-----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, QU2Be68Jsh0eowMW8Ugefr1GuvJ+fbZ6KQhi3BTfCetz9BUX7Qm2q2g9pMtT4SvM Dr002Nh6GsEi2S3jxcprbQ== 0000950131-97-004706.txt : 19970801 0000950131-97-004706.hdr.sgml : 19970801 ACCESSION NUMBER: 0000950131-97-004706 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970731 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: 97649454 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 =============================================================================== FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 1997 [_] 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 incorporation (I.R.S. Employer or organization) Identification No.) 500 West 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: 105 shares of Common Stock, $.25 par value, outstanding at July 31, 1997. =============================================================================== Website is http://www.hellerfin.com PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HELLER FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (in millions)
ASSETS June 30, December 31, 1997 1996 ----------- ------------ (unaudited) Cash and cash equivalents............................................. $ 268 $ 296 Receivables (Note 3) Commercial loans Term loans.......................................................... 2,620 2,434 Revolving loans..................................................... 1,677 1,493 Factored accounts receivable.......................................... 2,369 994 Equipment loans and leases............................................ 1,857 1,614 Real estate loans..................................................... 1,288 1,726 Indirect consumer loans............................................... 298 268 ------- ------ Total receivables................................................ 10,109 8,529 Less: Allowance for losses of receivables (Note 3).................... 250 225 ------- ------ Net receivables.................................................. 9,859 8,304 Equity and real estate investments.................................... 421 419 Debt securities....................................................... 253 251 Operating leases...................................................... 207 135 Investments in international joint ventures........................... 193 272 Other assets.......................................................... 407 249 ------- ------ Total assets..................................................... $11,608 $9,926 ======= ====== LIABILITIES AND STOCKHOLDERS' EQUITY Senior debt Commercial paper and short-term borrowings........................... $ 3,826 $2,745 Notes and debentures (Note 4)........................................ 4,600 4,761 ------- ------ Total debt....................................................... 8,426 7,506 Credit balances of factoring clients.................................. 1,113 590 Other payables and accruals........................................... 368 306 ------- ------ Total liabilities................................................ 9,907 8,402 Minority interest in equity of Heller International Group, Inc........ 58 57 Stockholders' equity Cumulative Perpetual Senior Preferred Stock, Series A............... 125 125 Noncumulative Perpetual Senior Preferred Stock, Series B (Note 5)... 150 - Cumulative Convertible Preferred Stock, Series D (Note 6)........... - 25 Common Stock and additional paid-in capital......................... 685 663 Retained earnings................................................... 683 654 ------- ------ Total stockholders' equity....................................... 1,643 1,467 ------- ------ Total liabilities and stockholders' equity....................... $11,608 $9,926 ======= ======
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 Six Months Ended June 30, Ended June 30, -------------- -------------- 1997 1996 1997 1996 ---- ---- ---- ---- (unaudited) (unaudited) Interest income..................................................... $ 238 $ 198 $ 446 $ 400 Interest expense.................................................... 131 111 247 223 ----- ------ ----- ------ Net interest income............................................... 107 87 199 177 Fees and other income............................................... 53 18 79 37 Factoring commissions.............................................. 30 13 43 26 Income of international joint ventures.............................. 9 11 19 20 ----- ------ ----- ------ Operating revenues................................................ 199 129 340 260 Operating expenses.................................................. 90 60 152 119 Provision for losses................................................ 34 25 56 49 ----- ------ ----- ------ Income before income taxes and minority interest.................. 75 44 132 92 Income tax provision................................................ 28 9 45 21 Minority interest in income of Heller International Group, Inc...... 3 - 4 2 ----- ------ ----- ------ Net income........................................................ $ 44 $ 35 $ 83 $ 69 ===== ====== ===== ======
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN RETAINED EARNINGS (in millions)
For the Six Months Ended June 30, -------------- 1997 1996 ---- ---- (unaudited) Retained earnings at December 31, 1996 and 1995.............................. $ 654 $ 571 Net income................................................................. 83 69 Common stock dividends..................................................... (28) (24) Preferred stock dividends.................................................. (6) (6) Net changes in unrealized holding gains or losses on securities available for sale, net of tax...................................................... (8) 4 Deferred translation adjustment, net of tax................................ (12) (1) ------ ----- Retained earnings at June 30, 1997 and 1996.................................. $ 683 $ 613 ====== =====
The retained earnings balance includes unrealized net gains (losses) on securities available for sale of $4 and $(1), net of tax, at June 30, 1997 and 1996, respectively. Retained earnings also includes deferred foreign currency translation adjustments of $(27) and $(15), net of tax, at June 30, 1997 and 1996, 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 Six Months Ended June 30, ------------------------ 1997 1996 ------ ------ (unaudited) OPERATING ACTIVITIES Net income................................................................. $ 83 $ 69 Adjustments to reconcile net income to net cash provided by operating activities: Provision for losses...................................................... 56 49 Losses from equity investments............................................ 32 29 Provision for deferred tax asset.......................................... 7 1 Increase (decrease) in accounts payable and accrued liabilities........... 15 (47) Undistributed income of international joint ventures...................... (12) (13) Increase (decrease) in interest payable................................... 3 (10) Other..................................................................... 23 - ----------- ---------- Net cash provided by operating activites................................. 207 78 INVESTING ACTIVITIES Long-term loans funded..................................................... (2,254) (1,287) Collections of principal................................................... 1,434 1,228 Sales and syndications of longer-term loans................................ 906 325 Net increase in short-term loans and advances to factoring clients Due to the consolidation of Factofrance.................................. (819) - Other.................................................................... (400) (416) Investment in operating leases............................................. (83) - Investments in equity interests and other investments...................... (132) (85) Sales of investments and equipment on lease................................ 165 58 Factofrance goodwill and noncompetition agreement.......................... (96) - Other...................................................................... 13 (31) ----------- ---------- Net cash used for investing activities................................... (1,266) (208) FINANCING ACTIVITIES Senior note issuances...................................................... 674 133 Retirement of notes and debentures......................................... (852) (508) Increase in commercial paper and other short-term borrowings Due to the consolidation of Factofrance.................................. 792 - Other.................................................................... 289 217 Proceeds from preferred stock issuance..................................... 147 - Net decrease in advances to affiliates..................................... 8 27 Dividends paid on common and preferred stock............................... (34) (30) Other...................................................................... 7 (1) ----------- ---------- Net cash provided by (used for) financing activities..................... 1,031 (162) ----------- ---------- Decrease in cash and cash equivalents....................................... (28) (292) Cash and cash equivalents at the beginning of the period.................... 296 599 ----------- ---------- Cash and cash equivalents at the end of the period.......................... $ 268 $ 307 =========== ==========
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 in conjunction 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, 1996. 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 to conform to the current year's presentation. (2) Acquisition of Factofrance On April 2, 1997, the Company's subsidiary, Heller International Group, Inc. ("International Group"), purchased the interest of its joint venture partner in Factofrance Heller S.A. ("Factofrance") for $174 million. As a result, International Group increased its ownership interest in Factofrance from 48.8% to 97.6%. International Group has held an interest in Factofrance for over 30 years, using the equity method of accounting for its previous ownership position. Factofrance, founded in 1965, is the leading factoring company in the French marketplace. Factofrance is headquartered in Paris and has seven regional sales offices covering local markets. The Factofrance acquisition was accounted for using the purchase method of accounting in accordance with Accounting Principles Board Opinion (APB) No. 16, "Business Combinations." Under this method of accounting, the purchase price was allocated to assets acquired and liabilities assumed based on their estimated fair values at the date of purchase. Goodwill related to the acquisition was $78 million and is being amortized over 25 years. The acquisition price includes $18 million for a noncompetition agreement which is being amortized over the five year life of the agreement. The following table presents pro forma combined income statements of the Company and Factofrance and its subsidiaries for the six months ended June 30, 1997 and 1996. The pro forma combined income statements are presented as if the acquisition had been effective January 1, 1996. The combined historical results of operations of Heller and Factofrance for 1997 and 1996 have been adjusted to reflect the amortization of goodwill, the amortization of the noncompetition agreement and the costs of financing for the transaction. This information is intended for informational purposes only and is not necessarily indicative of the future results of operations of the Company or of the results of operations of the Company that would have occurred had the acquisition been effective in the periods presented.
For the Six Months Ended June 30, ------------------ 1997 1996 ------- ------- Interest income.................................................. $ 461 $ 445 Interest expense................................................. 256 248 ------- ------- Net interest income............................................ 205 197 Fees and other income............................................ 88 47 Factoring commissions............................................ 56 60 Income of international joint ventures........................... 16 14 ------- ------- Operating revenues............................................. 365 318 Operating expenses............................................. 172 163 Provision for losses............................................. 58 55 ------- ------- Income before income taxes and minority interest............... 135 100 Income tax provision............................................. 46 26 Minority interest in income of Heller International Group, Inc... 5 4 ------- ------- Net income..................................................... $ 84 $ 70 ======= =======
5 (3) 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:
June 30, December 31, 1997 1996 --------- ------------ (in millions) Impaired receivables...................................... $ 259 $ 264 Repossessed assets........................................ 31 14 ----- ----- Total nonearning assets.................................. $ 290 $ 278 ===== ===== Ratio of total nonearning assets to total lending assets.. 2.9% 3.3% ===== =====
The average investment in nonearning impaired receivables was $258 million for the six months ended June 30, 1997. Loan Modifications-- The Company had $14 million of loans that are considered troubled debt restructures at June 30, 1997 and December 31, 1996. The Company also had $14 million of loans at June 30, 1997 that were restructured at a market rate 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. Interest income of less than $1 million has been recorded on these receivables under the modified terms. At June 30, 1997, 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 six month period included an additional provision of $56 million and gross writedowns and recoveries of $59 million and $10 million, respectively. The consolidation of Factofrance resulted in an increase of $18 million in the allowance for losses of receivables during the second quarter of 1997. Impaired receivables with identified reserve requirements were $174 million at June 30, 1997 and $176 million at December 31, 1996.
June 30, December 31, 1997 1996 -------- ------------ (in millions) Identified reserve requirement for impaired receivables.. $ 60 $ 57 Additional allowance for losses of receivables........... 190 168 ----- ----- Total allowance for losses of receivables............. $ 250 $ 225 ===== ===== Ratio of allowance for losses of receivables to nonearning impaired receivables....................... 97% 85% ===== =====
6 (4) Notes and Debentures The Company issued and retired the following notes and debentures during the six months ended June 30, 1997 (excluding unamortized premium and discount):
Principal Senior Debt - Notes and Debentures Amount ------------- (in millions) Issuances: Variable rate medium-term notes due on various dates ranging from April 7, 1998 to April 22, 2002.................................. $ 574 6.58% medium-term notes due February 28, 2002...................... 10 6.64% medium-term notes due May 13, 1999........................... 25 6.70% medium-term notes due March 20, 2000......................... 10 6.71% medium-term notes due March 21, 2000......................... 10 7.00% medium-term notes due March 19, 2002......................... 40 7.03% medium-term notes due March 21, 2002......................... 5 ------- $ 674 ======= Retirements: Variable rate medium-term notes due on various dates ranging from January 15, 1997 to June 23, 1997................................ $ 511 7.69% medium-term notes due May 27, 1997........................... 3 7.73% medium-term notes due May 20, 1997........................... 5 6.45% notes due February 15, 1997.................................. 5 7.75% notes due May 15, 1997....................................... 200 Variable rate notes due on March 24, 1997.......................... 128 ------- $ 852 =======
In April 1997, the Company increased its existing bank credit facilities under a modified agreement which provides $3.0 billion of liquidity support at more favorable terms to the Company. The total bank credit facility is comprised of two equal facilities, a 364-day facility expiring April 7, 1998 and a 5-year facility expiring April 8, 2002. The modified terms of the agreement principally reflect reduced pricing. (5) Issuance of Preferred Stock In June, 1997, the Company issued 1,500,000 shares of 6.687% Noncumulative Perpetual Senior Preferred Stock, Series B ("Noncumulative Perpetual Preferred Stock") at $100 per share and received proceeds of $150 million less underwriting costs of two percent. The shares were initially sold to Lehman Brothers Inc., Chase Securities Inc. and Merrill Lynch & Co., each of whom agreed to offer or sell such shares only to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933 and to a limited number of institutional accredited investors pursuant to Regulation D under the Securities Act. The Company has agreed to use its reasonable best efforts to file a registration statement within 150 days of issuance with respect to an offer to exchange the Noncumulative Perpetual Preferred Stock for shares of substantially identical fixed rate noncumulative perpetual senior preferred stock of the Company. The Company is prohibited from paying cash dividends in any period on Common Stock or upon any other preferred stock that ranks, with respect to dividends, equal to or junior to the Noncumulative Perpetual Preferred Stock unless current dividends on the Noncumulative Perpetual Preferred Stock have been paid. The Noncumulative Perpetual Preferred Stock is not redeemable prior to August 15, 2007. On or after such date, the Noncumulative Perpetual Preferred Stock will be redeemable at the option of the Company, in whole or in part, at a redemption price of $100 per share, plus any accrued and unpaid dividends. (6) Conversion of Convertible Preferred Stock In May, 1997, the Company's Parent, Heller International Corporation, converted all of its shares of Cumulative Convertible Preferred Stock, Series D, no par value, into an aggregate of five shares of Common Stock of the Company at the conversion price of one share of Common Stock for each 200 shares of Convertible Preferred Stock. No other shares of the Series D Convertible Preferred Stock remain outstanding. 7 (7) Derivative Financial Instruments Used for Risk Management Purposes The following disclosures are provided to supplement the disclosures of the Company's policy for accounting for derivative financial instruments in the Company's annual report on Form 10-K for the year ended December 31, 1996 in accordance with the Securities Exchange Commission final rules on "Disclosure of Accounting Policies for Derivative Financial Instruments." The policies noted below are consistent with the Company's historical practices. Gains or losses on terminated interest rate swaps that were hedges of underlying obligations are amortized to interest income or interest expense over the remaining life of the related underlying obligation. If the underlying asset or obligation is sold, the gain or loss related to closing the swap is recognized currently in income. Gains or losses on terminated foreign currency exchange contracts which were hedges of net investments in a foreign subsidiary or joint venture continue to be deferred and are recognized when the international investment is sold or is substantially liquidated. If the underlying investment is sold, the gain or loss related to closing the contract is recognized currently in income. The Company entered into $1.7 billion of interest rate swaps during the six months ended June 30, 1997 to more closely match the interest rate and currency characteristics of its debt and assets. These instruments had the effect of converting $929 million of floating rate obligations to a fixed rate, $500 million of six month variable rate obligations to three-month variable rate obligations, and $160 million of fixed rate medium term notes to a variable rate. The Company also entered into $106 million of cross currency interest rate swap agreements which had the effect of converting fixed rate medium-term notes to fixed rate French Franc denominated notes. The Company also periodically enters into forward contracts or purchases options to effectively hedge the translation of the related foreign currency income. The Company held $272 million of forward contracts at June 30, 1997. (8) Statement of Cash Flows Noncash investing activities which occurred during the six month period ended June 30, 1997 include $21 million of receivables which were classified as repossessed assets. For the six month periods ended June 30, 1997 and 1996, the Company paid income taxes to its Parent of $25 million and $53 million, respectively. (9) Accounting Developments Effective January 1, 1997, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." Under this Statement, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered and derecognizes liabilities when extinguished. This Statement provides standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The adoption of this Statement did not have a material impact on the Company's consolidated financial statements. In June, 1997, the Financial Standards Accounting Board released Statement of Accounting Standards No. 130, "Reporting Comprehensive Income," which the Company is required to adopt no later than 1998. This statement establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Statement of Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" was also released in June, 1997 and is required to be adopted no later than 1998. SFAS 131 requires segments to be reported based on the way management organizes segments within the Company for making operating decisions and assessing performance. The Company plans to adopt both of the above pronouncements effective January 1, 1998. 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 Six Months Ended June 30, June 30, -------------------------- ------------------------ Percent Percent 1997 1996 Change 1997 1996 Change ---- ---- ------- ---- ---- ------- (dollars in millions) Interest income......................... $238 $198 20% $446 $400 12% Interest expense........................ 131 111 18 247 223 11 ---- ---- ---- ---- Net interest income 107 87 23 199 177 12 Fees and other income................... 53 18 194 79 37 114 Factoring commissions................... 30 13 131 43 26 65 Income of international joint ventures.. 9 11 (18) 19 20 (5) ---- ---- ---- ---- Operating revenues.................... 199 129 54 340 260 31 Operating expenses...................... 90 60 50 152 119 28 Provision for losses.................... 34 25 36 56 49 14 ---- ---- ---- ---- Income before taxes and minority interest............................ 75 44 70 132 92 43 Income tax provision.................... 28 9 211 45 21 114 Minority interest in income of Heller International Group, Inc.............. 3 - - 4 2 100 ---- ---- ---- ---- Net income......................... $ 44 $ 35 26% $ 83 $ 69 20% ==== ==== ==== ====
Net income for the second quarter of 1997 totaled $44 million and increased by $9 million or 26% versus the second quarter of 1996, while net income for the six months ended June 30, 1997 totaled $83 million and increased by $14 million or 20% over the first six months of 1996, due to a significant increase in operating revenues. In addition, the Company's ongoing portfolio continued to exhibit strong credit quality as evidenced by low levels of nonearning assets and net writeoffs. On April 2, 1997, the Company's subsidiary, Heller International Group Inc., completed its acquisition of Factofrance from its joint venture partner, increasing its ownership interest in Factofrance from 48.8% to 97.6%. Heller International Group has held an interest in Factofrance for over 30 years, using the equity method of accounting for its previous ownership position. Factofrance, founded in 1965, is the leading factoring company in the French marketplace. This increase in ownership resulted in Factofrance being reported on a consolidated basis as of the date of purchase. With Factofrance's results now accounted for on a consolidated basis, operating revenues and operating expenses increased $31 million and $20 million, respectively for the six months and three months ended June 30, 1997. Virtually all of the changes in factoring commissions and income of international joint ventures were the result of the consolidation of Factofrance. This acquisition had a modest favorable impact on the Company's second quarter net income as acquisition costs offset Factofrance's earnings. Net interest income increased by 23% and 12% for the second quarter and six months ended June 30, 1997, respectively, reflecting growth in lending assets and increased fee accelerations on loan repayments. This growth is partially offset by the continued shift of the portfolio to lower risk, but lower yielding asset based products. Fees and other income nearly tripled during the second quarter of 1997 and increased to $79 million from $37 million for the six months ended June 30, 1997 and 1996, respectively. This increase in fees and other income reflects the continued strong participation fee income of the Company's real estate business, as well as a gain of $24 million recognized on the securitization of approximately $500 million of mortgage loans in June, 1997. Net investment gains were $7 million for the six month period ended June 30, 1997 compared to $16 million for the same period in 1996. Gross investment gains were $39 million and $45 million, while losses and writedowns were $32 million and $29 million for the six months ended June 30, 1997 and 1996, respectively. 9 Operating expenses, excluding the impact of the Factofrance consolidation, increased by 17% and 11% for the second quarter and first six months of 1997, respectively. The increase is primarily due to continued investment in the expansion of the asset based businesses. While gross writeoffs have decreased during 1997, the provision for losses increased for the second quarter and for the six months ended June 30, 1997, primarily due to growth in assets and a lower level of recoveries in the first six months of 1997 versus 1996. The ongoing portfolio demonstrated continued strong credit performance with the post-1990 lending assets requiring only $21 million or 50 basis points of net writedowns during the first six months. Gross writedowns totaled $59 million and $75 million, while recoveries totaled $10 million and $26 million for the six months ended June 30, 1997 and 1996, respectively. The Company's effective tax rate increased to 34% for the six months ended June 30, 1997 from 23% for the same period in 1996. The effective rate for 1997 and 1996 remained below statutory rates due to the effect of earnings from international joint ventures, the use of foreign tax credits and favorable tax issue resolutions. 10 PORTFOLIO COMPOSITION Total lending assets and investments grew by $1.6 billion or 17% for the six months ended June 30, 1997 primarily due to the consolidation of Factofrance. During the first six months of 1997 new business volume totaled $2.4 billion, a 30% increase over the prior year period. The Company's portfolio continued to exhibit strong liquidity as evidenced by paydowns, loans sales, syndications and securitizations totaling $2.2 billion in the first six months of 1997. The Company continued to grow the lower risk asset based businesses and reduce the pre-1990 corporate finance and real estate finance portfolios.
Lending Assets and Investments as of June 30, December 31, ------------------- ----------------- 1997 Percent 1996 Percent ------ --------- ------ --------- By Product Category: (dollars in millions) Asset based finance................................. $ 4,817 43% $4,270 44% International asset based finance................... 1,809 16 337 3 Corporate finance................................... 2,443 22 2,447 26 Real estate finance................................. 1,735 15 2,062 21 Specialized finance................................. 217 2 232 3 Investments in international joint ventures......... 193 2 272 3 ------- --- ------ --- Total lending assets and investments.............. $11,214 100% $9,620 100% ======= === ====== === By Asset Type: Receivables......................................... $10,109 90% $8,529 89% Repossessed assets.................................. 31 -- 14 -- ------- --- ------ ---- Total lending assets.............................. $10,140 90% $8,543 89% Equity and real estate investments.................. 421 4 419 4 Debt securities..................................... 253 2 251 3 Operating leases.................................... 207 2 135 1 Investments in international joint ventures......... 193 2 272 3 ------- --- ------ ---- Total investments................................. $ 1,074 10% $1,077 11% ------- --- ------ ---- Total lending assets and investments.............. $11,214 100% $9,620 100% ======= === ====== ====
The asset based lending portfolio is comprised of equipment loans and leases to end-users, factored accounts receivable, secured working capital finance, vendor finance program loans and leases, small business finance activities and indirect consumer finance. The table below provides a breakdown among the Company's various asset based product groups. Lender Finance represents the Company's financing of other financial service providers. This portfolio is comprised of the former Sales Finance portfolio as well as a portion previously included in the Vendor Finance product group.
Lending Assets and Investments as of June 30, December 31, --------------------- ---------------- 1997 Percent 1996 Percent ------- ------- ------ ------- (dollars in millions) Equipment Finance and Leasing....................... $1,166 24% $ 981 23% Current Asset Management............................ 830 18 928 22 Business Credit..................................... 1,014 21 867 20 Vendor Finance...................................... 691 14 657 16 First Capital....................................... 576 12 403 9 Lender Finance...................................... 540 11 434 10 ------ --- ------ --- Total lending assets and investments.............. $4,817 100% $4,270 100% ====== === ====== ===
Growth in asset based lending assets and investments of $547 million for the six months ended June 30, 1997 was distributed among five of the asset based product groups. During the first half of the year the Company reached another milestone as the Equipment Finance and Leasing and Business Credit portfolios each grew to over $1 billion in lending assets and investments. Lending assets and investments for Equipment Finance and Leasing, Business Credit, First Capital and Lender Finance increased due to strong new business, with the Company funding 11 over $1.4 billion of asset based financings during the six month period. The Company achieved this level of funding while continuing to maintain strong credit disciplines in all of its asset based businesses. These portfolios experienced less than $4 million in net writedowns for the six months ended June 30, 1997. At June 30, 1997, the Company had contractually committed to finance an additional $1 billion to new and existing asset based borrowers. Corporate finance lending assets and investments decreased slightly as strong new business fundings were offset by runoff in both the pre- and post-1990 portfolios as well as syndications and participations in the post-1990 portfolio. The Company funded in excess of $800 million of corporate financings during the six months ended June 30, 1997 and continues to maintain strong credit disciplines. At June 30, 1997, the Company was contractually committed to finance an additional $760 million to new and existing corporate finance borrowers. The real estate portfolio decreased by $327 million during the six months ended June 30, 1997. The decline in lending assets was due primarily to the securitization of approximately $500 million of commercial mortgage loans, net of discounts and deferred fees. The Company has not retained any residual interest in this transaction as all of the commercial mortgage pass-through certificates were sold to third parties on a non-recourse basis. In addition, the Company has not retained any servicing obligations on this portfolio. Fundings, primarily in apartments and retail property types totaled approximately $525 million during the six month period. Unfunded contractual loan commitments to new and existing borrowers were $70 million at June 30, 1997. The international asset based finance portfolio, which is comprised of the Company's consolidated international subsidiaries, grew by $1.5 billion primarily as the result of the Factofrance consolidation. In addition, investments in international joint ventures decreased due to the acquisition of Factofrance which was previously recorded as a joint venture. 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, net fees and other income and factoring commissions from domestic and consolidated international operations and the Company's share of the net income of its international joint ventures.
Total Revenues For the Six Months Ended June 30, ---------------------------------------------- 1997 Percent 1996 Percent ---- ------- ---- ------- (dollars in millions) Asset based finance............................................. $240 41% $176 36% International asset based finance............................... 54 9 20 4 Corporate finance............................................... 120 21 149 31 Real estate finance............................................. 146 25 110 23 Specialized finance............................................. 8 1 8 2 Investments in international joint ventures..................... 19 3 20 4 ---- --- ---- --- Total revenues................................................. $587 100% $483 100% ==== === ==== ===
Total revenues increased $104 million or 22% from the prior year principally reflecting increases in interest income, fees and other income and factoring commissions. Asset based finance experienced a $54 million increase in interest income consistent with an increase in lending assets of over $1.1 billion from June 30, 1996. International asset based finance total revenues increased $34 million from the prior year primarily as the result of the consolidation of Factofrance. Corporate finance interest income decreased by $28 million from the first six months of 1996 principally due to lower levels of lending assets and investments. Real estate finance fees and other income increased by $30 million from June 30, 1996 primarily due to the gain on securitization recognized in the second quarter of 1997 and fees on participations which grew by $5 million in the first six months of 1997. 12 PORTFOLIO QUALITY The Company's ongoing portfolio continued to demonstrate strong credit performance in the second quarter. In addition, the Company continues to resolve and reduce its exposure to pre-1990 accounts.
June 30, December 31, -------- ------------ 1997 1996 -------- ------------ (dollars in millions) Lending Assets and Investments: Receivables..................................................................... $10,109 $8,529 Repossessed assets.............................................................. 31 14 ------- ------ Total lending assets......................................................... 10,140 8,543 Equity and real estate investments.............................................. 421 419 Debt securities................................................................. 253 251 Operating leases................................................................ 207 135 Investments in international joint ventures..................................... 193 272 ------- ------ Total investments............................................................ 1,074 1,077 ------- ------ Total lending assets and investments......................................... $11,214 $9,620 ======= ====== Nonearning Assets: Impaired receivables............................................................ $ 259 $ 264 Repossessed assets.............................................................. 31 14 ------- ------ Total nonearning assets...................................................... $ 290 $ 278 ======= ====== Ratio of nonearning impaired receivables to receivables......................... 2.6% 3.1% ======= ====== Ratio of total nonearning assets to total lending assets........................ 2.9% 3.3% ======= ====== Allowances for Losses: Allowance for losses of receivables............................................. $ 250 $ 225 ======= ====== Ratio of allowance for losses of receivables to: Receivables.................................................................. 2.5% 2.6% ======= ====== Nonearning impaired receivables.............................................. 97% 85% ======= ====== Delinquencies: Earning loans delinquent 60 days or more........................................ $ 178 $ 143 ======= ====== Ratio of earning loans delinquent 60 days or more to receivables................ 1.8% 1.7% ======= ====== For The Six Months Ended June 30, -------------- 1997 1996 ---- ---- Net writedowns of lending assets: (dollars in millions) Net writedowns on receivables................................................... $ 49 $ 46 Net writedowns on repossessed assets............................................ - 3 ------- ------ Total net writedowns....................................................... $ 49 $ 49 ======= ====== Ratio of net writedowns to average lending assets (annualized)............. 1.1% 1.2% ======= ====== Net writedowns on post-1990 lending assets...................................... $ 21 $ 13 ======= ====== Ratio of post-1990 net writedowns to average total lending assets (annualized).. 0.5% 0.3% ======= ======
13 Nonearning assets decreased to 2.9% of total lending assets at June 30, 1997. The majority of nonearning assets continue to be comprised of pre-1990 corporate finance and real estate accounts, which constitute 57% of total nonearning assets at June 30, 1997. Net writedowns decreased to 1.1% of average lending assets for the six months ended June 30, 1997 as compared to 1.2% for the same period in the prior year. Gross writedowns declined to $59 million from $75 million while recoveries were $10 million as compared to $26 million in the first six months of 1997 and 1996, respectively. The post-1990 portfolio continued to demonstrate excellent credit quality requiring only $21 million of net writedowns or 50 basis points of lending assets during the first six months. Net writedowns totaling $13 million or 30 basis points of lending assets were taken during the same period in the prior year. Loans considered troubled debt restructures were $14 million, unchanged from December 31, 1996. The Company also had $14 million of receivables at June 30, 1997 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. Pre-1990 Portfolio Profile The Company continued to reduce the pre-1990 corporate finance and real estate portfolios. The pre-1990 portfolio decreased by $189 million or 19% due to the resolution or run-off of credits during the six months ended June 30, 1997. The following table provides a breakdown of the pre-1990 portfolio.
Pre-1990 Portfolio Profile June 30, December 31, 1997 1996 ---- ---- (dollars in millions) Pre-1990 lending assets and investments........... $ 790 $ 979 ===== ===== Pre-1990 nonearning assets........................ $ 164 $ 163 ===== ===== Ratio of pre-1990 lending assets and investments to total lending assets and investments.......... 7.0% 10.2% ===== ===== For the Six Months Ended June 30, 1997 1996 ---- ---- (dollars in millions) Net writedowns on pre-1990 lending assets......... $ 28 $ 36 ===== ===== Ratio of pre-1990 net writedowns to average total lending assets (annualized)...................... 0.6% 0.9% ===== =====
On July 2, 1997, the Company received $78 million representing a full payoff on its largest pre-1990 account, further reducing the size of the pre-1990 portfolio to approximately 6% of total lending assets and investments. LIQUIDITY AND CAPITAL RESOURCES To meet its funding requirements for asset growth, debt retirement and payment of dividends the Company supplemented its cash flows from operations by issuing $674 million of senior notes and debentures, issuing $150 million in preferred stock and increasing its level of commercial paper and short-term borrowings by $289 million. In addition, the consolidation of Factofrance had the effect of increasing commercial paper and short-term borrowings by $792 million. The ratio of commercial paper and short-term borrowings to total debt was 45% at June 30, 1997 and 37% at December 31, 1996. Of this increase, 5% was due to the consolidation of Factofrance in the second quarter. Factofrance primarily uses commercial paper and short-term borrowings to fund its assets which are short-term in nature. Leverage (net of short-term investments) remained unchanged at 5.0x at June 30, 1997 and December 31, 1996, as the effect of the consolidation of Factofrance was offset by the issuance of $150 million of preferred stock. 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. 14 On April 8, 1997 the Company extended and increased its bank credit facilities from $2.3 billion to $3.0 billion. The total bank credit facility is comprised of two equal facilities, a 364-day facility expiring April 7, 1998 and a 5-year facility expiring April 8, 2002. In addition, at June 30, 1997 the Company had $375 million (U.S. dollar equivalent) in committed foreign bank credit facilities for the consolidated international subsidiaries, and $32 million available under the foreign currency revolving credit facilities. Committed bank credit and sale facilities from financial institutions represent 103% of outstanding commercial paper and short-term borrowings at June 30, 1997. In connection with the issuance of the Series B Noncumulative Perpetual Preferred Stock, the Company and The Fuji Bank, Limited, amended the termination provisions of the Keep Well Agreement so that after December 31, 2002, the agreement may only be terminated if the ratings by Moody's Investor Service, Inc. and Standard and Poor's Corporation of the Series A and Series B Preferred Stock were no lower than the ratings at the time of issuance and the Company's senior debt rating was unchanged as a result of the termination of the agreement. The agreement may in any event be terminated on December 31, 2007. In addition, the Company's Parent converted all of its Convertible Preferred Stock, Series D into an aggregate of five shares of Common Stock of the Company during the second quarter. No other shares of the Series D Convertible Preferred Stock remain outstanding. Risk Management Derivative agreements entered into during the first six months of 1997 were entirely related to accomplishing risk management objectives to reduce the Company's overall level of financial risk arising from normal business operations. During the six months ended June 30, 1997, the Company entered into agreements which consisted of interest rate swap agreements with aggregate notional amounts of approximately $1.7 billion. As of June 30, 1997, the Company held $272 million of forward currency exchange contracts which serve as hedges of translation of its investment in international subsidiaries and joint ventures or effectively hedge the translation of the related foreign currency income. Accounting Developments Effective January 1, 1997, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." Under this Statement, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This Statement provides standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The adoption of this Statement did not have a material impact on the Company's consolidated financial statements. In June, 1997, the Financial Standards Accounting Board has released Statement of Accounting Standards No. 130, "Reporting Comprehensive Income," which the Company is required to adopt no later than 1998. This Statement establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Statement of Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" was also released in June, 1997 and is required to be adopted no later than 1998. SFAS 131 requires segments to be reported based on the way management organizes segments within the Company for making operating decisions and assessing performance. The Company plans to adopt both of the above pronouncements effective January 1, 1998. 15 Part II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (3)(i)(a) Certificate of Amendment of the Restated Certificate of Incorporation of the Company dated as of May 30, 1997 and filed with the Secretary of State of the State of Delaware on June 2, 1997 (3)(i)(b) Certificate of Designation, Preferences and Rights of the Company's Fixed Rate Noncumulative Perpetual Senior Preferred Stock Series B (Liquidation Preference $100.00 per share) dated as of June 13, 1997 and filed with the Secretary of State of the State of Delaware on June 13, 1997 (10) Second Amendment to the Amended and Restated Keep Well Agreement dated as of June 17, 1997 between Fuji Bank and the Company (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 January 30, 1997, the Company filed with the U.S. Securities and Exchange Commission (the "SEC") a Current Report on Form 8-K, dated January 27, 1997, to announce the Company's earnings for the year ended December 31, 1996. On April 4, 1997, the Company filed with the SEC a Current Report on Form 8-K, dated April 3, 1997, to announce the acquisition by Heller International of Compagnie de Suez' 48.8% share in Factofrance. On April 24, 1997, the Company filed with the SEC a Current Report on Form 8-K, dated April 22, 1997, to announce the Company's earnings for the quarter ended March 31, 1997. On July 28, 1997, the Company filed with the SEC a Current Report on Form 8-K, dated July 24, 1997 to announce the Company's earnings for the quarter ended June 30, 1997. 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: Lauralee E. Martin ------------------------------------------- Lauralee E. Martin Executive Vice President and Chief Financial Officer By: Lawrence G. Hund ------------------------------------------- Lawrence G. Hund Senior Vice President, Controller and Chief Accounting Officer Date: July 31, 1997 17 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 Six Months Ended June 30, 1997 ------------- Net income before income taxes and minority interest in income of Heller International Group, Inc.............. $132 Add-Fixed charges Interest and debt expense.............................. 247 One-third of rentals................................... 4 ----- Total fixed charges............................... 251 ----- Net income, as adjusted.................................. $383 ----- Ratio of earnings to fixed charges....................... 1.53x ===== Preferred stock dividends on a pre-tax basis............. 8 Total combined fixed charges and preferred stock dividends.................................. $259 ----- Ratio of earnings to combined fixed charges and preferred stock dividends.............................. 1.48x =====
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. 18 EX-3.(I).(A) 2 CERTIFICATE OF AMENDMENT EXHIBIT (3)(i)(a) STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 09:00 AM 06/02/1997 971180038 - 0092127 CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF HELLER FINANCIAL, INC. (a Delaware corporation) HELLER FINANCIAL, INC., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), does hereby certify that the amendments to the Corporation's Restated Certificate of Incorporation set forth in the following resolutions was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware: RESOLVED, that Section 2 of Clause (b) of Article FOURTH of the Restated Certificate of Incorporation of the Corporation under the heading "NW Preferred Stock, Class B" be deleted in its entirety and that there be inserted in its place the following new Section 2: "2. Dividends. The holders of shares of the NW Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors, dividends in cash in an amount determined at a rate equal to one percent per annum above the rate of interest at which deposits in United States dollars are offered by the principal office of The Fuji Bank, Limited in London, England, to prime banks in the London interbank market for a period equal to three months (or, in the case of the initial issuance of a series of NW Preferred Stock, for a period equal to the period commencing on the date of issuance of such series and ending on the date of the calendar quarter during which such issuance occurred), which dividend amount shall be established on the second business day preceding the first day of each calendar quarter (or in the case of the initial issuance of a series of NW Preferred Stock, on the second business day preceding the date of issuance of such series), payable quarterly on March 31, June 30, September 30, and December 31 in each year, commencing on the first such date following the initial issuance of any series of NW Preferred Stock (each of such quarterly periods (or, in the case of the initial issuance of a series of NW Preferred Stock, such shorter period) ending on the last day of such months, being hereinafter called a `dividend period'). The rights of holders of the NW Preferred Stock shall be noncumulative. Accordingly, if the Board of Directors fails to declare a dividend on the NW Preferred Stock payable on a dividend payment date, then holders of NW Preferred Stock will have no right to receive a dividend in respect of the dividend period ending on such dividend payment date, and the Company will have no obligation to pay dividends accrued for such period, whether or not dividends on the NW Preferred Stock are declared payable on any future dividend payment date. The amount of dividends payable for any period shorter than a full quarterly dividend period will be calculated on the basis of a 360-day year consisting of twelve 30-day months. All dividends declared upon the shares of the NW Preferred Stock and any other preferred stock ranking on a parity as to dividends with the NW Preferred Stock shall be declared pro rata, so that the amounts of dividends declared per share on the NW Preferred Stock and such other preferred stock shall in all cases bear to each other the same rate that Accrued Dividends per share on the shares of the NW Preferred Stock and such other preferred stock bear to each other. No full dividends shall be declared or paid or set apart for payment of the preferred stock of any series ranking, as to dividends, on a parity with or junior to the NW Preferred Stock for any period unless dividends have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for such payment on the NW Preferred Stock for the then-current dividend period (without accumulation of accrued and unpaid dividends for prior dividend periods unless previously declared). When dividends are not paid in full, as aforesaid, upon the shares of NW Preferred Stock and any other preferred stock ranking on a parity as to dividends with the NW Preferred Stock, all dividends declared upon shares of NW Preferred Stock and any other class of series of preferred stock ranking on a parity as to dividends with the NW Preferred Stock shall be declared pro rata so that the amount of dividends declared per share on the NW Preferred Stock and such other preferred stock shall in all cases bear to each other the same ratio that dividends per share on the shares of NW Preferred Stock for the then-current dividend period (without accumulation of accrued and unpaid dividends for prior dividend periods unless previously declared) and such other preferred stock bear to each other. Holders of shares of NW Preferred Stock shall not be entitled to any dividend, whether payable in cash, property or stock, in excess of full dividends for the then-current dividend period (without accumulation of accrued and unpaid dividends for prior dividend periods unless previously declared), as herein provided, on the NW Preferred Stock. Holders of shares of the NW Preferred Stock shall not be entitled to any dividends, whether payable in case, property or stock, and no dividends shall be paid on any shares of NW Preferred Stock during the existence of a default in the payment of principal of or interest on any outstanding indebtedness of the Company for money borrowed." RESOLVED, that Definition B of Section 6 of Article FOURTH of the Restated Certificate of Incorporation of the Corporation under the heading "NW Preferred Stock, Class B" be deleted in its entirety and that there be inserted in its place the following new Definition B: "B. The term 'Accrued Dividends' shall mean the aggregate amount of dividends that have been declared but have not been paid in respect of shares of the NW Preferred Stock." RESOLVED, that Definition C of Section 6 of Article FOURTH of the Restated Certificate of Incorporation of the Corporation ('Date of Accrual') under the heading "NW Preferred Stock, Class B" be deleted in its entirety and that there be inserted in its place "C. Intentionally Omitted." RESOLVED, that Definition D of Section 6 of Article FOURTH of the Restated Certificate of Incorporation of the Corporation ('Full Cumulative Dividends') under the heading "NW Preferred Stock, Class B" be deleted in its entirety and that there be inserted in its place "D. Intentionally Omitted." RESOLVED, that all of the provisions set forth in Clause (b) of Article FOURTH of the Restated Certificate of Incorporation of the Corporation under and including the heading "Cumulative Convertible Preferred Stock, Series D" be deleted in their entirety. IN WITNESS WHEREOF, Heller Financial, Inc. has caused this Certificate to be signed and attested by its duly authorized officers this 30th day of May, 1997. HELLER FINANCIAL, INC. By: /s/ Richard J. Almeida --------------------------- Its: Chairman --------------------------- Richard J. Almeida ATTEST: /s/ Mark J. Ohringer - -------------------------- Assistant Secretary Mark J. Ohringer Seal EX-3.(I).(B) 3 CERTIFICATE OF DESIGNATION EXHIBIT (3)(i)(b) STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 09:00 AM 06/13/1997 971195976 - 0092127 CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF FIXED RATE NONCUMULATIVE PERPETUAL SENIOR PREFERRED STOCK, SERIES B (Liquidation Preference $100.00 Per Share) --------------------------------- Pursuant to Section 151 of the General Corporation Law of the State of Delaware --------------------------------- The undersigned DOES HEREBY CERTIFY that the following resolutions were duly adopted by the Board of Directors (the "Board of Directors" or "Board") of Heller Financial, Inc., a Delaware corporation (the "Corporation"), on May 22, 1997 in accordance with the provisions of Section 151 of the Delaware General Corporation Law: RESOLVED, that pursuant to authority conferred upon the Board of Directors by the provisions of the Restated Certificate of Incorporation and the By-laws of the Corporation, the Board of Directors hereby creates one series of the Senior Preferred Stock, $.01 par value per share, of the Corporation ("Senior Preferred Stock") and fixes the designation and voting powers of the shares of such series as follows: 1. Designation. The designation of the series of Senior Preferred Stock created by these resolutions shall be Fixed Rate Noncumulative Perpetual Senior Preferred Stock, Series B ("Series B Senior Preferred Stock"). The number of authorized shares constituting the Series B Senior Preferred Stock is 1,500,000. The shares of the Series B Senior Preferred Stock shall have a stated value of $100.00 per share. 2. Voting Rights. The Series B Senior Preferred Stock shall not have any voting powers, either general or special, except as required by applicable law and as stated herein. (a) Unless the vote or consent of the holders of a greater number of shares shall then be required by law, the consent of the holders of at least 66 2/3% of all of the shares of Series B Senior Preferred Stock at the time outstanding, given in person or by proxy, either in writing or by a vote at a meeting called for the purpose at which the holders of shares of Series B Senior Preferred Stock shall vote together as a separate class, shall be necessary for authorizing, effecting or validating the amendment, alteration or repeal of any of the provisions of the Restated Certificate of Incorporation of the Corporation (the "Restated Certificate"), of this Certificate of Designation, Preferences and Rights or of any other certificate amendatory of or supplemental to the Restated Certificate (including any certificate of designation, preferences and rights or any similar document relating to any series of Senior Preferred Stock or any series of the Preferred Stock, no par value per share, of the Corporation ("Junior Preferred Stock")) or of the By- laws of the Corporation which would adversely affect the preferences, rights, powers or privileges of the Series B Senior Preferred Stock; (b) Unless the vote or consent of the holders of a greater number of shares shall then be required by law, the consent of the holders of at least 66 2/3% of all of the Series B Senior Preferred Stock and all other series of Senior Preferred Stock for which dividends are noncumulative ("Noncumulative Senior Preferred Stock") ranking on a parity with shares of the Series B Senior Preferred Stock, either as to dividends or upon liquidation, at the time outstanding, given in person or by proxy, either in writing or by a vote at a meeting called for the purpose at which the holders of shares of the Series B Senior Preferred Stock and such other series of Noncumulative Senior Preferred Stock shall vote together as a single class without regard to series, shall be necessary for authorizing, effecting, increasing or validating the creation, authorization or issue of any shares of any class of stock of the Corporation ranking prior to the shares of the Series B Senior Preferred Stock as to dividends or upon liquidation, or the reclassification of any authorized stock of the Corporation into any such prior shares, or the creation, authorization or issue of any obligation or security convertible into or evidencing the right to purchase any such prior shares. (c) If, at the time of any annual meeting of stockholders for the election of directors of the Corporation, a default in preference dividends on the Series B Senior Preferred Stock or any other class or series of Noncumulative Senior Preferred Stock ranking on a parity with the Series B Senior Preferred Stock, either as to dividends or upon liquidation, and upon which like voting rights have been conferred and are exercisable (excluding any other class or series of Series B Senior Preferred Stock expressly entitled to elect additional directors to the Board by a vote separate and distinct from the vote provided for in this paragraph (c), "Voting Noncumulative Senior Preferred Stock") shall exist, the number of directors constituting the Board shall be increased by two (without duplication of any increase made pursuant to the terms of any other class or series of Voting Noncumulative Senior Preferred Stock), and the holders of the Series B Senior Preferred Stock and the Voting Noncumulative Senior Preferred Stock shall have the right at such meeting, voting together as a single class without regard to class or series (to the exclusion of the holders of Common Stock, Junior Preferred Stock and of any series of Senior Preferred Stock which is not Voting Noncumulative Senior Preferred Stock), to elect two directors of the Corporation to fill such newly created directorships. Each director elected by the holders of shares of Series B Senior Preferred Stock and any class or series of Voting Noncumulative Preferred Stock in an election provided for by this Section 2(c) (herein called a "Preferred Director") shall continue to serve as such director until the next annual meeting of stockholders for the election of directors of the Corporation and until his successor is elected and qualified, notwithstanding that prior to the end of such term a default in preference dividends shall cease to exist. Any Preferred Director may be removed by, and shall not be removed except by, the vote of the holders of record of the outstanding shares of Series B Senior Preferred Stock and Voting Noncumulative Senior Preferred Stock entitled to have originally -2- voted for such director's election, voting together as a single class without regard to class or series, at a meeting of the Corporation's stockholders, or of the holders of shares of Series B Senior Preferred Stock and Voting Noncumulative Senior Preferred Stock, called for that purpose. So long as a default in any preference dividends on the Series B Senior Preferred Stock or any class or series of Voting Noncumulative Senior Preferred Stock shall exist, (A) any vacancy in the office of a Preferred Director may be filled (expect as provided in the following clause (B)) by an instrument in writing signed by the remaining Preferred Director and filed with the Corporation and (B) in the case of the removal of any Preferred Director, the vacancy may be filled by the vote of the holders of the outstanding shares of Series B Senior Preferred Stock and Voting Noncumulative Senior Preferred Stock entitled to have originally voted for the removed director's election, voting together as a single class without regard to class or series; at the same meeting at which such removal shall be voted. Each director appointed as aforesaid shall be deemed for all purposes hereto to be a Preferred Director. Whenever the term of office of the Preferred Directors shall end and a default in preference dividends shall no longer exist, the number of directors constituting the Board shall be reduced by two. For purposes hereof, a "default in preference dividends" on the Series B Series Preferred Stock or any class or series of Voting Noncumulative Senior Preferred Stock shall be deemed to have occurred whenever dividends upon the Series B Senior Preferred Stock or such class or series of Voting Noncumulative Senior Preferred Stock have not been paid or declared and set aside for payment for the equivalent of six full quarterly dividends or more (whether or not consecutive), and, having so occurred, such default shall be deemed to exist thereafter until, but only until, all dividends on the Series B Senior Preferred Stock or such other class or series of Voting Noncumulative Senior Preferred Stock have been paid or declared and set apart for payment regularly for at least one year (i.e., four consecutive full quarterly dividend periods). FURTHER RESOLVED, that the 1,500,000 shares of Series B Senior Preferred Stock authorized for issuance pursuant to the resolutions of this Board of Directors all constitute Senior Preferred Stock within the 20,000,000 shares originally authorized pursuant to the resolutions of this Board of Directors. FURTHER RESOLVED, that the Board of Directors hereby delegates to the Special Financing Committee of the Board of Directors the authority of the Board of Directors (i) to fix any of the preferences or rights of the Series B Senior Preferred Stock relating to dividends, redemption, dissolution or any distribution of assets of the Corporation, and (ii) to file with the Secretary of State of the State of Delaware a certificate setting forth the voting powers, designations, preferences and relative, participating, optional or other rights of the Series B Senior Preferred Stock or the qualifications, limitations or restrictions thereof. The undersigned DOES HEREBY FURTHER CERTIFY that the following resolutions were duly adopted by the Special Financing Committee of the Board of Directors pursuant to the authorization conferred upon the Special Financing Committee as set forth above, pursuant -3- to a Unanimous Written Consent dated May 22, 1997 adopted in accordance with the provisions of Section 151 of the Delaware General Corporation Law: RESOLVED, that pursuant to the authority conferred upon the Special Financing Committee of the Board of Directors of the Corporation by resolutions adopted by the Board of Directors on May 22, 1997, this Special Financing Committee hereby fixes the preferences and rights of the Series B Senior Preferred Stock relating to dividends, redemption, dissolution and distribution of the assets of the Corporation as follows: 3. Preferences. The Series B Senior Preferred Stock will be fixed rate noncumulative perpetual (i.e., will be redeemable, if at all, solely at the option of the Corporation) Senior Preferred Stock and will rank senior to the Junior Preferred Stock as to payments of dividends and upon liquidation. 4. Dividends. (a) The holders of shares of the Series B Senior Preferred Stock shall be entitled to receive cash dividends thereon at a rate per annum to be determined by either of Lauralee E. Martin, Chief Financial Officer of the Corporation, or Anthony O'B. Beirne, Treasurer of the Corporation, but not in any event to exceed the rate that is equivalent to 50 basis points over the rate at the time of determination on United States Treasury Bonds with a 30 year maturity, such rate per annum to be computed on the basis of the stated value thereof of $100.00 per share, and no more, payable (if declared) quarterly out of the funds of the Corporation legally available for the payment of dividends. Such dividends shall be payable, when, as and if declared by the Board or a duly authorized committee thereof, on February 15, May 15, August 15 and November 15 of each year (each a "Dividend Payment Date"), commencing August 15, 1997. Each such dividend shall be paid to the holders of record of shares of Series B Senior Preferred Stock as they appear on the stock register of the Corporation on the close of business on such record date, which shall be not less than five nor more than 50 days (whether or not business days) preceding the Dividend Payment Date, as shall be fixed by the Board or a duly authorized committee thereof. The rights of holders of the Series B Senior Preferred Stock shall be noncumulative. Accordingly, if the Board fails to declare a dividend on the Series B Senior Preferred Stock payable on a Dividend Payment Date, then holders of Series B Senior Preferred Stock will have no right to receive a dividend in respect of the dividend period ending on such Dividend Payment Date, and the Corporation will have no obligation to pay dividends accrued for such period, whether or not dividends on the Series B Senior Preferred Stock are declared payable on any future Dividend Payment Date. The amount of dividends payable for any period shorter than a full quarterly dividend period will be calculated on the basis of a 360-day year consisting of twelve 30-day months. (b) If one or more amendments to the Internal Revenue Code of 1986, as amended (the "Code"), are enacted that reduce the percentage of the dividends received deduction (currently 70%) as specified in Section 243(a)(1) of the Code or any successor provision (the "Dividends Received Percentage"), the amount of each dividend payable (if -4- declared) per share of the Series B Senior Preferred Stock for dividend payments made on or after the date of enactment of such change shall be increased by multiplying the amount of the dividend payable determined as described above (before adjustment) by a factor, which shall be the number determined in accordance with the following formula (the "DRD Formula") and rounding the result to the nearest cent (with one-half cent rounded up): 1 - [.35 (1 - .70)] ------------------- 1 - [.35 (1 - DRP)] For purposes of the DRD Formula, "DRP" means the Dividends Received Percentage applicable to the dividend in question; provided, however, that if the Dividends Received Percentage applicable to the dividend in question is less than 50%, then the DRP will equal 0.50. No amendment to the Code, other than a change in the percentage of the dividends received deduction set forth in Section 243(a)(1) of the Code or any successor provision, will give rise to an adjustment. Notwithstanding the foregoing provisions, in the event that, with respect to any such amendment, the Corporation shall receive either (i) an unqualified opinion of independent recognized tax counsel based upon the legislation amending or establishing the DRP or upon a published pronouncement of the Internal Revenue Service (the "IRS") addressing such legislation or (ii) a private letter ruling or similar form of assurance from the IRS, in either case to the effect that such an amendment would not apply to dividends payable on shares of Series B Senior Preferred Stock, then any such amendment shall not result in the adjustment provided for pursuant to the DRD Formula. The Corporation's calculation of the dividends payable, as so adjusted and as certified accurate as to calculation and reasonable as to method by the independent certified public accountants then regularly engaged by the Corporation, shall be final and not subject to review. If any amendment to the Code which reduces the Dividends Received Percentage is enacted after a dividend payable on a Dividend Payment Date has been declared but before such dividend has been paid, the amount of dividends payable on such Dividend Payment Date will not be increased; but instead, an amount, equal to the excess, if any, of (x) the product of the dividends paid by the Corporation on such Dividend Payment Date and the DRD Formula (where the DRP used in the DRD Formula would be equal to the greater of the reduced Dividends Received Percentage and 0.50) over (y) the dividends paid by the Corporation on such Dividend Payment Date, will be payable (if declared) on the next succeeding Dividend Payment Date to holders of Series B Senior Preferred Stock on the record date applicable to such succeeding Dividend Payment Date, in addition to any other amounts payable on such Dividend Payment Date. In addition, if an amendment to the Code is enacted that reduces the Dividends Received Percentage and such reduction retroactively applies to a Dividend Payment Date as to which the Corporation previously paid dividends on shares of Series B Senior Preferred Stock (each an "Affected Dividend Payment Date"), the Corporation will pay (if declared) additional dividends (the "Retroactive Dividends") on the next succeeding Dividend Payment Date (or if such amendment is enacted after the dividend payable on such Dividend Payment Date has been -5- declared, on the second succeeding Dividend Payment Date following the date of enactment), to holders of Series B Senior Preferred Stock on the record date applicable to such succeeding Dividend Payment Date, in an amount equal to the excess, if any, of (x) the product of the dividends paid by the Corporation on each Affected Dividend Payment Date and the DRD Formula (where the DRP used in the DRD Formula would be equal to the greater of the reduced Dividends Received Percentage and 0.50, applied to each Affected Dividend Payment Date) over (y) the dividends paid by the Corporation on each Affected Dividend Payment Date. Retroactive Dividends will not be paid in respect of the enactment of any amendment to the Code if such amendment would not result in an adjustment due to the Corporation having received either an opinion of counsel or tax ruling referred to in the third preceding paragraph. The Corporation will only make one payment of Retroactive Dividends. In the event that the amount of dividends payable per share of Series B Senior Preferred Stock shall be adjusted pursuant to the DRD Formula and/or Retroactive Dividends are to be paid, the Corporation will cause notice of each such adjustment and, if applicable any Retroactive Dividends, to be sent to each holder of record of the shares of Series B Senior Preferred Stock at such holder's address as the same appears on the stock register of the Corporation. (c) If (i) any of the Registration Statements (as defined below) required by the Registration Rights Agreement, by and among the Corporation and Lehman Brothers Inc., Chase Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Registration Rights Agreement"), has not been filed with the Securities and Exchange Commission (the "Commission") on or prior to the date specified for such filing in the Registration Rights Agreement, (ii) any of the Registration Statements has not been declared effective by the Commission on or prior to the date specified for such effectiveness in the Registration Rights Agreement (the "Effectiveness Target Date"), (iii) the Exchange Offer (as defined below) has not been Consummated (as defined below) within 30 business days after the Effectiveness Target Date with respect to the Exchange Offer Registration Statement (as defined below) or (iv) if applicable, the Shelf Registration Statement (as defined below) has been filed and declared effective and shall at any time prior to the second anniversary (or such shorter period as may hereafter be provided in Rule 144(k) under the Securities Act of 1933, as amended (the "Securities Act"), or similar successor rule) of the initial issuance of the Series B Senior Preferred Stock (other than after such time as all shares of Series B Senior Preferred Stock have been disposed of thereunder or otherwise cease to be registrable securities within the meaning of the Registration Rights Agreement) cease to be effective, or fail to be usable for its intended purpose without being succeeded within two business days by a post-effective amendment to such Registration Statement that cures such failure and that is itself immediately declared effective (each such event referred to in clauses (i) through (iv), a "Registration Default"), then as liquidated damages to each holder of the Series B Senior Preferred Stock, additional dividends (the "Additional Dividends") shall become payable (if declared) by the Corporation on the Series B Senior Preferred Stock at a rate of 0.25% per annum, computed on the basis of the stated value thereof of $100.00 per share; provided, however, that the Additional Dividends rate on the -6- Series B Senior Preferred Stock may not exceed, in the aggregate, 0.25% per annum, computed on the basis of the stated value thereof of $100.00 per share; and provided further that following the cure of all Registration Defaults or upon the expiration of two years (or such shorter period as may hereafter be provided in Rule 144(k) under the Securities Act, or similar successor rule) commencing on the date of the initial issuance of the Series B Senior Preferred Stock, Additional Dividends on the Series B Senior Preferred Stock shall cease to accrue. Any Additional Dividends payable as described above will be payable (if declared) in cash on February 15, May 15, August 15 and November 15 of each year, together with the dividends otherwise payable in respect of the Series B Senior Preferred Stock. For purposes of this Section 4(c), the following terms have the following meanings: "Consummated," with respect to the Exchange Offer, means (i) the filing and effectiveness under the Securities Act of the Exchange Offer Registration Statement relating to the Exchange Preferred Stock to be issued in the Exchange Offer, (ii) the maintenance of such Exchange Offer Registration Statement continuously effective and the keeping of the Exchange Offer open for a period not less than the minimum period required pursuant to the Registration Rights Agreement, and (iii) the delivery by the Corporation of the same number of shares of Exchange Preferred Stock as the number of shares of Series B Senior Preferred Stock that were tendered by holders thereof pursuant to the Exchange Offer. "Exchange Offer" means the registration by the Corporation under the Securities Act of the Exchange Preferred Stock pursuant to a Registration Statement pursuant to which the Corporation offers the holders of all outstanding shares of Series B Senior Preferred Stock the opportunity to exchange all such outstanding shares of Series B Senior Preferred Stock held by such holders for an aggregate number of shares of Exchange Preferred Stock equal to the aggregate number of shares of Series B Senior Preferred Stock tendered in such exchange offer by such holders. "Exchange Offer Registration Statement" means the Registration Statement relating to the Exchange Offer. "Exchange Preferred Stock" means the series of the Corporation's fixed rate noncumulative perpetual Senior Preferred Stock to be issued in the Exchange Offer that has terms identical in all material respects to the Series B Senior Preferred Stock except that (i) the Exchange Preferred Stock shall have been registered pursuant to an effective registration statement under the Securities Act and the certificates therefor shall contain no restrictive legends thereon and (ii) the certificate of designation, preferences and rights governing such Exchange -7- Preferred Stock shall not contain the provisions with respect to Additional Dividends contained in this Section 4(c). "Registration Statement" means any registration statement of the Corporation relating to (i) an offering of Exchange Preferred Stock pursuant to an Exchange Offer or (ii) the registration for resale of shares of Series B Senior Preferred Stock, which is filed pursuant to the provisions of the Registration Rights Agreement. "Shelf Registration Statement" means a Registration Statement, which may be an amendment to the Exchange Offer Registration Statement, filed by the Corporation with the Commission for an offering to be made on a continuous basis pursuant to Rule 415 under the Securities Act and providing for resales of shares of Series B Senior Preferred Stock, as may be required under the Registration Rights Agreement. (d) So long as any shares of Series B Senior Preferred Shares are outstanding, no dividend (other than a dividend in Common Stock, Junior Preferred Stock or any other stock ranking junior to the Series B Senior Preferred Stock as to dividends and upon liquidation and other than as provided in subsection (d) of this Section 4) shall be declared or paid or set aside for payment, nor shall any other distribution be declared or made upon the Common Stock, Junior Preferred Stock or any other stock ranking junior to or on a parity with the Series B Senior Preferred Stock as to dividends or upon liquidation, nor shall any Common Stock, Junior Preferred Stock or other stock of the Corporation ranking junior to or on a parity with the Series B Senior Preferred Stock as to dividends or upon liquidation be redeemed, purchased or otherwise acquired for any consideration (nor shall any funds be paid to, or made available for, a sinking fund for the redemption of any shares of any such stock) by the Corporation (except by conversion into or exchange for stock of the Corporation ranking junior to the Series B Senior Preferred Stock as to dividends and upon liquidation) unless, in each case, the full dividends on all outstanding shares of the Series B Senior Preferred Stock shall have been, or contemporaneously are, paid, or declared and a sum sufficient for the payment thereof has been or is set apart for such payment, for the then-current dividend period (without accumulation of accrued and unpaid dividends for prior dividend periods unless previously declared). (e) When dividends are not paid or declared and set aside for payment in full, as aforesaid, upon the shares of Series B Senior Preferred Stock and any other Senior Preferred Stock ranking on a parity as to dividends with the Series B Senior Preferred Stock, all dividends declared upon shares of Series B Senior Preferred Stock and any other class or series of Senior Preferred Stock ranking on a parity as to dividends with the Series B Senior Preferred Stock shall be declared pro rata so that the amount of dividends declared per share on the Series B Senior Preferred Stock and such other Senior Preferred Stock shall in all cases bear to each other the same ratio that dividends per share on the shares of Series B Senior Preferred Stock for the then-current dividend period (without accumulation of accrued and unpaid dividends for prior dividend periods unless previously declared) and such other Senior Preferred Stock bear to each -8- other. Holders of shares of Series B Senior Preferred Stock shall not be entitled to any dividend, whether payable in cash, property or stock, in excess of full dividends for the then-current dividend period (without accumulation of accrued and unpaid dividends for prior dividend periods unless previously declared), as herein provided, on the Series B Senior Preferred Stock. 5. Redemption. (a) The shares of Series B Senior Preferred Stock shall not be redeemable prior to August 15, 2007. On and after August 15, 2007, the Corporation, at its option, may redeem shares of the Series B Senior Preferred Stock, in whole or in part, at any time or from time to time, at a redemption price of $100.00 per share, plus accrued and unpaid dividends thereon (whether or not earned or declared) for the then-current dividend period (without accumulation of accrued and unpaid dividends for prior dividend periods unless previously declared), including any dividends payable due to changes in the Dividends Received Percentage, Retroactive Dividends and Additional Dividends to the date fixed for redemption. In the event that fewer than all the outstanding shares of Series B Senior Preferred Stock are to be redeemed pursuant to this Section 5(a), the number of shares to be redeemed shall be determined by the Board and the shares to be redeemed shall be determined by lot or pro rata as may be determined by the Board or by any other method as may be determined by the Board in its sole discretion to be equitable. (b) Notwithstanding the foregoing, if dividends for the then-current dividend period to the redemption date (without accumulation of accrued and unpaid dividends for prior dividend periods unless previously declared) have not been declared and paid or set apart for payment on all outstanding shares of Series B Senior Preferred Stock, no shares of Series B Senior Preferred Stock shall be redeemed unless all outstanding shares of Series B Senior Preferred Stock are simultaneously redeemed, and the Corporation shall not purchase or otherwise acquire any shares of Series B Senior Preferred Stock; provided, however, that the foregoing shall not prevent the purchase or acquisition of shares of Series B Senior Preferred Stock pursuant to a tender or exchange offer made on the same terms to all holders of Series B Senior Preferred Stock and mailed to the holders of record of the Preferred Stock at such holders' addresses as the same appear on the stock register of the Corporation; provided, further, that if some, but less than all, of the shares of the Series B Senior Preferred Stock are to be purchased or otherwise acquired pursuant to such tender or exchange offer and the number of shares so tendered exceeds the number of shares so to be purchased or otherwise acquired by the Corporation, the shares of the Series B Senior Preferred Stock tendered will be purchased or otherwise acquired by the Corporation on a pro rata basis (with adjustments to eliminate fractions) according to the number of such shares tendered by each holder tendering shares of Series B Senior Preferred Stock. (c) In the event the Corporation shall redeem shares of Series B Senior Preferred Stock pursuant to subsection (a) of this Section 5, notice of such redemption shall be -9- given by first class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the redemption date, to each holder of record of the shares to be redeemed, at such holder's address as the same appears on the stock register of the Corporation. Each such notice shall state: (i) the redemption date; (ii) the number of shares of Series B Senior Preferred Stock to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (iii) the redemption price; (iv) the place or places where certificates for such shares are to be surrendered for payment of the redemption price; and (v) that dividends on the shares to be redeemed will cease to accrue on such redemption date. (d) Notice having been mailed as aforesaid, from and after the redemption date (unless default shall be made by the Corporation in providing funds for the payment of the redemption price) dividends on the shares of Series B Senior Preferred Stock so called for redemption under subsection (a) of this Section 5 shall cease to accrue, and said shares shall no longer be deemed to be outstanding, and all rights of the holders thereof as stockholders of the Corporation (except the right to receive from the Corporation the redemption price against delivery of such shares) shall cease. Upon surrender in accordance with said notice of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Board shall so require and the notice shall so state), such shares shall be redeemed by the Corporation at the applicable redemption price. In case fewer than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares without cost to the holder thereof. (e) If the Corporation gives notice of redemption, then, by 12:00 Noon, Chicago time, on the redemption date, the Corporation shall irrevocably deposit with a paying agent (which may be an affiliate of the Corporation) (the "Paying Agent"), which shall be a bank or trust company organized and in good standing under the laws of the United States, the State of Illinois or the State of New York and having capital, surplus and undivided profits aggregating at least $10,000,000, funds sufficient to pay the applicable redemption price, including any accrued and unpaid dividends to the redemption date, and shall give the Paying Agent irrevocable instructions and authority to pay the redemption price to the holder or holders of record of the shares of Series B Senior Preferred Stock upon surrender of certificates for such shares (previously endorsed or assigned for transfer). If notice of redemption shall have been given, then upon the date of such deposit, all rights of holders of the shares so called for redemption shall cease, except the right of the holders of such shares to receive the redemption price against delivery of such shares, but without interest, and such shares shall cease to be outstanding. The Corporation shall be entitled to receive, from time to time, from the Paying Agent, the interest, if any, earned on such funds deposited with the Paying Agent, and the holders of any shares to be redeemed with such funds shall have no claim to any such interest. Any funds so deposited which are unclaimed at the end of two years from such redemption date shall upon demand be repaid to the Corporation, after which the holders of the shares of Series B Senior Preferred Stock so called for redemption shall be entitled to look only to the Corporation for payment thereof. -10- 6. Liquidation Preference. (a) Upon the dissolution, liquidation or winding up of the Corporation, voluntary or involuntary, the holders of the shares of Series B Senior Preferred Stock shall be entitled to receive and be paid out of the assets of the Corporation available for distribution to its stockholders, before any payment or distribution shall be made on the Common Stock, the Junior Preferred Stock or any other class of stock ranking junior to the Series B Senior Preferred Stock upon liquidation, the amount of $100.00 per share, plus an amount equal to the sum of all accrued and unpaid dividends (whether or not earned or declared) on such shares for the then-current dividend period (without accumulation of accrued and unpaid dividends for prior dividend periods unless previously declared) to the date of final distribution. (b) Neither the sale of all or substantially all the property or business of the Corporation nor the merger or consolidation of the Corporation into or with any other corporation or the merger or consolidation of any other corporation into or with the Corporation, shall be deemed to be a dissolution, liquidation or winding up, voluntary or involuntary, for the purposes of this Section 6. (c) After the payment to the holders of the shares of Series B Senior Preferred Stock of the full preferential amounts provided for in this Section 6, the holders of the shares of Series B Senior Preferred Stock, as such, shall have no right or claim to any of the remaining assets of the Corporation. (d) In the event the assets of the Corporation available for distribution to the holders of the shares of Series B Senior Preferred Stock upon any dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, shall be insufficient to pay in full all amounts to which such holders are entitled pursuant to subsection (a) of this Section 6, no such distribution shall be made on account of any shares of any other class or series of Senior Preferred Stock ranking on a parity with the shares of Series B Senior Preferred Stock upon such dissolution, liquidation or winding up, unless proportionate distributive amounts shall be paid on account of the shares of Series B Senior Preferred Stock ratably, in proportion to the full distributable amounts for which holders of all such parity shares are respectively entitled upon such dissolution, liquidation or winding up. 7. Conversion and Exchange. The holders of shares of the Series B Senior Preferred Stock shall not have any rights to convert such shares into, or to exchange such shares for, shares of Common Stock, any other class or classes of capital stock (or any other security) or any other series of any class or classes of capital stock (or any other security) of the Corporation. 8. Priority as to Certain Distributions. As a series of Senior Preferred Stock, the shares of the Series B Senior Preferred Stock shall be entitled to such rights and priorities, and subject to such limitations, as to dividends as are set forth in these resolutions and in the Restated Certificate of Incorporation of the Corporation. -11- 9. Sinking Fund. No sinking fund shall be provided for the purchase or redemption of shares of the Series B Senior Preferred Stock. 10. Ranking. Without limitation to any provision set forth in these resolutions or in the Restated Certificate of Incorporation, it is hereby confirmed and expressly declared that the Series B Senior Preferred Stock constitutes a series of Senior Preferred Stock and, accordingly, ranks senior to all shares of Junior Preferred Stock as to dividends and distributions of assets upon liquidation, dissolution or winding up. For purposes hereof, any class or series or stock of the Corporation shall be deemed to rank: (a) prior to the Series B Senior Preferred Stock as to dividends or distribution of assets upon liquidation, dissolution or winding up, if the holders of such class or series shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of Series B Senior Preferred Stock; (b) on a parity with the Series B Senior Preferred Stock as to dividends or distribution of assets upon liquidation, dissolution or winding up, whether or not the dividend rates, dividend payment dates, redemption prices or liquidation preferences per share thereof are different from those of the Series B Senior Preferred Stock, if the holders of such class or series of stock and of the Series B Senior Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend amounts or liquidation preferences, without preference or priority to the holders of Series B Senior Preferred Stock; and (c) junior to the Series B Senior Preferred Stock as to dividends or distribution of assets upon liquidation, dissolution or winding up, if such stock shall be Common Stock or Junior Preferred Stock or if the holders of the Series B Senior Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of shares of such class or series. 11. Exclusion of Other Rights. Unless otherwise required by law, shares of the Series B Senior Preferred Stock shall not have any rights, including preemptive rights, or preferences other than those specifically set forth herein or as provided by applicable law. 12. Miscellaneous. The Board of Directors may interpret the provisions hereof to resolve any inconsistency or ambiguity which may arise or be revealed and if such inconsistency or ambiguity reflects an inaccurate provision hereof, the Board of Directors may, in appropriate circumstances, authorize the filing of a certificate of correction pursuant to Delaware law. 13. Change in Number of Shares. As provided in the Restated Certificate of Incorporation of the Corporation, but subject to applicable law, the Board of Directors may -12- increase or decrease the number of shares of this series of Senior Preferred Stock subsequent to the issue of shares of this series, but not below the number of shares of Series B Senior Preferred Stock then outstanding. The undersigned DOES HEREBY FURTHER CERTIFY that the following resolution was duly adopted on June 11, 1997 by Lauralee E. Martin, Chief Financial Officer of the Corporation, pursuant to the authorization conferred upon her by the Special Financing Committee as set forth above: RESOLVED, that pursuant to the authority conferred upon Lauralee E. Martin, Chief Financial Officer of the Corporation, by resolutions adopted by the Special Financing Committee of the Board of Directors by Unanimous Written Consent dated May 22, 1997, Lauralee E. Martin hereby fixes the dividend rate on the Series B Senior Preferred Stock at 6.687% per annum, which rate does not exceed the rate that is equivalent to 50 basis points over the rate at the time of determination on United States Treasury Bonds with a 30 year maturity and which rate is subject to adjustment as provided in Section 4 hereof. IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be hereunto affixed and this Certificate to be signed by Lauralee E. Martin, its Executive Vice President and Chief Financial Officer, and attested to by Mark J. Ohringer, its Assistant Secretary, this 13th day of June, 1997. By: /s/ Lauralee E. Martin ---------------------- Lauralee E. Martin Executive Vice President and Chief Financial Officer [SEAL] ATTEST By: /s/ Mark J. Ohringer -------------------- Mark J. Ohringer Assistant Secretary -13- EX-10 4 2ND AMENDMENT TO THE AMD'D AND RESTATED KEEP WELL EXHIBIT 10 SECOND AMENDMENT TO AMENDED AND RESTATED KEEP WELL AGREEMENT This Second Amendment to the Amended and Restated Keep Well Agreement (this "Amendment") is dated as of June 17, 1997 and is made by and between The Fuji Bank, Limited, a Japanese banking corporation ("Fuji"), acting by and through its New York Branch, and Heller Financial, Inc., a Delaware corporation ("Finance"). RECITALS A. Fuji and Finance are parties to that certain Amended and Restated Keep Well Agreement dated as of August 28, 1992, as amended by that certain First Amendment to Amended and Restated Keep Well Agreement dated as of May 3, 1995 (as so amended, the "Keep Well Agreement"). Capitalized terms used but not otherwise defined herein shall have the respective meanings given to them in the Keep Well Agreement. B. By this Amendment, Fuji and Finance desire to amend the Keep Well Agreement as more specifically set forth hereinafter. NOW, THEREFORE, in consideration of the foregoing, and other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Amendment to the Keep Well Agreement. The Keep Well Agreement is hereby amended as follows: (a) The following new definitions are added to Section 1 of the Keep Well Agreement in the appropriate alphabetical order: "'Series A Preferred Stock' shall mean the 'Cumulative Perpetual Senior Preferred Stock, Series A' issued by Finance." "'Series B Preferred Stock' shall mean the 'Fixed Rate Noncumulative Perpetual Senior Preferred Stock, Series B' issued by Finance and any preferred stock issued by Finance in exchange therefor." "'Series A Minimum Rating' shall mean with respect to: a) Moody's, a rating of 'a3' and, with respect to Moody's successor rating agency, if any, the comparable rating of such successor, all as determined in accordance with the definition of Moody's below; and b) S&P, a rating of 'A-' and, with respect to S&P's successor rating agency, if any, the comparable rating of such successor, all as determined in accordance with the definition of S&P below." "'Series B Minimum Rating' shall mean with respect to: a) Moody's, a rating of 'baa1' and, with respect to Moody's successor rating agency, if any, the comparable rating of such successor, all as determined in accordance with the definition of Moody's below; and b) S&P, a rating of 'BBB' and, with respect to S&P's successor rating agency, if any, the comparable rating of such successor, all as determined in accordance with the definition of S&P below." "'Termination Date' shall mean the earlier of (a) December 31, 2007 and (b) the Unsupported Rating Date, but in no event earlier than December 31, 2002." "'Unsupported Rating Date' shall mean such date on which Finance shall have first obtained from each of the Rating Agencies a written certification that upon termination of this Agreement the ratings on the senior unsecured indebtedness of Finance without the support provided by this Agreement shall be no lower than the ratings of Finance with the support provided by this Agreement." (b) The definition of "Minimum Rating" is deleted from Section 1 of the Keep Well Agreement. (c) The definition of "Moody's" in Section 1 of the Keep Well Agreement is deleted in its entirety and there is inserted in its place the following new definition: "'Moody's' shall mean Moody's Investors Service, Inc. Any reference in this Agreement to any specific rating by Moody's is a reference to such rating as currently defined by Moody's and shall be deemed to refer to the equivalent rating if such rating system changes. If Moody's shall at any time discontinue rating either the Series A Preferred Stock or the Series B Preferred Stock and S&P is not then rating such Preferred Stock, then Goldman, Sachs & Co. for as long as the Series A Preferred Stock shall remain outstanding and thereafter Lehman Brothers Inc., or its applicable successor, shall, within 30 days, select a nationally recognized substitute rating agency and identify the comparable ratings from such agency. During such 30 day period, Moody's rating shall be considered to be the last rating Moody's provided before it discontinued rating the applicable Preferred Stock." (d) Clause (a) within the definition of "NW Preferred Stock" in Section 1 of the Keep Well Agreement is deleted in its entirety and there is inserted in its place the following new clause (a): (a) Dividends. Dividends as to any series of NW Preferred Stock shall be payable (if declared) quarterly commencing on the last day of the calendar 2 quarter during which such series is issued, and on the last day of each calendar quarter thereafter (each such last day of a calendar quarter being a "Dividend Date") for so long as that series is outstanding (the dividend during the first such quarter to be prorated); dividends on each series of NW Preferred Stock shall accrue and be payable at a rate per annum equal at all times during a calendar quarter ending on a Dividend Date to 1% per annum above the rate of interest at which deposits in United States Dollars are offered by the principal office of Fuji in London, England on the second Business Day (it being agreed that for this purpose only, the definition of "Business Day" shall not include reference to Chicago) preceding the first day of such calendar quarter (or, in the case of the first dividend period, preceding the date of issuance of such series) to prime banks in the London interbank market for a period equal to three months (or, in the case of such first dividend period, equal to such shorter period commencing on the date of issuance of such series and ending on the last day of the calendar quarter during which such issuance occurred); provided, however that the dividends on each series of NW Preferred Stock shall be noncumulative such that if the Board of Directors of Finance fails to declare a dividend on the NW Preferred Stock payable on a dividend payment date, then holders of NW Preferred Stock will have no right to receive a dividend in respect of the dividend period ending on such dividend payment date, and Finance will have no obligation to pay dividends accrued for such period, whether or not dividends on the NW Preferred Stock are declared payable on any future dividend payment date; and provided further, however, that no dividend shall be paid on any series of NW Preferred Stock during the existence of a default in the payment of principal of or interest on any outstanding indebtedness for money borrowed of Finance;" (e) The definition of "Preferred Stock" in Section 1 of the Keep Well Agreement is deleted in its entirety and there is inserted in the appropriate alphabetical order within Section 1 the following new definition: "'Preferred Stock' shall mean either the Series A Preferred Stock or the Series B Preferred Stock, or both, as the context shall require." (f) The definition of "Rating Agencies" in Section 1 of the Keep Well Agreement is deleted in its entirety and there is inserted in its place the following new definition: "'Rating Agencies' shall mean Moody's and S&P and their respective successors, if any, selected in accordance with the definitions of Moody's and S&P, respectively. In the event either Moody's or S&P shall discontinue rating either the Series A Preferred Stock or the Series B Preferred Stock or both while the other is continuing to provide such ratings, 'Rating Agencies' shall thereafter mean the Rating Agency which is continuing to provide such ratings." 3 (g) The definition of "S&P" in Section 1 of the Keep Well Agreement is deleted in its entirety and there is inserted in its place the following new definition: "'S&P' shall mean Standard & Poor's Corporation. Any reference in this Agreement to any specific rating by S&P is a reference to such rating as currently defined by S&P and shall be deemed to refer to the equivalent rating if such rating system changes. If S&P shall at any time discontinue rating either the Series A Preferred Stock or the Series B Preferred Stock and Moody's is not then rating such Preferred Stock, then Goldman, Sachs & Co. for as long as the Series A Preferred Stock shall remain outstanding and thereafter Lehman Brothers Inc., or its applicable successor, shall, within 30 days, select a nationally recognized substitute rating agency and identify the comparable ratings from such agency. During such 30 day period, S&P's rating shall be considered to be the last rating S&P provided before it discontinued rating the applicable Preferred Stock." (h) Section 6(e) of the Keep Well Agreement is deleted in its entirety and there is inserted in its place the following new Section 6(e): "(e) Finance will maintain (and Fuji hereby undertakes to assure that Finance will maintain) in full force and effect and available to it unused short-term lines of credit, asset sales facilities and committed credit facilities in its favor in an amount at all times approximately equal to 75% of the amount of its commercial paper (including Commercial Paper) from time to time outstanding; and" (i) Section 8 of the Keep Well Agreement is amended by deleting each reference therein to "December 31, 2002" and inserting in each such place the phrase "the Termination Date." (j) Section 8(e) of the Keep Well Agreement is deleted in its entirety and there is inserted in its place the following new Section 8(e): "(e)(1) Anything contained elsewhere herein to the contrary notwithstanding, it is expressly understood and agreed that this Agreement may not be terminated for any reason by either party hereto, and shall continue in full force and effect, at any time while all or any portion of the Series A Preferred Stock is outstanding and held by third parties other than Fuji (or any direct or indirect wholly-owned subsidiary of Fuji) unless Finance shall have first obtained from each of the Rating Agencies a written certification that upon termination of this Agreement the Series A Preferred Stock will be rated no lower than the Series A Minimum Rating. 4 (2) Anything contained elsewhere herein to the contrary notwithstanding, it is expressly understood and agreed that this Agreement may not be terminated for any reason by either party hereto, and shall continue in full force and effect, at any time while all or any portion of the Series B Preferred Stock is outstanding and held by third parties other than Fuji (or any direct or indirect wholly-owned subsidiary of Fuji) unless Finance shall have first obtained from each of the Rating Agencies a written certification that upon termination of this Agreement the Series B Preferred Stock will be rated no lower than the Series B Minimum Rating. (3) For purposes of the each of the foregoing clauses (1) and (2), the Series A Preferred Stock or the Series B Preferred Stock shall cease to be considered outstanding at such time as an effective notice of redemption of all of such Preferred Stock shall have been given by Finance and funds sufficient to effectuate such redemption shall have been deposited with the party designated for such purpose in the notice." 2. Consent by Fuji to Changes to NW Preferred Stock. Fuji hereby consents to all of the changes to the terms of the NW Preferred Stock contemplated by this Amendment and to any corresponding changes required to be made to the certificate of incorporation of Finance or otherwise. 3. Miscellaneous. (a) Governing Law. This Amendment shall be governed by, and construed in accordance with, the laws of the State of New York. (b) Binding Effect; Successors. This Amendment shall be binding upon, and inure to the benefit of, Fuji and Finance and their respective successors and assigns. (c) Continued Effectiveness. Except as expressly amended hereby, the terms and conditions of the Keep Well Agreement remain in full force and effect. (d) Counterparts. This Amendment may be executed in counterparts, each of which shall be deemed to be an original, but all of such counterparts shall together constitute but one and the same Amendment. [signature pages follow] 5 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered by their respective officers thereunto duly authorized as of the date first above written. THE FUJI BANK, LIMITED By: /s/ Atsushi Takano ------------------------- Name: Atsushi Takano ----------------------- Its: Managing Director ------------------------ THE FUJI BANK, LIMITED, NEW YORK BRANCH, as Obligor under Section 3 of the Amended and Restated Keep Well Agreement By: /s/ Tsutomu Hayano ------------------------- Name: Tsutomu Hayano ----------------------- Its: General Manager ------------------------ HELLER FINANCIAL, INC. By: /s/ Richard J. Almeida ------------------------- Name: Richard J. Almeida ----------------------- Its: Chairman ------------------------ 6 EX-27 5 FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from the Heller Financial, Inc. Quarterly Report Form 10Q for the period ending June 30, 1997 pursuant to Section 13 or 15(d) of the Securities Act of 1934 and is qualified in its entirety by reference to such financial statements. 1,000,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 0 268 0 29 237 0 0 10,109 (250) 11,608 0 3,826 1,481 4,600 685 0 275 683 11,608 446 0 0 446 0 247 199 56 0 152 132 132 0 0 83 0 0 4.50 259 115 14 0 225 59 10 250 0 0 250 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 $45 million income tax provision and $4 million of minority interest in international income.
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