616 Less: Allowance for losses of receivables (Note 2).. 245 231 ------ ------ Net receivables................................ 7,940 7,385 Investments......................................... 702 634 Investments in international joint ventures......... 225 174 Other assets........................................ 202 184 ------ ------ $9,291 $8,476 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Senior debt Commercial paper and short-term borrowings......... $2,326 $2,451 Notes and debentures (Note 3)...................... 4,800 3,930 ------ ------ Total debt..................................... 7,126 6,381 Credit balances of factoring clients................ 473 452 Other payables and accruals......................... 263 274 ------ ------ Total liabilities.............................. 7,862 7,107 Minority interest in equity of Heller International Group, Inc........................................ 46 39 Stockholders' equity Cumulative Perpetual Senior Preferred Stock, Series A ($.01 Par Value; stated value, $25; 8.125%; 5,000,000 shares authorized and outstanding)................................. 125 125 Cumulative Convertible Preferred Stock, Series D (No Par Value; 1/2% under prime; 1,000 shares authorized and outstanding)...................... 25 25 Common Stock ($.25 Par Value; 1,000 shares authorized; 100 shares outstanding) and additional paid-in capital....................... 663 663 Retained earnings................................. 570 517 ------ ------ Total stockholders' equity..................... 1,383 1,330 ------ ------ $9,291 $8,476 ====== ======
The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these statements. 2 HELLER FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (in millions)
For the Three Months For the Nine Months Ended September 30, Ended September 30, -------------------- ------------------- 1995 1994 1995 1994 --------- ------- -------- -------- (unaudited) (unaudited) Interest income................................................. $ 215 $ 188 $ 635 $ 509 Interest expense................................................ 117 89 348 238 ----- ----- ----- ----- Net interest income........................................... 98 99 287 271 Fees and other income........................................... 54 39 126 122 Income of international joint ventures.......................... 9 7 26 17 ----- ----- ----- ----- Operating revenues............................................ 161 145 439 410 Operating expenses.............................................. 53 47 155 137 Provision for losses............................................ 56 48 134 138 ----- ----- ----- ----- Income before income taxes and minority interest.............. 52 50 150 135 Income tax provision............................................ 15 19 46 39 Minority interest in income of Heller International Group, Inc.. 2 1 5 3 ----- ----- ----- ----- Net income...................................................... $ 35 $ 30 $ 99 $ 93 ===== ===== ===== =====
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN RETAINED EARNINGS (in millions)
For the Nine Months Ended September 30, --------------------- 1995 1994 --------- --------- (unaudited) Retained earnings at December 31, 1994 and 1993............................... $ 517 $ 440 Net income................................................................. 99 93 Common stock dividends..................................................... (34) - Preferred stock dividends.................................................. (9) (9) Net changes in unrealized holding gains or losses on securities available for sale, net of tax....................................................... (8) 1 Deferred translation adjustment, net of tax................................ 5 (4) ----- ----- Retained earnings at September 30, 1995 and 1994.............................. $ 570 $ 521 ===== =====
The retained earnings balance includes deferred translation adjustments of $(12) and $(16) at September 30, 1995 and 1994, respectively. Unrealized net (losses) gains on securities available for sale were ($3) and $10 at September 30, 1995 and 1994, respectively. 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 CASH FLOWS (in millions)
For the Nine Months Ended --------------------------- September 30, --------------------------- 1995 1994 ---------- ---------- (Unaudited) OPERATING ACTIVITIES Net income............................................................... $ 99 $ 93 Adjustments to reconcile net income to net cash provided by operating activities: Provision for losses.................................................... 134 138 Loans originated for resale............................................. (39) (62) Net proceeds from sales of loans originated for resale.................. 42 54 (Increase) decrease in net deferred tax asset........................... (27) 42 Increase in accounts payable and accrued liabilities.................... 8 15 Undistributed income of international joint ventures.................... (21) (11) Increase (decrease) in interest payable................................. 4 (1) Other................................................................... 9 19 ------- ------- Net cash provided by operating activities............................. 209 287 INVESTING ACTIVITIES Longer-term loans funded................................................. (2,120) (2,011) Collections of principal................................................. 1,559 1,411 Sales of longer-term loans............................................... 369 293 Net increase in short-term loans and advances to factoring clients........................................... (523) (431) Investment in equity interests, equipment on lease, and other investments................................................... (136) (119) Sales of investments and equipment on lease.............................. 58 46 Other.................................................................... (30) (20) ------- ------- Net cash used for investing activities................................ (823) (831) FINANCING ACTIVITIES Senior note issues....................................................... 1,132 641 Retirement of notes and debentures....................................... (261) (518) (Decrease) increase in commercial paper and other short-term borrowings.. (125) 601 Net decrease (increase) in advances to affiliates........................ 34 (19) Dividends paid on common and preferred stock............................. (43) (9) ------- ------- Net cash provided by financing activities............................. 737 696 ------- ------- Increase in cash and cash equivalents.................................... 123 152 Cash and cash equivalents at the beginning of the period................. 99 170 ------- ------- Cash and cash equivalents at the end of the period....................... $ 222 $ 322 ======= =======
The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these statements. 4 HELLER FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited) (1) Basis of Presentation These consolidated condensed financial statements should be read with the financial statements and notes included in the annual report on Form 10-K of Heller Financial, Inc. (the "Company") for the year ended December 31, 1994. In the opinion of management, all adjustments considered necessary for a fair presentation have been included in these financial statements and were of a normal, recurring nature. Certain prior year amounts have been reclassified in order to conform to the current year's presentation. (2) Impaired Receivables and Repossessed Assets The Company does not recognize interest and fee income on impaired receivables classified as nonearning and on repossessed assets, which are set forth in the following table:
September 30, December 31, 1995 1994 -------------- ------------- (in millions) Impaired receivables...................................... $ 271 $ 284 Repossessed assets........................................ 35 19 ----- ----- Total nonearning assets.................................. $ 306 $ 303 ===== ===== Ratio of total nonearning assets to total lending assets.. 3.7% 4.0% ===== =====
The average investment in impaired receivables was $330 million for the nine months ended September 30, 1995. Effective January 1, 1995, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan" and the related disclosure requirements of SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosure." These pronouncements require that impaired receivables be measured based on the present value of expected future cash flows discounted at the receivable's effective interest rate. Impairment may also be measured based on the receivable's observable market price or the fair value of the collateral if the receivable is collateral dependent. When the recorded balance of an impaired receivable exceeds the relevant measure of value, impairment is recorded through an increase in the provision for the allowance for losses of receivables. The Company had previously measured receivable impairment using methods consistent with those prescribed in SFAS No. 114. Accordingly, upon adoption of these statements, there was no effect to total nonearning assets nor to the total allowance for losses as previously reported at December 31, 1994. SFAS No. 114 also requires changes in the presentation and disclosure of certain impaired receivables. Receivables that were considered in-substance repossessions of collateral are now presented as impaired receivables until the underlying collateral is physically possessed or legally foreclosed. Upon adoption, this requirement was retroactively applied resulting in the reclassification of $31 million of in-substance repossessed assets to impaired receivables and $4 million of related valuation allowance to the allowance for losses of receivables at December 31, 1994. 5 Loan Modifications-- The Company had $26 million and $54 million of loans that are considered troubled debt restructures at September 30, 1995 and December 31, 1994, respectively. The Company also had $99 million of receivables at September 30, 1995 that were restructured at a market rate of interest and written down from the original loan balance. The recorded investment of these receivables is expected to be fully recoverable. Interest income of approximately $2 million has been recorded on these receivables under the modified terms, along with cash interest collections of the same amount. At September 30, 1995, the Company was not committed to lend significant additional funds under the restructured agreements. Allowance for Losses-- The change in the allowance for losses of receivables during the nine month period included an additional provision of $121 million and net writedowns of $107 million. Impaired receivables with identified reserve requirements were $249 million at September 30, 1995 and $195 million at December 31, 1994.
September 30, December 31, 1995 1994 -------------- ------------- (in millions) Identified reserve requirement for impaired receivables.. $ 84 $ 66 Additional allowance for losses of receivables........... 161 165 ----- ----- Total allowance for losses of receivables............. $ 245 $ 231 ===== ===== Ratio of allowance for losses of receivables to nonearning impaired receivables....................... 90% 81% ===== =====
The valuation allowance for repossessed assets of $6 million at September 30, 1995 and December 31, 1994 is included in other assets on the balance sheet. (3) Notes and Debentures The Company issued and retired the following notes and debentures during the nine months ended September 30, 1995 (excluding unamortized premium and discount):
Principal Senior Debt - Notes and Debentures Amount ------------- Issuances: (in millions) Variable rate series F medium-term notes due on various dates ranging from August 28, 1996 to September 29, 2000..................................... $ 631 2.65% Eurobonds denominated in Japanese yen due September 29, 2000.......... 205 7% notes due May 15, 2002................................................... 150 4 1/2% Eurobonds denominated in Japanese yen due June 16, 2000.............. 100 6.51% medium-term notes due September 20, 1999.............................. 25 7.27% medium-term notes due May 30, 2002 and August 21, 2002................ 21 ------ $1,132 ======
6
Retirements: Variable rate series E medium-term notes due on various dates ranging from May 5, 1995 to June 2, 1995...................................... $ 86 9.1% medium-term notes due on various dates ranging from February 6, 1995 to February 16, 1995............................ 60 Variable rate series F medium-term notes due August 16, 1995............ 50 8.92% medium-term notes due August 7, 1995.............................. 30 6.45% notes due February 15, 1995 and August 15, 1995................... 20 6.70%-6.77% medium-term notes due on May 22, 1995 and May 23, 1995...... 15 ---- $261 ====
In April of 1995, the Company replaced its existing bank credit facilities with a new agreement that provides $2.2 billion of liquidity support at more favorable terms to the Company. The terms of these facilities primarily include reduced pricing, an increase in the term for $1.1 billion of the facilities to five years, required stockholders' equity of $900 million, and the elimination of any funding covenant based on material adverse change in the financial condition of the Company. On May 3, 1995 the Company and Fuji Bank agreed to extend the term of the Keep Well Agreement for an additional two years from December 31, 2000 to December 31, 2002. (4) Derivative Financial Instruments Used for Risk Management Purposes The Company entered into several derivative instruments during the nine months ended September 30, 1995 to more closely match the interest rate and currency characteristics of its debt and assets. These instruments include $950 million of basis swaps which had the effect of changing the index on an equivalent amount of medium-term notes from the three month London Inter-bank Offered Rate ("LIBOR") to a rate based on Prime. The $950 million of basis rate swaps will expire at the end of 1995. The Company has also entered into $1 billion of basis swaps effective January 2, 1996 which expire at the end of 1996. The Company also entered into various other swap agreements during the nine month period which had the effect of converting $168 million of variable rate medium-term notes based on various floating rate indices to rates based on three month LIBOR and $21 million of 7.27% medium-term notes to a variable rate based on six and three month LIBOR. Additionally, the Company employs cross currency interest rate swap agreements to convert foreign currency denominated debt to U.S. dollar denominated debt. During the nine month period ended September 30, 1995, the Company converted the 4 1/2% and 2.65% Eurobonds denominated in Japanese yen to $100 million and $205 million, respectively, with interest based on six month LIBOR. The terms of these swap agreements generally coincide with the life of the related debt issuance. In order to minimize the effect of movements in exchange rates on its financial results, the Company periodically enters into forward contracts and purchases options. These financial instruments serve as hedges of its foreign investment in international subsidiaries and joint ventures or effectively hedge the translation of the related foreign currency income. The Company held $222 million of forward contracts and $22 million of purchased options at September 30, 1995. 7 (5) Statement of Cash Flows Noncash investing activities which occurred during the nine month period ended September 30, 1995 include $62 million of receivables which were classified as repossessed assets and $31 million of in-substance repossessed assets which were classified as impaired receivables in accordance with SFAS No. 114. Receivables of $34 million were exchanged for investments of the same amount, and a $12 million gain was realized on an exchange of available for sale equity securities. During the comparable 1994 period, $117 million of positions in two repossessed companies were converted to equity investments. In addition, $59 million of receivables were classified as repossessed assets and $19 million of repossessed assets were resolved and returned to receivables. For the nine month periods ended September 30, 1995 and 1994, the Company paid income taxes of $81 million and $19 million and received refunds related to income taxes paid in prior years of $10 million and $21 million, respectively. (6) Subsequent Events In October, 1995 the Company securitized approximately $220 million of mobile home park, self storage and limited service hotel receivables, net of discounts and deferred fees. Of the amount securitized, approximately $176 million was sold, with recourse limited to the investment retained by the Company. The Company estimates its exposure will be minimal and has established a reserve of $1 million for this purpose. In October, 1995 the Company issued $315 million of one year variable rate medium-term notes. On October 6, 1995 the Securities and Exchange Commission declared effective the Company's registration statement on Form S-3 pursuant to which the Company registered $2.5 billion of debt to be issued from time to time. On October 17, 1995 the Company filed a prospectus supplement which established a medium-term notes program for the sale of these notes at varying maturities and rates which will be determined at the time of issuance. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS For the Three Months Ended For the Nine Months Ended September 30, September 30, ----------------------------- --------------------------- Percent Percent 1995 1994 Change 1995 1994 Change ------- ------ -------- ------ ------ -------- (dollars in millions) Interest income......................... $ 215 $ 188 14% $635 $509 25% Interest expense........................ 117 89 31 348 238 46 ----- ----- ---- ---- Net interest income.................... 98 99 (1) 287 271 6 Fees and other income................... 54 39 38 126 122 3 Income of international joint ventures.. 9 7 29 26 17 53 ----- ----- ---- ---- Operating revenues..................... 161 145 11 439 410 7 Operating expenses...................... 53 47 13 155 137 13 Provision for losses.................... 56 48 17 134 138 (3) ----- ----- ---- ---- Income before taxes and minority interest............................. 52 50 4 150 135 11 Income tax provision.................... 15 19 (21) 46 39 18 Minority interest in income of Heller International Group, Inc............... 2 1 100 5 3 67 ----- ----- ---- ---- Net income........................... $ 35 $ 30 17% $ 99 $ 93 6% ===== ===== ==== ====
Net income for the third quarter of 1995 increased by $5 million or 17% due to higher revenues from fees and other income, an increase in income of international joint ventures, and a decrease in the provision for income taxes. These were offset by an increase for the quarter in the provision for losses and continued spending for developing businesses. Net income for the nine month period ended September 30, 1995 increased by $6 million or 6% over the prior year's comparable period to $99 million. This increase was due to growth in net interest income and an increase in income of international joint ventures partially offset by increased spending for developing businesses and an increase in the income tax provision. Third quarter net interest income decreased slightly from the prior year period primarily due to costs of carrying higher average levels of equity investments. Net interest income increased 6% for the nine month period ended September 30, 1995 as growth in earning fund levels and a moderate increase in net interest margin exceeded the costs of carrying a higher average level of equity investments. Rates charged on 81% of average earning funds for the nine month period ended September 30, 1995 were based on floating indices such as the average three month London Inter-bank Offered Rate, which increased to 6.1% from 4.3% and contributed to the 14% and 25% increase in interest income for the three month and nine month periods, respectively. Interest expense increased for the three months and nine months ended September 30, 1995 partly due to the rise in the average borrowing rate to 6.9% from 5.2% and the higher level of debt used to finance portfolio growth. Fees and other income increased $15 million or 38% for the third quarter due to higher gains from equity investments and increased revenues from real estate transactions which were partially offset by $13 million of equity writedowns. For the nine month period ended September 30, 1995, fees and other income increased slightly as higher gains from sales of equity investments, increased revenues from real estate transactions and gains on project investments were offset by equity writedowns of $32 million. Income of international joint ventures increased for the quarter and for the nine month period ended September 30, 1995 due to growth in earnings primarily from European joint ventures and benefits from changes in foreign exchange rates relative to the U.S. dollar. 9 Operating expenses were higher principally due to increased spending on developing businesses which continue to grow their earning fund levels. The ratio of operating expenses to average fund levels is expected to remain relatively stable during the balance of 1995. The provision for losses increased by $8 million and decreased by $4 million for the three and nine month periods, respectively. Net writedowns of receivables and repossessed assets increased for the quarter and nine month period by $12 million and $5 million, respectively, compared to the prior year periods as the Company continued to aggressively resolve pre-1990 real estate and corporate finance problem accounts. This aggressive account resolution resulted in an 18 percent reduction in nonearning assets during the third quarter while the Company's newer business portfolios continued to exhibit strong credit quality. The Company's effective tax rate increased from 29% for the nine months ended September 30, 1994 to 31% for the same period in 1995. The Company's effective rate remained below statutory rates due to the favorable resolution of certain state tax issues. The Company's provision for income taxes for the nine months ended September 30, 1994 was lower than the statutory rate due to favorable tax issue resolution and the recognition of additional deferred tax benefits. 10 PORTFOLIO COMPOSITION During the nine month period ended September 30, 1995, lending assets and investments increased $704 million or 8% as the Company continued to build a more balanced portfolio by diversifying its asset base and sources of income. The asset based finance category includes secured working capital finance, vendor finance program loans and leases, equipment loans and leases to end- users, factoring, and small business finance activities.
Lending Assets and Investments as of September 30, December 31, ---------------- ---------------- 1995 Percent 1994 Percent ------ -------- ------ -------- BY PRODUCT CATEGORY: (dollars in millions) Corporate finance........................................... $3,260 36% $3,309 39% Asset based finance......................................... 2,810 31 2,103 25 Real estate finance......................................... 2,130 23 2,152 25 Specialized finance and investments......................... 481 5 505 6 International factoring and asset based finance............. 466 5 374 5 ------ --- ------ --- Total lending assets and investments....................... $9,147 100% $8,443 100% ====== === ====== === Lending assets include receivables and repossessed assets. BY ASSET TYPE: Receivables................................................. $8,185 89% $7,616 91% Repossessed assets.......................................... 35 - 19 - ------ --- ------ --- Total lending assets....................................... $8,220 89% $7,635 91% Investments................................................. 702 8 634 7 International joint ventures................................ 225 3 174 2 ------ --- ------ --- Total investments.......................................... $ 927 11% $ 808 9% ------ --- ------ --- Total lending assets and investments....................... $9,147 100% $8,443 100% ====== === ====== ===
Corporate finance lending assets and investments continued to decrease as a percentage of the overall portfolio due to runoff or resolution of pre-1990 accounts and a relatively high level of payoffs in the newer portfolio. The Company funded $1.1 billion of corporate financings during the nine months ended September 30, 1995 compared to $902 million in the prior year period, while continuing to maintain strong credit disciplines on average hold size and debt multiples. The average retained transaction size decreased to $16 million at September 30, 1995 from $18 million at December 31, 1994, which is consistent with the Company's strategy to hold smaller positions in individual transactions. The Company was contractually committed at September 30, 1995 to finance an additional $1.2 billion to new and existing corporate finance borrowers. Corporate financings are generally considered by certain regulatory agencies as highly leveraged transactions. Asset based finance became the second largest product category during 1995 increasing $707 million to 31% of total lending assets and investments at September 30, 1995. This increase is due primarily to growth in secured working capital finance, vendor program finance, and end-user equipment finance combined with a seasonal increase in factored receivables. New business fundings of secured working capital finance receivables, vendor program finance receivables, and end-user equipment loans and leases increased during the nine month period and amounted to $254 million, $253 million, and $189 million, respectively, compared to $162 million, $191 million, and $141 million in the prior year period. The Company achieved this level of funding while continuing to maintain strong credit disciplines in these developing businesses. At September 30, 1995, the Company had contractually committed to finance an additional $691 million to new and existing borrowers of asset based finance. 11 Real estate finance decreased to 23% of total lending assets and investments as the Company continued to lower its office building concentration and diversify its portfolio among several other property types. Real estate fundings amounted to $468 million during the nine month period and consisted primarily of hotel, mobile home park and discounted loan portfolio financings. Unfunded contractual loan commitments to new and existing borrowers were $253 million at September 30, 1995. During October 1995, the Company securitized $220 million of its mobile home park, self storage and limited service hotel receivables. Of this amount, $176 million was sold with limited recourse. The Company's obligation to fund loan commitments is generally contingent upon the maintenance of specific credit standards by the borrowers. Total revenues include interest income, fees and other income from wholly- owned domestic and international operations, and the Company's share of the net income of its international joint ventures.
Total Revenues For the Nine Months Ended September 30, ----------------------------------------- 1995 Percent 1994 Percent ------- ----------- ------- ---------- (dollars in millions) Corporate finance................................ $ 310 39% $ 277 43% Asset based finance.............................. 212 27 159 25 Real estate finance.............................. 184 23 154 24 International factoring and asset based finance.. 46 6 36 5 Specialized finance and investments.............. 35 5 22 3 ----- --- ----- --- Total revenues.................................. $ 787 100% $ 648 100% ===== === ===== ===
Total revenues increased $139 million or 21% from the prior year principally reflecting growth in assets and higher market interest rates. 12 PORTFOLIO QUALITY
September 30, December 31, ------------- ------------ 1995 1994 ------ ------ Lending Assets and Investments: (dollars in millions) Receivables....................................................... $8,185 $7,616 Repossessed assets................................................ 35 19 ------ ------ Total lending assets............................................. 8,220 7,635 Investments....................................................... 927 808 ------ ------ Total lending assets and investments............................. $9,147 $8,443 ====== ====== Nonearning Assets: Impaired receivables.............................................. $ 271 $ 284 Repossessed assets................................................ 35 19 ------ ------ Total nonearning assets.......................................... $ 306 $ 303 ====== ====== Ratio of nonearning impaired receivables to receivables........... 3.3% 3.7% ====== ====== Ratio of total nonearning assets to total lending assets.......... 3.7% 4.0% ====== ====== Allowances for Losses: Allowance for losses of receivables............................... $ 245 $ 231 Valuation allowance for repossessed assets........................ 6 6 ------ ------ Total allowance for losses....................................... $ 251 $ 237 ====== ====== Ratio of allowance for losses of receivables to: Receivables...................................................... 3.0% 3.0% ====== ====== Nonearning impaired receivables.................................. 90% 81% ====== ====== Delinquencies: Earning loans delinquent 60 days or more.......................... $ 97 $ 103 ====== ====== Ratio of earning loans delinquent 60 days or more to receivables.. 1.2% 1.4% ====== ======
For The Nine Months ------------------- Ended September 30, ------------------- 1995 1994 ------ ------ Writedowns: (dollars in millions) Net writedowns on receivables..................................... $ 107 $ 92 Net writedowns on repossessed assets.............................. 11 21 ------ ------ Total net writedowns............................................ $ 118 $ 113 ====== ======
The overall credit quality of the portfolio continued to improve as portfolio growth was concentrated in the Company's lower risk asset based product areas. These portfolios and those in corporate finance and real estate finance funded under the Company's post 1990 revised lending strategies continued to exhibit strong credit quality. Nonearning assets decreased to 3.7% of total lending assets at September 30, 1995 compared to 4.0% at December 31, 1994. The decrease is the result of the Company's continued efforts to resolve its pre-1990 corporate finance and real estate troubled accounts combined with strong credit performance in the Company's newer portfolios. Increases in nonearning assets due to the addition of certain pre-1990 corporate finance and real estate accounts during the first six months of the year were offset by a net reduction during the third quarter due to the sale of one large pre-1990 apartment complex account and the restructure of several large pre-1990 real estate credits. The Company had $99 million of receivables at September 30, 1995 that were restructured at market rates of interest, written down from the original loan balance and returned to earning status. The recorded investment of these receivables is expected to be fully recoverable. Nonearning assets principally consist of corporate finance and real estate accounts originated prior to 1990. Total net writedowns increased $5 million for the nine month period ended September 30, 1995 as a result of the significant amount of pre-1990 real estate and corporate finance resolutions which occurred during the period. Delinquent receivables decreased from the prior year end reflecting continued strong performance of the Company's newer portfolios combined with the restructure of several pre-1990 real estate credits. Loans considered troubled debt restructures decreased to $26 million from $54 million in the prior year due to the sale of one large pre-1990 corporate finance credit. Effective January 1, 1995, The Company adopted the provisions of Statement of Financial Accounting Standard ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan," and the related disclosure requirements of SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosure." These pronouncements require that impaired receivables be measured based on the present value of expected future cash flows discounted at the receivable's effective interest rate. Impairment may also be measured based on the receivable's observable market price or based on the fair value of the collateral if the receivable is collateral dependent. The Company had previously measured impairment using methods similar to those prescribed in SFAS No. 114. Accordingly, there was no effect to total nonearning assets nor to the total allowance for losses as previously reported at December 31, 1994. SFAS No. 114 also requires that receivables that were previously classified as repossessed assets under in-substance repossession rules now be presented as impaired receivables until the collateral is physically possessed or legally foreclosed. This provision was retroactively applied resulting in the reclassification of $31 million of in-substance repossessed assets to nonearning impaired receivables and the transfer of $4 million from the related valuation allowance to the allowance for losses of receivables at December 31, 1994. 13 LIQUIDITY AND CAPITAL RESOURCES During the first nine months of 1995, the Company increased lending assets and investments by $704 million, reduced the level of commercial paper and short term borrowings by $125 million, retired $261 million of senior notes, and paid $43 million in dividends to common and preferred stockholders. To meet these funding requirements, the Company supplemented its cash flow from operations by issuing $1,132 million of senior notes and debentures. The ratio of commercial paper and short-term borrowings to total debt decreased by 5% to 33% at September 30, 1995 compared with 38% at December 31, 1994, reflecting the Company's decision to continue to reduce the level of short-term funding. Leverage was increased slightly to 5.2x at September 30, 1995 compared to 4.8x at December 31, 1994, due to the 8% growth in lending assets and investments and an increase in liquidity from a higher level of cash equivalents. Leverage and the level of commercial paper and short-term borrowings continue to remain within ranges targeted by the Company to maintain a strong financial position. At September 30, 1995, the Company had unused bank credit facilities of $2,210 million, liquidity support of $500 million from Fuji Bank under the Keep Well Agreement and $494 million available under the factored accounts receivable sale program, all of which provide the Company with an aggregate amount of $3,204 million of committed credit and sale facilities representing 138% of outstanding commercial paper and short-term borrowings. Committed credit and sale facilities from unaffiliated financial institutions represent 114% of outstanding commercial paper and short-term borrowings at September 30, 1995. The liquidity provided by the bank credit facilities and the Keep Well Agreement remain unused at September 30, 1995. During the second quarter, the bank credit facilities' terms were changed to include reduced pricing, an increase in the term for $1.1 billion of the facilities to five years, required stockholders' equity of $900 million, and the elimination of any funding covenant based on material adverse change in the financial condition of the Company. On May 3, 1995 the Company and Fuji Bank agreed to extend the term of the Keep Well Agreement for an additional two years from December 31, 2000 to December 31, 2002. RISK MANAGEMENT The Company maintains a conservative currency and interest rate risk posture by using derivatives as an integral part of its asset/liability management program to reduce its overall level of financial risk. These derivatives, particularly interest rate swap agreements, are used to lower funding costs, diversify sources of funding or alter interest rate exposure arising from mismatches between assets and liabilities. Agreements entered into during the first nine months of 1995 were entirely related to accomplishing these risk management objectives and consisted of notional amounts approximating $1.4 billion of basis and cross currency interest rate swap agreements. The Company invests in and operates commercial finance companies throughout the world. Over the course of time, reported results from the operations and investments in foreign countries may fluctuate in response to exchange rate movements in relation to the U.S. dollar. While the Western European operations and investments are the largest areas of the Company's activities, reported results will be influenced to a lesser extent by the exchange rate movements in the currencies of other countries in which our subsidiaries and investments are located. To minimize the effect of movements in exchange rates on financial results, the Company will periodically enter into forward currency exchange contracts and purchase options which serve as hedges of translation of foreign currency income and investment amounts to U.S. dollars. As of September 30, 1995, the Company held $244 million of forward currency exchange contracts and purchased options related to this purpose. 14 ACCOUNTING DEVELOPMENTS The Financial Accounting Standards Board has released Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed Of," and SFAS No. 122, "Accounting for Mortgage Servicing Rights," effective for financial statements for fiscal years beginning after December 15, 1995. The Company does not expect the adoption of these pronouncements to have a material effect on its results of operations or financial position. 15 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (12) Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends (27) Financial Data Schedule (b) Reports on Form 8-K On July 31, 1995, the Company filed with the U.S. Securities and Exchange Commission a Current Report on Form 8-K, dated July 28, 1995, to announce the Company's earnings for the quarter ended June 30, 1995. On October 3, 1995, the Company filed with the U.S. Securities and Exchange Commission a Current Report on Form 8-K, dated September 29, 1995, to announce the appointment of a successor Trustee, Registrar and Paying Agent for Senior Securities and Junior Subordinated Securities issued under the Company's Registration Statement No. 33-58716, dated February 25, 1993. On October 17, 1995, the Company filed a prospectus supplement under registration statement no. 33-62479, which established a Medium-Term Notes program for the sale of up to $2.5 billion of notes due from 9 months to 30 years from the date of issue. On October 18, 1995, the Company filed with the U.S. Securities and Exchange Commission a Current Report on Form 8-K, dated October 17, 1995 to file the Distribution Agreement, Supplemental Indentures, Forms of Medium-Term Notes and tax opinion in connection with the establishment of its Medium-Term Notes, series G program. On October 24, 1995, the Company filed with the U.S. Securities and Exchange Commission a Current Report on Form 8-K, dated October 24, 1995, to announce the Company's earnings for the quarter ended September 30, 1995. 16 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: Richard J. Almeida -------------------------------------------- Richard J. Almeida Executive Vice President and Chief Financial Officer By: Lawrence G. Hund -------------------------------------------- Lawrence G. Hund Senior Vice President, Controller and Chief Accounting Officer Date: October 27, 1995 17 EX-12 2 COMPUTATION OF EARNINGS EXHIBIT (12) HELLER FINANCIAL, INC. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (unaudited) (dollars in millions)
For the Nine Months Ended September 30, 1995 ------------------ Net income before income taxes and minority interest in income of Heller International Group, Inc........................ $150 Add-Fixed charges Interest and debt expense........................................ 348 One-third of rentals............................................. 5 ---- Total fixed charges......................................... 353 ---- Net income, as adjusted............................................ $503 ---- Ratio of earnings to fixed charges................................. 1.42x ==== Preferred stock dividends on a pre-tax basis....................... 13 Total combined fixed charges and preferred stock dividends.. $366 ---- Ratio of earnings to combined fixed charges and preferred stock dividends........................................ 1.37x ====
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 in Heller International Group, Inc. income 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. EX-27 3 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HELLER FINANCIAL INC. QUARTERLY REPORT FORM 10Q FOR THE PERIOD ENDING SEPTEMBER 30, 1995 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. 1,000,000 9-MOS DEC-31-1995 JAN-01-1995 SEP-30-1995 0 222 0 22 120 0 0 8,185 (245) 9,291 0 2,326 736 4,800 663 0 150 570 9,291 635 0 0 635 0 348 287 121 0 168 150 99 0 0 99 0 0 4.96 271 75 26 0 231 131 24 245 0 0 245 Notes: The Company is a finance company whose normal operations do not include the trading of investment securities. Earnings per share information not provided as Heller Financial, Inc. has only one common shareholder. Net income is net of $46 million income tax provision and $5 million of minority interest in international income.
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