-----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, JMkG6nEPN55EIZ5b1gO7cO9fie7U11ecVoMOE5eLPgzAHLSDqurjTiXzN/YCx6Qu 3vFaeCBJFKTQ8QoB4DanwA== 0000950131-98-002809.txt : 19980430 0000950131-98-002809.hdr.sgml : 19980430 ACCESSION NUMBER: 0000950131-98-002809 CONFORMED SUBMISSION TYPE: S-2/A PUBLIC DOCUMENT COUNT: 18 FILED AS OF DATE: 19980428 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: S-2/A SEC ACT: SEC FILE NUMBER: 333-46915 FILM NUMBER: 98602720 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 S-2/A 1 AMENDMENT NUMBER 3 TO FORM S-2 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 1998 REGISTRATION NO. 333-46915 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- PRE-EFFECTIVE AMENDMENT NO. 3 TO FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- HELLER FINANCIAL, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) --------------- DELAWARE 36-1208070 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 500 WEST MONROE STREET, CHICAGO, ILLINOIS 60661, (312) 441-7000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) --------------- DEBRA H. SNIDER, ESQ. EXECUTIVE VICE PRESIDENT, CHIEF ADMINISTRATIVE OFFICER, GENERAL COUNSEL AND SECRETARY HELLER FINANCIAL, INC. 500 WEST MONROE STREET, CHICAGO, ILLINOIS 60661, (312) 441-7000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: LAWRENCE D. LEVIN, ESQ. ANDREW D. SOUSSLOFF, ESQ. MARK D. WOOD, ESQ. SULLIVAN & CROMWELL KATTEN MUCHIN & ZAVIS 125 BROAD STREET 525 WEST MONROE STREET, SUITE 1600 NEW YORK, NEW YORK 10004 CHICAGO, ILLINOIS 60661 (212) 558-4000 (312) 902-5200 --------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [_] If the Registrant elects to deliver its latest annual report to security holders or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this Form, check the following box: [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [_] If delivery of this prospectus is expected to be made pursuant to Rule 434, check the following box: [_] CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PROPOSED MAXIMUM TITLE OF SHARES AGGREGATE OFFERING AMOUNT OF TO BE REGISTERED PRICE(1) REGISTRATION FEE(2) - -------------------------------------------------------------------------------- Class A Common Stock, $0.25 par value.... $963,125,000 $284,122 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
(1) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(o) of Regulation C under the Securities Act of 1933, as amended. (2) Previously paid. --------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- EXPLANATORY NOTE This Registration Statement contains two forms of prospectuses: one to be used in connection with an offering of the Class A Common Stock in the United States (the "U.S. Prospectus") and one to be used in connection with a concurrent international offering of the Class A Common Stock outside the United States (the "International Prospectus"). The forms are identical except for certain differing pages for the International Prospectus which are included herein following the form of U.S. Prospectus. Each differing page for the International Prospectus is labeled "Alternate Page for International Prospectus". ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED APRIL 28, 1998 33,500,000 SHARES LOGO CLASS A COMMON STOCK (PAR VALUE $0.25 PER SHARE) ---------- Of the 33,500,000 shares of Class A Common Stock offered, 30,150,000 shares are being offered hereby in the United States and 3,350,000 shares are being offered in a concurrent international offering outside the United States. The initial public offering price and the aggregate underwriting discount per share will be identical for both Offerings. See "Underwriting". All of the shares of Class A Common Stock offered hereby are being sold by the Company. The Company is currently an indirect, wholly-owned subsidiary of The Fuji Bank, Limited. Upon completion of the Offerings, Fuji Bank will beneficially own, indirectly, 100% of the outstanding shares of Class B Common Stock of the Company. The Class B Common Stock, which has three votes per share (except that the outstanding shares of Class B Common Stock, while held by Fuji Bank, may never represent more than 79% of the combined voting power of all outstanding shares of the Company's voting stock), is a class of common stock separate from the Class A Common Stock, which has one vote per share. Immediately following the Offerings, the 33,500,000 shares of Class A Common Stock offered in the Offerings will represent 39.6% of the economic interest (or rights of holders of common equity to participate in distributions in respect of the common equity) in the Company (43.0% if the Underwriters' over- allotment options are exercised in full) and, due to the limitation on the voting power of the Class B Common Stock while held by Fuji Bank, 21.0% of the combined voting power of all classes of voting stock of the Company (regardless of whether the Underwriters' over-allotment options are exercised). The remainder of the voting power and economic interest in the Company will be beneficially held by Fuji Bank, which will therefore continue to be able to exercise a controlling influence over the business and affairs of the Company upon consummation of the Offerings. See "Risk Factors--Control by and Relationship with Fuji Bank", "Certain Relationships and Related Transactions-- Relationship with Fuji Bank" and "Description of Capital Stock". Prior to this offering, there has been no public market for the Class A Common Stock. It is currently estimated that the initial public offering price per share will be between $23.00 and $25.00. For factors to be considered in determining the initial public offering price, see "Underwriting". Shares of Class A Common Stock are being reserved for sale to certain directors, officers, employees and benefit plans of the Company and certain other designated individuals at the initial public offering price. See "Underwriting". Such employees and directors will be entitled to purchase, in the aggregate, less than 5% of the Class A Common Stock offered in the Offerings. SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR CERTAIN CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE CLASS A COMMON STOCK. The Class A Common Stock has been approved for listing on the New York Stock Exchange, upon notice of issuance, under the symbol "HF". ---------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ----------
INITIAL PUBLIC UNDERWRITING PROCEEDS TO OFFERING PRICE DISCOUNT(1) COMPANY(2) -------------- ------------ ------------ Per Share............................. $ $ $ Total (3)............................. $ $ $
- ----- (1) The Company and Fuji Bank have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. (2) Before deducting estimated expenses of $2,200,000 payable by the Company. (3) The Company has granted the U.S. Underwriters an option for 30 days to purchase up to an additional 4,522,500 shares at the initial public offering price per share, less the underwriting discount, solely to cover over-allotments. Additionally, the Company has granted the International Underwriters a similar option with respect to an additional 502,500 shares as part of the concurrent international offering. If such options are exercised in full, the total initial public offering price, underwriting discount and proceeds to Company will be $ , $ and $ , respectively. See "Underwriting". ---------- The shares offered hereby are offered severally by the U.S. Underwriters, as specified herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that the shares will be ready for delivery in New York, New York, on or about , 1998, against payment therefor in immediately available funds. GOLDMAN, SACHS & CO. J.P. MORGAN & CO. Joint Lead Managers BT ALEX. BROWN LEHMAN BROTHERS MERRILL LYNCH & CO. ---------- The date of this Prospectus is , 1998. [INSIDE FRONT COVER GATEFOLD-LEFT] On the left side of the page is the following text: Heller Financial, Inc. has a 79 year history of consistently serving the needs of mid-sized and small businesses both in the United States and around the world. The Company's mission is to provide high quality financial services and capital that help mid-sized and small enterprises succeed, and to do so by building strong positions in the markets it serves, and strong relationships with the clients it serves. Heller has a variety of commercial finance capabilities including: . Asset based financing . Sales and vendor financing . Corporate financing . Small business financing . Real estate financing . International financing . Equipment financing and leasing . Factoring and working capital loans On the right side of the page are bar graphs presenting the following financial data of the Company for the years 1993-1997: NET INCOME APPLICABLE TO COMMON STOCK Year (in millions) ---- ------------- 1993 $107 1994 108 1995 115 1996 123 1997 144 TOTAL ASSETS Year (in millions) ---- ------------- 1993 $ 7,913 1994 8,476 1995 9,638 1996 9,926 1997 12,861 NEW BUSINESS VOLUME Year (in millions) ---- ------------- 1993 $ 2,084 1994 2,917 1995 3,854 1996 4,052 1997 5,970 COMMON STOCKHOLDERS' EQUITY Year (in millions) ---- ------------- 1993 $ 1,128 1994 1,205 1995 1,259 1996 1,342 1997 1,403 [INSIDE FRONT COVER GATEFOLD--RIGHT] The following text is at the top of the page Heller Financial has a strong presence in over 40 offices throughout the United States... [This text is followed by a map of United States indicating office locations by city] In the middle of the page is the following text: ...and in 19 countries around the world. This text is followed by a map of South America, Europe, Asia and Australia indicating office locations by country [LOGO] Straight talk. Smart deals. AVAILABLE INFORMATION Heller Financial, Inc. (the "Company") is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports and other information with the Securities and Exchange Commission (the "Commission"). Reports and other information filed by the Company may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's Regional Offices located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such materials may also be obtained from the web site the Commission maintains at http://www.sec.gov. In addition, such materials may be inspected and copied at the offices of the New York Stock Exchange (the "NYSE"), 20 Broad Street, New York, New York 10005. The Company has filed with the Commission a registration statement on Form S-2 (herein, together with all amendments and exhibits, the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"). This Prospectus does not contain all the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information, reference is hereby made to the Registration Statement. ---------------- INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed with the Commission (File No. 1-6157) pursuant to the Exchange Act are incorporated herein by reference: (1) The Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997; and (2) The Company's Current Reports on Form 8-K filed with the Commission on January 29, 1998, January 30, 1998, February 20, 1998, February 27, 1998 and April 21, 1998. The Company will provide without charge to each person, including any beneficial owner, to whom a copy of this Prospectus is delivered, on the written or oral request of any such person, a copy of any or all of the documents incorporated herein by reference, other than exhibits to such information (unless such exhibits are specifically incorporated by reference into such documents). Requests should be directed to Heller Financial, Inc., 500 West Monroe Street, Chicago, Illinois 60661, Attention: Treasurer, telephone (312) 441-7000. ---------------- Any statement contained in a document all or a portion of which is incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is, or is deemed to be, incorporated by reference herein modifies or supersedes such statement. Any statement so modified shall not be deemed to constitute a part of this Prospectus except as so modified, and any statement so superseded shall not be deemed to constitute a part of this Prospectus. ---------------- CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE OFFERINGS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING". 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and consolidated financial statements, including the notes thereto, appearing elsewhere in this Prospectus or incorporated by reference herein. Unless the context indicates otherwise, (i) references to the "Company" in this Prospectus are to Heller Financial, Inc. together with its consolidated subsidiaries, (ii) references to "Fuji Bank" in this Prospectus are to The Fuji Bank, Limited together with its consolidated subsidiaries, (iii) references to "FAHI" in this Prospectus are to Fuji America Holdings, Inc., a wholly-owned subsidiary of Fuji Bank and the immediate parent of the Company and (iv) information contained in this Prospectus assumes that the Class A Common Stock will be sold in the Offerings at a price of $24.00 per share (the midpoint of the range set forth on the cover page of this Prospectus) and that the Underwriters' over-allotment options will not be exercised. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH HEREIN UNDER THE HEADING "RISK FACTORS". THE COMPANY The Company is a leading diversified commercial financial services company which provides a broad array of financial products and services to mid-sized and small businesses in the United States and selected international markets. The Company provides its products and services principally in five business categories: (i) asset based finance ("Asset Based Finance"), which provides secured loans and factoring through five business groups, (ii) Heller Real Estate Financial Services ("Real Estate Finance"), which provides secured real estate financing, (iii) Heller International Group, Inc. ("International Group"), which provides international asset based financing and factoring, (iv) Heller Corporate Finance ("Corporate Finance"), which provides collateralized cash flow lending, and (v) Heller Project Finance ("Project Finance"), which provides structured financing for domestic energy-related projects. The Company's primary clients and customers are entities in the manufacturing and service sectors having annual sales generally in the range of $5 million to $250 million and in the real estate sector having property values generally in the range of $1 million to $40 million. The Company concentrates primarily on senior secured lending, with 89% of lending assets and investments at December 31, 1997 being made on such basis. Also, to a more limited extent, the Company makes subordinated loans and invests in select debt and equity instruments. The Company believes that, as of December 31, 1997, it was the fourth largest factoring operation in the United States in terms of factoring volume (and the largest factoring operation worldwide), the third largest originator of U.S. Small Business Administration ("SBA") 7(a) guaranteed small business loans (including leadership positions in California and Texas) and among the largest lenders to private equity-sponsored companies in the U.S. middle market. Additionally, the Company is a recognized leader in real estate finance, vacation ownership lending and middle-market equipment finance and leasing in the United States. The Company has built its portfolio through effective asset origination capabilities, disciplined underwriting and credit approval processes and effective portfolio management. Most of the Company's business groups have also developed the ability to manage asset, client and industry concentrations and enhance profitability by distributing assets through securitizations, syndications and/or loan sales. The Company's total lending assets and investments were $11.9 billion and common stockholders' equity was $1.4 billion at December 31, 1997. For the year ended December 31, 1997, the Company's net income increased 19% to $158 million, from $133 million for the prior year, while new business volume increased 47% over the prior year, from $4.1 billion to $6.0 billion. Net income applicable to common stock was $144 million for the year ended December 31, 1997, which represented an increase of 17% from $123 million for the prior year. The credit quality of the Company's portfolio is reflected in nonearning assets of $155 million, or 1.4% of total lending assets, at December 31, 1997. 3 The Company was incorporated in 1919 under the laws of the State of Delaware. As of March 31, 1998, the Company employed 2,362 people worldwide. Its executive offices are located at 500 West Monroe Street, Chicago, Illinois 60661 (telephone: (312) 441-7000). The Company's web site address is http://www.hellerfin.com. STRATEGY The Company is dedicated to delivering consistent growth in earnings and assets, while maintaining the credit quality of its asset portfolio. Over the past five years, the Company has achieved growth in earnings and assets through its strong client orientation, productive origination network, disciplined adherence to prudent credit principles and its long-standing leadership positions in many of its target markets. Management believes that the following operating principles have been key to the Company's success and will continue to guide its business strategy in the future: . Maintain "superior client focus" in targeted mid-sized and small business markets throughout all economic cycles . Build and maintain a strong financial profile through a sound capital structure, a diversified and high-quality asset portfolio and conservative reserve levels . Adhere to prudent credit standards and actively manage the Company's portfolio . Enhance productivity by leveraging existing operating platforms, selectively investing in technology and people and practicing disciplined expense management . Develop, attract and retain experienced professionals by maintaining a vibrant culture that promotes delegation, accountability, creativity and teamwork Adhering to these operating principles, the Company intends to continue its earnings and asset growth by employing the following strategies: MAINTAIN AND BUILD LEADERSHIP POSITIONS IN SELECTED MID-SIZED AND SMALL BUSINESS MARKETS. The Company's proven ability to develop client relationships and originate transactions with mid-sized and small businesses throughout economic cycles has resulted in leadership positions in several of its businesses. In addition, since 1992, the Company has entered several markets in which the Company believes it has developed an effective infrastructure to enable it to establish leadership positions. This strategy has resulted in compound annual growth in new business volume of 25% over the past five years. The Company seeks further growth by (i) continuing to develop the well- established market positions of its domestic and international factoring, Corporate Finance and Heller Small Business Lending ("Small Business Lending") businesses, by offering a broad array of innovative financing products and services, (ii) continuing to expand the capabilities of Real Estate Finance, including origination of fixed rate commercial mortgages held for ultimate securitization ("CMBS"), and (iii) further developing the market positions of certain other asset based lending businesses, such as Heller Equipment Finance and Leasing ("Equipment Finance and Leasing"), Heller Business Credit ("Business Credit") and Heller Sales Finance ("Sales Finance"), by building upon its proven competencies and technical expertise. The Company believes that the businesses which comprise its Asset Based Finance portfolio represent an attractive combination of growth potential, earnings consistency and credit quality. CONTINUE TO GROW THE COMPANY'S INTERNATIONAL BUSINESSES. The Company has a significant international presence in factoring and asset based financing, and has had subsidiaries and joint ventures in many international markets for more than 25 years. These enterprises provide a solid base for consistent growth in international earnings and also provide the Company with the opportunity to meet the international financing needs of its domestic client base. 4 MAINTAIN PRUDENT CREDIT STANDARDS AND ACTIVE PORTFOLIO MANAGEMENT. The Company has built a disciplined "credit culture" supported by portfolio and risk management processes. The Company establishes clearly defined credit strategies for each of its businesses, permitting them to make quick credit decisions under disciplined guidelines. Additionally, the Company believes that it has developed an expertise in structuring sophisticated transactions that enables it to accommodate unique client needs without compromising credit quality. The Company has centralized the administration of credit policy and portfolio management to ensure consistency in credit strategy, efficiency in credit analysis and processing and the ability to monitor credit quality and portfolio composition closely. The Company believes that its risk management systems, portfolio management and servicing capabilities, and client-oriented structuring capabilities will continue to support long-term profitability. ENHANCE CAPITAL MARKETS AND DISTRIBUTION EXPERTISE. As a complement to their strong origination capabilities, most of the Company's business groups have developed competencies in the syndication and/or securitization of lending assets, and the Company plans to prudently expand these capabilities. The Company believes that these skills will be increasingly important to the Company's ability to (i) maximize its origination strength by providing broader market access to higher quality credits, (ii) manage customer and asset concentrations, (iii) generate income growth in competitive markets through syndication fees and securitization gains and (iv) meet a broader array of the financial needs of its current clients. INCREASE OPERATING EFFICIENCIES WITHIN THE COMPANY. The Company has established a framework for its business categories that it believes can support the profitable addition of a significant level of assets. The Company believes it is recognizing significant economies of scale in certain of its established businesses (domestic and international factoring and Corporate Finance), and expects to improve economies of scale in its other businesses as they grow and achieve critical mass. The Company believes that its recent and ongoing investments in building its Asset Based Finance businesses and its Real Estate Finance CMBS capability provide effective operating platforms for these businesses, and that continued strong growth in new business using these existing platforms will generate productivity improvements in the future. The Company has also invested in technology and support systems, significantly upgrading its technology infrastructure in 1997 to streamline the management of portfolio accounts, increase its efficiency in processing high transaction volumes and enable Intranet and Internet communications and commerce. In addition, the Company will selectively pursue strategic acquisition opportunities of businesses and portfolios of assets that it believes will generate additional economies of scale and productivity improvements. RELATIONSHIP WITH FUJI BANK Presently, all of the outstanding common stock of the Company is indirectly owned by Fuji Bank, headquartered in Tokyo, Japan, through the Company's immediate parent, FAHI. Fuji Bank also directly owns 21% of the outstanding shares of International Group, a consolidated subsidiary of the Company engaged in international factoring and asset based financing activities. Fuji Bank will sell its interest in International Group to the Company upon consummation of the Offerings. Fuji Bank is one of the largest banks in the world, with total deposits of $301 billion at September 30, 1997. See "Risk Factors--Control by and Relationship with Fuji Bank", "Management's Discussion and Analysis of Financial Condition and Results of Operations--General" and "Certain Relationships and Related Transactions". Upon consummation of the Offerings, Fuji Bank will beneficially own all 51,050,000 of the outstanding shares of the Company's Class B Common Stock, $0.25 par value per share (the "Class 5 B Common Stock"), which has three votes per share (except that the outstanding shares of Class B Common Stock, while held by Fuji Bank, may never represent more than 79% of the combined voting power of all outstanding shares of the Company's voting stock) but is otherwise identical in all material respects to the Company's Class A Common Stock, $0.25 par value per share (the "Class A Common Stock"), which has one vote per share. Upon consummation of the Offerings, the Class B Common Stock beneficially owned by Fuji Bank will, due to the limitation on the voting power of the Class B Common Stock while held by Fuji Bank, represent, in the aggregate, 79.0% of the combined voting power of all of the outstanding shares of Class A Common Stock and Class B Common Stock (collectively, the "Common Stock") (regardless of whether the Underwriters' over-allotment options are exercised) and 60.4% of the economic interest (or rights of holders of common equity to participate in distributions in respect of the common equity) in the Company (57.0% if the Underwriters' over-allotment options are exercised in full). For as long as Fuji Bank continues to beneficially own shares of Common Stock representing more than 50% of the combined voting power of the Class A Common Stock and Class B Common Stock, Fuji Bank will be able to direct the election of all of the members of the Board of Directors of the Company (the "Board of Directors") and exercise a controlling influence over the business and affairs of the Company. Fuji Bank has advised the Company that its current intent is to continue to hold all of the Common Stock beneficially owned by it following the Offerings. Fuji Bank, FAHI and the Company have agreed not to sell or otherwise dispose of any shares of Common Stock for a period of 180 days after the date of this Prospectus, without the prior written consent of Goldman, Sachs & Co. From time to time, the Company and Fuji Bank have entered into, and can be expected to continue to enter into, agreements and business transactions, and the Company's Amended and Restated Certificate of Incorporation will include certain provisions relating to the Company's relationship with Fuji Bank. See "Risk Factors--Control by and Relationship with Fuji Bank", "Risk Factors--Shares Eligible for Future Sale; Possible Future Sales by Fuji Bank", "Certain Relationships and Related Transactions--Relationship with Fuji Bank", "Ownership of Common Stock", "Shares Available for Future Sale", "Description of Capital Stock" and "Underwriting". THE OFFERINGS The offering hereby of 30,150,000 shares of Class A Common Stock initially being offered in the United States (the "U.S. Offering") and the offering of 3,350,000 shares of Class A Common Stock initially being offered in a concurrent international offering outside of the United States (the "International Offering") are collectively referred to as the "Offerings". The closing of each Offering is conditioned upon the closing of the other Offering. CLASS A COMMON STOCK OFFERED: U.S. Offering..................... 30,150,000 shares International Offering............ 3,350,000 shares Total.......................... 33,500,000 shares COMMON STOCK OUTSTANDING AFTER THE OFFERINGS*: Class A Common Stock.............. 33,500,000 shares Class B Common Stock.............. 51,050,000 shares Total.......................... 84,550,000 shares - -------- * Excludes (i) 505,912 shares of restricted Class A Common Stock and 1,242,250 shares of Class A Common Stock issuable upon the exercise of options, which shares of restricted Class A Common Stock and options are to be granted to certain officers and employees of the Company upon consummation of the Offerings, and (ii) 4,593,088 shares of Class A Common Stock reserved for issuance with respect to awards that may be granted in the future under the Heller Financial, Inc. 1998 Stock Incentive Plan. See "Management--Executive Compensation--The 1998 Stock Incentive Plan". 6 USE OF PROCEEDS....................... The net proceeds to the Company from the Offerings are estimated to be approximately $762 million ($876 million if the Underwriters' over- allotment options are exercised in full), (i) $450 million of which will be used to repay indebtedness of the Company, consisting of a subordinated promissory note in the principal amount of $450 million issued on February 24, 1998 as a dividend to FAHI and (ii) approximately $309 million of which is expected to be paid as a cash dividend to FAHI, as the sole holder of the Class B Common Stock, following the consummation of the Offerings. See "Use of Proceeds". NYSE SYMBOL FOR CLASS A COMMON STOCK.. HF DIVIDENDS; VOTING RIGHTS; CONVERSION.. The holders of Class A Common Stock and Class B Common Stock share ratably on a per share basis in all dividends and other distributions on the Common Stock declared by the Board of Directors, except that holders of Class A Common Stock will not be entitled to receive the cash dividend which the Company expects to pay to FAHI, as the sole holder of the Class B Common Stock, with a portion of the net proceeds of the Offerings. See "Dividend Policy", "Use of Proceeds", and "Description of Capital Stock-- Common Stock--Dividends". With certain exceptions, the Class A Common Stock and Class B Common Stock vote together as a single class. However, the holders of Class A Common Stock are entitled to one vote per share and the holders of Class B Common Stock are entitled to three votes per share (except that the outstanding shares of Class B Common Stock, while held by Fuji Bank, may never represent more than 79% of the combined voting power of all outstanding shares of the Company's voting stock). See "Description of Capital Stock--Common Stock--Voting Rights". Under certain circumstances, shares of Class B Common Stock convert or are convertible into an equivalent number of shares of Class A Common Stock. See "Description of Capital Stock--Common Stock--Conversion". CONTROLLING STOCKHOLDER............... For information regarding the Company's controlling stockholder, see "Risk Factors--Control by and Relationship with Fuji Bank" and "Certain Relationships and Related Transactions--Relationship with Fuji Bank". RISK FACTORS.......................... For a discussion of certain considerations relevant to an investment in the Class A Common Stock, see "Risk Factors". 7 SUMMARY FINANCIAL DATA The results of operations and balance sheet data of the Company for each of the years in the three-year period ended December 31, 1997 and as of December 31, 1997 and 1996, respectively, were derived from the audited consolidated financial statements of the Company, including the notes thereto, appearing elsewhere in this Prospectus. The results of operations and balance sheet data for each of the years in the two-year period ended December 31, 1994 and as of December 31, 1995, 1994 and 1993, respectively, except 1994 and 1993 net income applicable to common stock and pro forma amounts for all years, were derived from audited consolidated financial statements of the Company, including the notes thereto, which are not presented herein. The data presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements, including the notes thereto, appearing elsewhere in this Prospectus.
YEAR ENDED DECEMBER 31, --------------------------------------- 1997(1) 1996 1995 1994 1993 ------- ------ ------ ------ ------ (IN MILLIONS, EXCEPT PER SHARE DATA) RESULTS OF OPERATIONS: Net interest income.................. $ 408 $ 355 $ 387 $ 366 $ 356 Operating revenues................... 754 533 620 557 517 Operating expenses................... 357 247 216 195 174 Provision for losses................. 164 103 223 188 210 Income before income taxes and minority interest................... 233 183 181 174 133 Net income........................... 158 133 125 118 117 Net income applicable to common stock............................... 144 123 115 108 107 Pro forma net income applicable to common stock per share(2)........... 1.70 DECEMBER 31, --------------------------------------- 1997(1) 1996 1995 1994 1993 ------- ------ ------ ------ ------ (IN MILLIONS, EXCEPT PER SHARE DATA) BALANCE SHEET DATA: Receivables.......................... $10,722 $8,529 $8,085 $7,616 $7,062 Allowance for losses of receivables.. (261) (225) (229) (231) (221) Total assets......................... 12,861 9,926 9,638 8,476 7,913 Commercial paper and short-term borrowings.......................... 3,432 2,745 2,223 2,451 1,981 Long-term debt....................... 6,004 4,761 5,145 3,930 3,968 Total debt.......................... 9,436 7,506 7,368 6,381 5,949 Total liabilities.................... 11,096 8,402 8,208 7,107 6,625 Preferred stock...................... 275 125 125 125 125 Common equity........................ 1,403 1,342 1,259 1,205 1,128 Total stockholders' equity.......... 1,678 1,467 1,384 1,330 1,253 Pro forma book value per common share(2)(3)......................... 16.59
- ------- (1) The financial data presented for 1997 reflect the Company's purchase (through its subsidiary, International Group) of its joint venture partner's interest in Factofrance Heller, S.A. ("Factofrance") in April 1997 for $174 million, which resulted in Factofrance being reported on a consolidated basis with the Company as of the date of acquisition. The Company financed this acquisition through the issuance of senior debt. The premium related to this purchase was allocated as follows: $78 million to goodwill and $18 million to a noncompetition agreement. The consolidation of Factofrance resulted in increases of $2.0 billion, $94 million, $59 million and 570 in total assets, operating revenues, operating expenses and number of employees, respectively, during 1997 as compared to 1996. This acquisition had a modest favorable impact on the Company's 1997 net income, as earnings from the Company's increased ownership interest in Factofrance were partially offset by costs related to the acquisition (including interest on the senior debt issued to finance the acquisition). (2) Based upon 84,550,000 shares of Common Stock to be outstanding upon consummation of the Offerings. Excludes (i) 505,912 shares of restricted Class A Common Stock and 1,242,250 shares of Class A Common Stock issuable upon the exercise of options, which shares of restricted Class A Common Stock and options are to be granted to certain officers and employees of the Company upon consummation of the Offerings, and (ii) 4,593,088 shares of Class A Common Stock reserved for issuance with respect to awards that may be granted in the future under the Heller Financial, Inc. 1998 Stock Incentive Plan. The Company will compute the cost of stock options in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). If the Company were to use Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and had the stock options been issued effective January 1, 1997, the compensation cost of these stock options would have reduced net income by $2.1 million, and pro forma net income applicable to common stock per share would have been $1.68 for 1997. The annual cost of the stock options was determined through the development of a valuation model which included assumptions of a ten-year option life, a risk-free interest rate of 5.67%, a dividend yield of 1.6%, and volatility of 19.44% based on industry peers' volatility. See "Management--Executive Compensation--The 1998 Stock Incentive Plan". (3)Book value represents total stockholders' equity, net of preferred stock. 8
YEAR ENDED DECEMBER 31, ------------------------------ 1997(1) 1996 1995 1994 1993 ------- ---- ---- ---- ---- PROFITABILITY Net interest income as a percentage of AFE(2).. 4.0% 4.1% 4.6% 4.7% 4.7% Non-interest operating revenues as a percentage of AFE(2)..................................... 3.5 2.0 2.7 2.5 2.2 Operating revenues as a percentage of AFE(2)... 7.5 6.1 7.3 7.2 6.9 Return on average common stockholders' equity(3)..................................... 10.5 9.4 9.3 9.2 10.0 Return on AFE(2)............................... 1.6 1.5 1.5 1.5 1.6 Ratio of earnings to combined fixed charges and preferred stock dividends(4).................. 1.39x 1.36x 1.34x 1.45x 1.44x Salaries and general operating expenses as a percentage of AFE(2).......................... 3.5% 2.8% 2.6% 2.5% 2.3% Ratio of operating expenses to operating revenues...................................... 47.3 46.3 34.8 35.0 33.7 Common dividend payout ratio(5)................ 47.7 47.2 47.0 20.4 1.9
AS OF, OR FOR THE YEAR ENDED, DECEMBER 31, ------------------------------------------------- 1997(1) 1996 1995 1994 1993 ---------- -------- -------- -------- -------- (IN MILLIONS, EXCEPT NUMBER OF EMPLOYEES AND OFFICE LOCATIONS) CREDIT QUALITY Ratio of earning loans delinquent 60 days or more to receivables............ 1.4% 1.7% 1.4% 1.4% 2.1% Ratio of net writedowns to average lending assets.... 1.5 1.3 2.9 2.4 2.8 Ratio of total nonearning assets to total lending assets.................... 1.4 3.3 3.6 4.0 5.9 Ratio of allowance for losses of receivables to receivables............... 2.4 2.6 2.8 3.0 3.1 Ratio of allowance for losses of receivables to net writedowns............ 1.8x 2.1x 1.0x 1.3x 1.1x Ratio of allowance for losses of receivables to nonearning impaired receivables............... 185.1% 85.2% 87.7% 81.3% 83.7% LEVERAGE Ratio of debt (net of short-term investments) to total stockholders' equity.................... 5.2x 5.0x 5.0x 4.7x 4.7x Ratio of commercial paper and short-term borrowings to total debt............. 36.4% 36.6% 30.2% 38.4% 33.3% OTHER Total lending assets and investments (6)........... $ 11,928 $ 9,620 $ 9,039 $ 8,443 $ 7,742 Funds employed(2).......... 10,673 9,030 8,542 7,991 7,309 Total managed assets(7).... 11,800 9,574 9,137 8,414 7,422 Number of employees........ 2,339 1,527 1,487 1,404 1,307 Number of office locations. 63 52 36 33 24
- ------- (1) The financial data presented for 1997 reflect the Company's purchase (through its subsidiary, International Group) of its joint venture partner's interest in Factofrance in April 1997 for $174 million, which resulted in Factofrance being reported on a consolidated basis with the Company as of the date of acquisition. The Company financed this acquisition through the issuance of senior debt. The premium related to this purchase was allocated as follows: $78 million to goodwill and $18 million to a noncompetition agreement. The consolidation of Factofrance resulted in increases of $2.0 billion, $94 million, $59 million and 570 in total assets, operating revenues, operating expenses and number of employees, respectively, during 1997 as compared to 1996. This acquisition had a modest favorable impact on the Company's 1997 net income, as earnings from the Company's increased ownership interest in Factofrance were offset by costs related to the acquisition (including interest on the senior debt issued to finance the acquisition). (2) Funds employed include lending assets and investments, less credit balances of factoring clients. The Company believes funds employed are indicative of the dollar amount which it has loaned to borrowers. Average funds employed ("AFE") reflect the average of lending assets and investments, less credit balances of factoring clients. (3) Return on average common stockholders' equity is computed as net income less preferred stock dividends paid, divided by average total stockholders' equity net of preferred stock. (4) The ratio of earnings to combined fixed charges and preferred stock dividends is calculated by dividing (i) income before income taxes, minority interest and fixed charges by (ii) fixed charges plus preferred stock dividends. (5) Common dividend payout ratio is computed as common dividends paid, divided by net income applicable to common stock. (6) Total lending assets and investments consist of receivables, repossessed assets, equity and real estate investments, operating leases, debt securities and investments in international joint ventures. (7) Total managed assets include funds employed, plus receivables previously securitized or sold and currently managed by the Company. 9 RECENT DEVELOPMENTS Set forth below is unaudited consolidated financial data and ratios of the Company for the periods indicated. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Operating results presented for the three months ended March 31, 1998 are not necessarily indicative of the operating results that may be expected for the year ended December 31, 1998.
THREE MONTHS ENDED MARCH 31, ------------------------- 1998 1997 --------- ------------ (IN MILLIONS, EXCEPT PER SHARE DATA) RESULTS OF OPERATIONS: Operating revenues............................... $ 186 $ 141 Operating expenses............................... 94 62 Provision for losses............................. 15 22 Net income....................................... 48 39 Net income applicable to common stock............ 43 36 MARCH 31, DECEMBER 31, 1998 1997 --------- ------------ BALANCE SHEET DATA: Receivables...................................... $10,676 $10,722 Allowance for losses of receivables.............. (261) (261) Preferred stock.................................. 275 275 Common equity.................................... 988(1) 1,403 THREE MONTHS ENDED MARCH 31, ------------------------- 1998 1997 --------- ------------ SELECTED DATA AND RATIOS: Operating revenues as a percentage of AFE........ 6.7% 6.4% Return on average common stockholders' equity.... 13.3 10.8 Return on AFE.................................... 1.7 1.8 Ratio of net writedowns to average lending assets.......................................... 0.6 1.0 MARCH 31, DECEMBER 31, 1998 1997 --------- ------------ Ratio of total nonearning assets to total lending assets.......................................... 1.6% 1.4% Ratio of earning loans delinquent 60 days or more to receivables.................................. 1.4 1.4 Ratio of allowance for losses of receivables to receivables..................................... 2.4 2.4 Ratio of senior debt (net of short-term investments) to total stockholders' equity...... 7.0x(1) 5.1x Ratio of commercial paper and short-term borrowings to senior debt....................... 36% 36% Total lending assets and investments............. $11,955 $11,928 Funds employed................................... 10,687 10,673
- -------- (1) Reflects a $450 million dividend paid to FAHI on February 24, 1998 in the form of a subordinated promissory note. The Company intends to use $450 million of the net proceeds from the Offerings to repay such indebtedness. See "Use of Proceeds" and "Dividend Policy". Net income for the three months ended March 31, 1998 was $48 million, a 23% increase over net income of $39 million for the same period in the previous year. Net income applicable to common stock was $43 million for the three months ended March 31, 1998, which represented an increase of 19% from $36 million for the three months ended March 31, 1997. The increase in net income was principally due to growth in operating revenues, which increased $45 million, or 32%, compared to the prior year period due to growth in both net interest income and non-interest income, including 10 increases in fees and other income and factoring commissions (including the securitization gain described below). Operating revenues as a percentage of AFE rose to 6.7% for the first quarter of 1998, compared to 6.4% for the first quarter of 1997. The consolidation of Factofrance had the effect of increasing operating revenues, operating expenses and factoring commissions by $27 million, $21 million and $14 million, respectively, and decreasing income of international joint ventures by $3 million, for the first quarter of 1998, as compared to the same period in the previous year. The Company's increased ownership of Factofrance had a modest favorable impact on net income for the three months ended March 31, 1998 as earnings were offset by costs of the acquisition. New business volume for the first quarter of 1998 totaled $1.7 billion, an 80% increase over new business volume of $951 million for the first quarter of 1997. Growth in new business volume was due to strong originations activity, primarily in Real Estate Finance and Corporate Finance. Total lending assets and investments of $12.0 billion at March 31, 1998 represented a slight increase over $11.9 billion in total lending assets and investments at December 31, 1997, as growth from new business was offset by portfolio runoff, syndications and the securitization of approximately $1.1 billion of CMBS receivables in the first quarter of 1998. The Company realized a pre-tax gain of $11 million on this securitization, which the Company anticipates may cause operating revenues and net income in the first quarter of 1998 to be higher than those in certain other quarters of 1998. The Company did not retain any residual risk in this securitization, as all of the receivable-backed securities were sold to third parties on a non-recourse basis. See "Business-- Real Estate Finance". Net writedowns totaled $15 million, or 60 basis points, during the first quarter of 1998 compared to $21 million, or 100 basis points, in the prior year period. The Company maintained a low level of nonearning assets at March 31, 1998, with nonearning assets totalling $166 million, or 1.6% of total lending assets, as compared to $155 million, or 1.4% of total lending assets, at December 31, 1997. The ratio of earning loans delinquent 60 days or more to receivables remained constant at 1.4% at March 31, 1998 as compared to December 31, 1997. Similarly, the Company's allowance for losses of receivables was 2.4% of total receivables at both March 31, 1998 and December 31, 1997. 11 RISK FACTORS Prospective investors should carefully consider, in addition to the other information contained or incorporated by reference in this Prospectus, the following factors before purchasing the Class A Common Stock offered hereby. ECONOMIC FACTORS RISK OF ECONOMIC RECESSION OR DOWNTURN The Company's business, financial condition and results of operations may be affected by various economic factors, including the level of economic activity in the markets in which the Company operates. Unfavorable economic conditions may make it more difficult for the Company to maintain both its new business origination volume and the credit quality thereof at levels previously attained. The Company's growth is dependent to a significant degree upon its ability to generate new finance receivables, and in an economic recession or other adverse economic environment, growth in finance receivables may not be attainable. Certain of the Company's business categories are subject to industry- specific economic factors. Demand for the Company's products with respect to targeted industries is affected by demand for such industries' services and products, and an economic downturn or slowdown in certain of these industries could adversely affect the demand for the Company's products. For example, the Company's U.S. factoring business, which generated 9.6% of the Company's revenues in 1997, could be adversely affected by a downturn in the textile and apparel markets, which are key markets served by such business. The textile and apparel markets contributed 20% and 65%, respectively, of the Company's U.S. factoring business revenues in 1997. Also, 17% of the Company's portfolio of lending assets and investments in 1997 consisted of commercial real estate finance assets. The Company's real estate finance activities could be adversely affected by a downturn in the commercial real estate markets, which markets have been characterized by cyclicality and may be significantly affected by certain factors, such as changes in tax regulations or interest rates. In addition, the Company realized 5.4% of its revenues in 1997 from net gains on equity investments, the continuation of which is dependent upon the performance of the equity markets, which have historically been volatile. Volatility in the capital markets could also adversely affect the timing and profitability of certain securitization transactions. Consequently, there can be no assurance that adverse economic conditions generally or in the commercial real estate markets, the capital markets or certain other markets or industries served by the Company will not have a material adverse effect on the Company's business, financial position or results of operations. In an economic recession or under other adverse economic conditions, nonearning assets and writedowns are likely to increase as debtors are more likely to be unable to meet contractual terms and their payment obligations. For example, the economic recession in the United States in the early 1990's adversely impacted the Company's pre-1990 Corporate Finance and Real Estate Finance portfolio, resulting in higher non-earning assets and writedowns. These portfolios were underwritten with significantly higher risk parameters than those parameters employed by the Company since 1990. Although the Company maintains an allowance for losses of receivables in an amount which it believes is sufficient to provide adequate protection against potential writedowns in its entire portfolio, this allowance could prove to be insufficient. Adverse economic conditions may cause declines in the Company's ability to realize the value of collateral securing certain of the Company's finance receivables or in the value of equipment subject to lease agreements. See "--Allowance for Losses of Receivables". An economic recession or downturn could contribute to a downgrading of the Company's credit ratings, which likely would increase the Company's funding costs, and could decrease its net interest income, limit its access to the capital markets or result in a decision by the lenders under the Company's existing bank credit facilities not to extend such credit facilities after their expiration. There 12 can be no assurance that a decline in economic conditions will not have a material adverse effect on the Company's business, financial position or results of operations. See "--Limitations Upon Liquidity and Capital Raising". INTEREST RATE RISK The Company's operating results and cash flow depend to a great extent upon its level of net interest income (or "spread"), which is the difference between total interest income earned on earning assets, such as loans and investments, and total interest expense paid on interest-bearing liabilities, such as borrowings. The amount of net interest income is affected by changes in the volume and mix of earning assets, the level of rates earned on those assets, the volume of interest-bearing liabilities and the level of rates paid on those interest-bearing liabilities. Although the Company has an active and comprehensive approach to managing its interest rate risk, including matching the anticipated maturities of its interest rate sensitive assets and interest rate sensitive liabilities and closely monitoring product pricing to remain responsive to changing market interest rates, significant increases in market interest rates, or (in the case of floating rate borrowers) the perception that an increase may occur, could adversely affect both the Company's ability to originate new finance receivables and its ability to grow. Conversely, a decrease in interest rates could result in an acceleration in the prepayment of owned and managed finance receivables. In addition, changes in market interest rates or in the relationships between short-term and long-term market interest rates or between different interest rate indices (i.e., basis risk) could affect the interest rates earned on interest-earning assets differently than the interest rates paid on interest-bearing liabilities, which could result in an increase in interest expense relative to interest income. An increase in market interest rates also could adversely impact the ability of the Company's floating-rate borrowers to meet their higher payment obligations, which could result in an increase in nonearning assets and writedowns. EXCHANGE RATE FLUCTUATIONS AND OTHER INTERNATIONAL FACTORS At December 31, 1997, international revenues constituted 14.7% of the Company's total revenues. Such international revenues were generated from activities of the Company's subsidiaries and international joint ventures in Europe (12.0%), Asia/Pacific (2.1%) and Latin America (0.6%). The Company expects that in future years it will continue to generate a meaningful portion of its revenues from international operations. Although, to date, foreign currency exchange rate fluctuations have not had a material adverse effect on the Company's business, financial condition or results of operations, there can be no assurance that they will not have such a material adverse effect in the future. Foreign currency exchange rate fluctuations can have a material adverse effect on the total level of international revenues generated by the Company from international asset based financing and factoring. Over time, reported results from the Company's consolidated operations and joint ventures in foreign countries may fluctuate in response to exchange rate movements in relation to the U.S. dollar. Because Western European operations and joint ventures, primarily in France and Holland, are the largest areas of the Company's international activities, reported results will be most affected by the exchange rate movements in the currencies of Western European countries. Reported results will be influenced to a lesser extent by the exchange rate movements in the currencies of other countries in which the Company's subsidiaries and joint ventures are located. In addition, an economic recession or downturn or increased competition in the international markets in which the Company operates could adversely affect the Company. Other risks inherent in conducting international business operations generally include political and macro-economic instability, changes in regulatory requirements and taxes, unreliability of judicial processes, and financial market instability and illiquidity. For example, although not material to the Company's consolidated financial results, during 1996 and 1997, the Company recorded higher levels of nonearning assets and writedowns on receivables which were originated by its Mexican subsidiary prior to the devaluation of the Mexican peso in December 1994. There can be no assurance that one or more of such factors will not have a material adverse 13 effect on the Company's business, financial condition and results of operations. In addition, instability or adverse economic conditions in international markets may adversely affect the businesses of the Company's domestic customers, which could adversely affect such customers' demand for the Company's products. See "Certain Relationships and Related Transactions-- Purchase of Interest in International Group from Fuji Bank". LIMITATIONS UPON LIQUIDITY AND CAPITAL RAISING The Company's primary sources of funds are cash flow from operations, commercial paper borrowings, issuances of medium-term notes and other term debt securities, and, to a lesser extent, securitizations, syndications and other loan sales. At December 31, 1997, commercial paper borrowings were $2.6 billion, and amounts due on term debt within one year were $2.0 billion. In the past, a downgrade in the Company's credit ratings has resulted in an increase in the Company's interest expense. There can be no assurance there will not be a downgrade in the Company's credit ratings in the future or, if such downgrading does occur, that it will not result in an increase in the Company's interest expense or have an adverse impact on the Company's ability to access the commercial paper market or the public and private debt markets. These events could in turn have a material adverse effect on the Company's business, financial position or results of operations. If the Company is unable to access such markets on acceptable terms, it could utilize its bank credit and receivable sale facilities, cash flow from operations and portfolio liquidations to satisfy its liquidity needs. At December 31, 1997, the Company had committed bank credit facilities totalling $4.0 billion, including $1.5 billion under a 364-day facility expiring April 7, 1998 (which the Company intends to renew), representing 122% of outstanding commercial paper and short-term borrowings from unaffiliated entities. Although the Company believes that such bank credit and receivable sale facilities should provide sufficient additional liquidity to the Company under foreseeable conditions, there can be no assurance that such facilities would provide adequate liquidity to the Company following a downgrade in its credit ratings or other adverse conditions or that such facilities will be renewed. The Company funds its operations independently of Fuji Bank and believes that the business of, and the outlook for, Fuji Bank is not necessarily closely related to the business of, and the outlook for, the Company. However, in the past when Fuji Bank's credit ratings have been downgraded, the Company's credit ratings have also been downgraded. On January 29, 1998, Moody's Investors Service, Inc. ("Moody's") lowered the Company's senior debt rating to A3 from A2 and its commercial paper rating to P-2 from P-1. Prior to this rating action, Moody's had given credit to the implicit and explicit support of Fuji Bank in determining the Company's credit ratings. This rating action was triggered by the weakening of Fuji Bank's credit ratings and, according to Moody's, placed the Company's credit ratings at levels that are more reflective of the Company's underlying financial fundamentals without the support of Fuji Bank. The Company estimates that its increased cost of borrowing due to this rating action by Moody's in January 1998 will result in an increase in interest expense for the Company, which increase is not expected to exceed $10 million on an annual basis. There can be no assurance that a future downgrading of Fuji Bank's credit ratings would not have a material adverse impact on the Company's credit ratings. Therefore, a deterioration in the financial condition of Fuji Bank could result in increased borrowing costs to the Company and could impair the Company's access to the public and private capital markets, which could have a material adverse effect on the Company's business, financial position or results of operations. For as long as Fuji Bank elects to maintain its beneficial ownership percentage of the Company, the Company may be constrained in its ability to raise common or preferred equity capital. Except as provided under the Company's Keep Well Agreement with Fuji Bank, dated as of April 23, 1983 and as subsequently amended (the "Keep Well Agreement"), Fuji Bank is not under any obligation to make future capital contributions. See "Certain Relationships and Related Transactions--Relationship with Fuji Bank--Keep Well Agreement". 14 CONTROL BY AND RELATIONSHIP WITH FUJI BANK Fuji Bank is currently the beneficial owner of all of the common stock of the Company. Upon consummation of the Offerings, Fuji Bank will beneficially own 100% of the outstanding Class B Common Stock, which will, due to the limitation on the voting power of the Class B Common Stock while held by Fuji Bank, represent, in the aggregate, 79.0% of the combined voting power of all of the outstanding Common Stock (regardless of whether the Underwriters' over- allotment options are exercised) and 60.4% of the economic interest (or rights of holders of common equity to participate in distributions in respect of the common equity) in the Company (57.0% if the Underwriters' over-allotment options are exercised in full). For as long as Fuji Bank continues to beneficially own shares of Common Stock representing more than 50% of the combined voting power of the Class A Common Stock and Class B Common Stock, Fuji Bank will be able to direct the election of all of the members of the Board of Directors and exercise a controlling influence over the business and affairs of the Company, including any determinations with respect to (i) mergers or other business combinations involving the Company, (ii) the acquisition or disposition of assets by the Company, (iii) the incurrence of indebtedness by the Company, (iv) the issuance of any additional Common Stock or other equity securities and (v) the payment of dividends with respect to the Common Stock. See "--Limitations upon Liquidity and Capital Raising". Similarly, Fuji Bank will have the power to (i) determine matters submitted to a vote of the Company's stockholders without the consent of the Company's other stockholders, (ii) prevent or cause a change in control of the Company or (iii) take other actions that might be favorable to Fuji Bank and disadvantageous to the Company or holders of the Class A Common Stock. In the foregoing situations or otherwise, various conflicts of interest between the Company or the holders of the Class A Common Stock and Fuji Bank could arise. Ownership interests of the Company's directors or officers in Fuji Bank's common stock or service as a director, officer or other employee of both the Company and Fuji Bank could create, or appear to create, potential conflicts of interest when those directors, officers and employees are faced with decisions that could have different implications for the Company or the holders of Class A Common Stock, on the one hand, and Fuji Bank, on the other hand. The Company's Amended and Restated Certificate of Incorporation will include certain provisions relating to the allocation of business opportunities that may be suitable for both the Company and Fuji Bank. See "-- Shares Eligible for Future Sale; Possible Future Sales by Fuji Bank", "Shares Available for Future Sale", "Certain Relationships and Related Transactions-- Relationship with Fuji Bank" and "Description of Capital Stock--Certain Certificate of Incorporation and By-Law Provisions--Corporate Opportunities". ALLOWANCE FOR LOSSES OF RECEIVABLES The Company maintains an allowance for losses of receivables at an amount which it believes is sufficient to provide adequate protection against potential losses in its entire receivables portfolio. The level of the allowance for losses of receivables is determined principally on the basis of (i) the current credit quality of the portfolio and trends in such quality, (ii) the current mix of finance receivables, (iii) the size and historical loss experience of the portfolio and (iv) current and anticipated future economic conditions. The allowance for losses reflects management's judgment of the loss potential, after considering factors such as the nature and characteristics of obligors, the collectibility and workout potential of loans identified as potential problems, economic conditions and trends, charge-off experience, delinquencies and the value of underlying collateral and guarantees, including recourse to dealers and manufacturers. Although the allowance for losses of receivables in the Company's balance sheet as of December 31, 1997 is considered adequate by the Company's management, there can be no assurance that this allowance will prove to be adequate over time to cover losses in the Company's receivables portfolio. This allowance for losses may prove to be inadequate due to unanticipated adverse changes in the economy generally or discrete events that adversely affect specific customers, industries or markets. The Company's business, financial position or results of operations could be materially adversely affected to the extent that the Company's allowance for losses of receivables is insufficient to cover such unanticipated changes or events. See "--Economic Factors--Risk of Economic Recession or Downturn", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Management--Portfolio Quality-- Allowance for Losses". 15 VARIABILITY OF QUARTERLY OPERATING RESULTS The Company's results of operations may vary significantly from quarter to quarter based upon the timing of certain events, such as securitizations and net investment gains, and upon other factors, including these "Risk Factors". For example, the Company securitized approximately $1.1 billion of its CMBS receivables in March 1998. The Company realized a gain on this securitization that may cause operating revenues and net income in the first quarter of 1998 to be higher than those in certain other quarters of 1998. See "Prospectus Summary--Recent Developments", "Business--Real Estate Finance" and Note 18 of the notes to the consolidated financial statements appearing elsewhere in this Prospectus. ATTRACTION AND RETENTION OF QUALIFIED PERSONNEL The Company's success depends to a significant degree upon the contributions of management, sales and credit personnel. Competition for qualified personnel in the commercial finance industry is intense, and there can be no assurance that the Company will be able to attract and retain qualified and experienced employees. The strength of the U.S. economy generally and the commercial finance markets specifically, as well as enhanced competition within the commercial finance markets, has intensified demand for qualified personnel with significant industry experience, making hiring and retaining such individuals by the Company increasingly difficult. Any difficulty in attracting and retaining qualified employees on acceptable terms could have a material adverse effect on the Company's business, financial position or results of operations. COMPETITION The Company's markets are highly fragmented and extremely competitive and are characterized by competitive factors that vary by product and geographic region. The Company's competitors include other commercial finance companies, national and regional banks and thrift institutions, investment banks, leasing companies, investment companies, manufacturers and vendors. Competition from both traditional competitors and new market entrants has been intensified in recent years by an improving economy, growing marketplace liquidity and increasing recognition of the attractiveness of the commercial finance markets. In addition, the rapid expansion of the securitization markets is dramatically reducing the difficulty in obtaining access to capital, which is the principal barrier to entry into these markets. This is further intensifying competition in certain market segments, including increasing competition from specialized securitization lenders which offer aggressive pricing terms. The Company competes primarily on the basis of pricing, terms, structure and service in many of its markets. Competitors of the Company seek to compete aggressively on the basis of these factors and the Company may lose market share to the extent it is unwilling to match its competitors' pricing, terms and structure in order to maintain its spreads or to maintain its credit discipline. To the extent that the Company matches competitors' pricing, terms or structure, it may experience decreased spreads and/or increased risk of credit losses. Many of the Company's competitors are large companies that have substantial capital, technological and marketing resources, and some of these competitors are larger than the Company and may have access to capital at a lower cost than the Company. Further, the size and access to capital of certain of the Company's competitors are being enhanced by the recent surge in consolidation activity in the commercial and investment banking industries. Also, the Company's competitors include businesses that are not affiliated with bank holding companies and therefore are not subject to the same extensive federal regulations that govern bank holding companies. As a result, such non-banking competitors may engage in certain activities which currently are prohibited to the Company. See "--Regulation", "Business--Competition" and "Business--Regulation". 16 REGULATION The Company is subject to federal and state regulation and supervision in the jurisdictions in which it operates. Such regulation and supervision are primarily for the benefit and protection of the Company's customers, and not for the benefit of investors, and could limit the Company's discretion in operating its businesses and its opportunity to derive a profit from its business. For example, state laws often establish maximum allowable finance charges for certain commercial loans. Noncompliance with applicable statutes or regulations could result in the suspension or revocation of any license or registration at issue, as well as the imposition of civil fines and criminal penalties. No assurance can be given that applicable laws or regulations will not be amended or construed differently, that new laws and regulations will not be adopted or that the Company will not be prohibited by state laws from raising interest rates above certain desired levels, any of which could adversely affect the business, financial condition or results of operations of the Company. See "Business--Regulation". Because the Company is an indirect subsidiary of Fuji Bank, the Company and its activities are examined by the Board of Governors of the Federal Reserve System (the "Federal Reserve") and are subject to limitations imposed by the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), and related regulations of the Federal Reserve. The ability of the Company to engage in new activities or to acquire securities or assets of another company is regulated by the Bank Holding Company Act. In general, the new activity or the activity of the other company must be one that the Federal Reserve has determined to be closely related to banking, and the Company must have obtained the approval of the Federal Reserve to engage in such activity. To obtain the Federal Reserve's approval, Fuji Bank must submit a notice that provides information both about the proposed activity or acquisition and about the financial condition and operations of Fuji Bank and the Company. The Bank Holding Company Act will continue to apply to the Company for as long as Fuji Bank holds 25% or more of any class of the Company's voting stock or otherwise is deemed to control the management or operations of the Company under the Bank Holding Company Act and the Federal Reserve's regulations and interpretations thereunder. In addition, certain of the Company's equity investments and small business lending activities are subject to the supervision and regulation of the SBA. There can be no assurance that these regulations will not have a material adverse effect on the Company's business, financial condition or results of operations in the future. See "Business--Regulation". LIMITATIONS UPON PAYMENT OF DIVIDENDS The Company is prohibited from paying cash dividends on the Common Stock unless all declared dividends on all outstanding shares of the Company's Fixed Rate Noncumulative Perpetual Senior Preferred Stock, Series C (the "Series C Preferred Stock") and full cumulative dividends on all outstanding shares of the Company's Cumulative Perpetual Preferred Stock, Series A (the "Series A Preferred Stock") have been paid. Though such dividends on the Company's Series C Preferred Stock and Series A Preferred Stock have been paid in full to date, there can be no assurance that the Company will continue to pay such dividends on a timely basis. Certain covenants in the Company's credit agreements have the indirect effect of limiting the amount of dividends that the Company may pay. The most restrictive of these covenants require that the Company not permit (i) consolidated stockholders' equity (as defined in the credit agreements) at the end of any fiscal quarter of the Company to be less than $1 billion ($900 million through March 31, 1998) or (ii) consolidated debt (as defined in the credit agreements) to exceed ten times consolidated stockholders' equity (as defined in the credit agreements) at the end of any fiscal quarter of the Company. The Company may agree to further restrictions in other agreements relating to loans, debt securities or other arrangements. The declaration and payment of dividends by the Company are subject to the discretion of the Board of Directors, and no assurance can be given that the Company will pay dividends. The Company 17 may cease to pay dividends at any time. The Board of Directors' determination as to the payment of dividends will depend upon, among other things, general business conditions, the Company's financial results, contractual, legal and regulatory restrictions regarding the payment of dividends by the Company (including those described above), the credit ratings of the Company and such other factors as the Board of Directors may consider to be relevant. For a discussion of the Company's dividend policy and certain related matters, see "Dividend Policy". The Company believes that maintaining its ratio of debt (net of short-term investments) to total stockholders' equity within certain parameters is an important factor in maintaining its existing credit ratings. Accordingly, under certain circumstances, the Company's ability to pay dividends may be restricted while the Company maintains levels of debt which management believes are appropriate. SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE FUTURE SALES BY FUJI BANK Fuji Bank has advised the Company that its current intent is to continue to hold all of the Common Stock beneficially owned by it following the Offerings. Fuji Bank, FAHI and the Company have agreed not to sell or otherwise dispose of any shares of Common Stock for a period of 180 days after the date of this Prospectus, without the prior written consent of Goldman, Sachs & Co. See "Underwriting". Under the Keep Well Agreement, as currently in effect, neither Fuji Bank nor any of its subsidiaries may sell, pledge or otherwise dispose of shares of the Company's common stock, or permit the Company to issue shares of its common stock, except to Fuji Bank or a Fuji Bank affiliate. However, prior to the consummation of the Offerings, the Keep Well Agreement will be amended to allow the Company or Fuji Bank or any of its affiliates to sell or dispose of Common Stock to any person or entity, provided that after any such sale or disposition, Fuji Bank (directly, or indirectly through one or more subsidiaries) continues to hold greater than 50% of the combined voting power of the outstanding Common Stock. This provision may be subject to further amendment by the Company and Fuji Bank without the approval of any of the Company's securityholders. As a result, there can be no assurance as to the period of time during which Fuji Bank will continue to maintain the same beneficial ownership of Common Stock to be beneficially owned by it immediately following the Offerings. Subject to applicable federal securities laws and the restrictions described above, after completion of the Offerings, Fuji Bank may sell any and all of the shares of Common Stock owned by it. Prior to consummation of the Offerings, the Company will grant certain registration rights to Fuji Bank, its subsidiaries and any Qualified Transferee (as defined below). Sales or distribution by any such person of substantial amounts of Common Stock in the public market, or the perception that such sales could occur, could adversely affect prevailing market prices for shares of Class A Common Stock. See "Shares Available for Future Sale" and "Certain Relationships and Related Transactions--Relationship with Fuji Bank-- Registration Rights Agreement". NO PRIOR MARKET FOR CLASS A COMMON STOCK Prior to the Offerings, there has been no public market for the Class A Common Stock. The initial public offering price of the Class A Common Stock will be determined by negotiations between the Company and the Underwriters. There can be no assurance that the initial public offering price will correspond to the price at which the Class A Common Stock will trade in the public market subsequent to the Offerings or that an active public market for the Class A Common Stock will develop and continue after the Offerings. See "Underwriting". ANTI-TAKEOVER PROVISIONS Certain provisions of the Company's Amended and Restated Certificate of Incorporation and the Company's Amended and Restated By-Laws may render more difficult or have the effect of discouraging unsolicited takeover bids from third parties or the removal of incumbent management of 18 the Company. See "Description of Capital Stock--Certain Certificate of Incorporation and By-Law Provisions". Although such provisions do not have a substantial practical significance to investors while Fuji Bank controls the Company, such provisions could have the effect of depriving stockholders of an opportunity to sell their shares at a premium over prevailing market prices should Fuji Bank's voting power decrease to less than 50%. PAYMENT OF PROCEEDS TO FAHI The Company currently expects that substantially all of the net proceeds of the Offerings will be paid to FAHI (i) to repay indebtedness of the Company, consisting of a subordinated promissory note in the principal amount of $450 million issued on February 24, 1998 as a dividend to FAHI and (ii) in respect of a cash dividend to FAHI, as the sole holder of the Class B Common Stock, following the consummation of the Offerings. Accordingly, the Company will retain an insignificant portion of the net proceeds from the Offerings. See "Use of Proceeds". SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Prospectus contains, and the documents incorporated by reference herein contain, certain "forward-looking statements" (as defined in Section 27A of the Securities Act) that are based on the beliefs of the Company's management, as well as assumptions made by, and information currently available to, the Company's management. The words "anticipates", "believes", "estimates", "expects", "plans", "intends" and similar expressions are intended to identify these forward-looking statements, but are not the exclusive means of identifying them. These forward-looking statements reflect the current views of the Company or its management and are subject to certain risks, uncertainties and contingencies which could cause the Company's actual results, performance or achievements to differ materially from those expressed in, or implied by, these statements. These risks, uncertainties and contingencies include, but are not limited to, the following: (i) the success or failure of the Company's efforts to implement its business strategy; (ii) the effect of economic conditions and the performance of borrowers; (iii) actions of the Company's competitors and the Company's ability to respond to such actions; (iv) the cost of the Company's capital, which depends in part on the Company's portfolio quality, ratings, prospects and outlook and general market conditions; (v) changes in governmental regulations, tax rates and similar matters; and (vi) the other factors discussed under the heading "Risk Factors" and elsewhere in this Prospectus. The Company assumes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. 19 USE OF PROCEEDS The net proceeds to the Company from the Offerings, after the deduction of estimated underwriting discounts and expenses payable by the Company, are estimated to be approximately $762 million ($876 million if the Underwriters' over-allotment options are exercised in full). The Company currently intends to use $450 million of such net proceeds to repay indebtedness of the Company, consisting of a $450 million promissory note issued on February 24, 1998 (the "FAHI Note") as a dividend from the Company to FAHI. The FAHI Note, which is subordinated to all senior indebtedness of the Company, bears interest at a rate of LIBOR plus 0.50% per annum and matures on February 24, 2004. The FAHI Note may be prepaid at any time without premium or penalty. The Company currently expects to use approximately $309 million of the net proceeds to pay a cash dividend to FAHI, as the sole holder of the Class B Common Stock, following the consummation of the Offerings. See "Dividend Policy". DIVIDEND POLICY The holders of the Class A Common Stock and Class B Common Stock share ratably on a per share basis in all dividends and other distributions on the Common Stock declared by the Board of Directors, except that holders of Class A Common Stock will not be entitled to receive the cash dividend which the Company expects to pay to FAHI, as the sole holder of the Class B Common Stock, with a portion of the net proceeds of the Offerings. The Company is prohibited from paying cash dividends on the Common Stock unless all declared dividends on all outstanding shares of Series C Preferred Stock and full cumulative dividends on all outstanding shares of Series A Preferred Stock have been paid. The Board of Directors currently intends to declare and pay quarterly dividends on both its Class A Common Stock and Class B Common Stock. It is expected that the first quarterly dividend to be paid ratably to the holders of Class A Common Stock and Class B Common Stock will be the dividend in respect of the quarter ending September 30, 1998, which will be the first full quarter following consummation of the Offerings. This dividend will be $0.09 per share (a rate of $0.36 per share annually) and will be paid in the fourth quarter of 1998. The only dividend expected to be paid in respect of the quarter ending June 30, 1998 is the dividend expected to be paid to FAHI following the consummation of the Offerings. See "Use of Proceeds". The declaration and payment of dividends by the Company are subject to the discretion of the Board of Directors, and no assurance can be given that the Company will pay such dividend or any further dividends. The determination as to the payment of dividends will depend upon, among other things, general business conditions, the Company's financial results, contractual, legal and regulatory restrictions regarding the payment of dividends by the Company, the credit ratings of the Company, planned investments by the Company and such other factors as the Board of Directors deems relevant. See "Risk Factors-- Limitations Upon Payment of Dividends" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources". The Company paid cash dividends to its former immediate parent, Heller International Corporation ("HIC"), of $43 million (plus $26 million in the form of International Group preferred stock), $58 million and $54 million during the years ended December 31, 1997, 1996 and 1995, respectively. The dividends historically paid to HIC by the Company are not indicative of its future dividend policy. 20 CAPITALIZATION The following table sets forth, as of December 31, 1997, (i) the capitalization of the Company and (ii) such capitalization as adjusted to give effect to (a) the reclassification of the Company's common stock into shares of Class A Common Stock and Class B Common Stock, (b) the registered issuance of the Series C Preferred Stock in exchange for the Company's privately issued Fixed Rate Noncumulative Perpetual Senior Preferred Stock, Series B (the "Series B Preferred Stock") pursuant to registration rights of the holders of Series B Preferred Stock, (c) the payment of a $450 million dividend to FAHI in the form of the FAHI Note, (d) the sale by the Company of the 33,500,000 shares of Class A Common Stock offered in the Offerings and the application of the estimated net proceeds therefrom, after deducting estimated underwriting discounts and expenses of the Offerings, to repay indebtedness of the Company, consisting of the FAHI Note, and to pay the cash dividend expected to be paid to FAHI, as the sole holder of the Class B Common Stock, following the consummation of the Offerings and (e) the Company's purchase of Fuji Bank's 21% interest in International Group for approximately $83 million, to be effected upon consummation of the Offerings. See "Use of Proceeds". This table is qualified by, and should be read in conjunction with, the consolidated financial statements of the Company, including the notes thereto, appearing elsewhere in this Prospectus.
DECEMBER 31, 1997 ------------------- ACTUAL AS ADJUSTED ------- ----------- (IN MILLIONS) LONG-TERM DEBT: Commercial paper and short-term borrowings............... $ 3,432 $ 3,432 Long-term debt........................................... 6,004 6,084 ------- ------- Total debt............................................. 9,436 9,516 MINORITY INTEREST.......................................... 87 7 STOCKHOLDERS' EQUITY: Cumulative Perpetual Senior Preferred Stock, Series A, $0.01 par value, 5,000,000 shares authorized, issued and outstanding, actual and as adjusted..................... 125 125 Fixed Rate Noncumulative Perpetual Senior Preferred Stock, Series B, $0.01 par value, 1,500,000 shares authorized, issued and outstanding, actual; no shares authorized, issued and outstanding, as adjusted......... 150 -- Fixed Rate Noncumulative Perpetual Senior Preferred Stock, Series C, $0.01 par value, no shares authorized, issued and outstanding, actual; 1,500,000 shares authorized, issued and outstanding, as adjusted......... -- 150 Class B Common Stock, $0.25 par value, 300,000,000 shares authorized and 51,050,000 shares issued and outstanding, actual and as adjusted(1)............................... 13 13 Class A Common Stock, $0.25 par value, no shares authorized, issued and outstanding, actual; 500,000,000 shares authorized and 33,500,000 shares issued and outstanding, as adjusted(2)............................. -- 8 Paid-in capital.......................................... 672 1,382 Retained earnings........................................ 718 -- ------- ------- Total stockholders' equity............................. $ 1,678 $ 1,678 ------- ------- Total capitalization................................. $11,201 $11,201 ======= =======
- -------- (1) In February 1998, the Company reclassified the 105 shares of the Company's common stock held by FAHI into Class B Common Stock and declared and paid a dividend of 51,049,895 shares of Class B Common Stock to FAHI. Such reclassification and dividend have been retroactively reflected in the December 31, 1997 totals. (2) Excludes (i) 505,912 shares of restricted Class A Common Stock and 1,242,250 shares of Class A Common Stock issuable upon the exercise of options, which shares of restricted Class A Common Stock and options are to be granted to certain officers and employees of the Company upon consummation of the Offerings, and (ii) 4,593,088 shares of Class A Common Stock reserved for issuance with respect to awards that may be granted in the future under the Heller Financial, Inc. 1998 Stock Incentive Plan. See "Management--Executive Compensation--The 1998 Stock Incentive Plan". 21 SELECTED FINANCIAL DATA The results of operations and balance sheet data of the Company for each of the years in the three-year period ended December 31, 1997 and as of December 31, 1997 and 1996, respectively, were derived from the audited consolidated financial statements of the Company, and the notes thereto, appearing elsewhere in this Prospectus. The results of operations and balance sheet data for each of the years in the two-year period ended December 31, 1994 and as of December 31, 1995, 1994 and 1993, respectively, except 1994 and 1993 net income applicable to common stock and basic and diluted net income applicable to common stock per share, and pro forma amounts for all years, were derived from audited consolidated financial statements of the Company, and the notes thereto, which are not presented herein. The data presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements, including the notes thereto, appearing elsewhere in this Prospectus.
YEAR ENDED DECEMBER 31, --------------------------------------- 1997(1) 1996 1995 1994 1993 ------- ------ ------ ------ ------ (IN MILLIONS, EXCEPT PER SHARE DATA) RESULTS OF OPERATIONS: Interest income....................... $ 924 $ 807 $ 851 $ 702 $ 620 Interest expense...................... 516 452 464 336 264 ------- ------ ------ ------ ------ Net interest income................. 408 355 387 366 356 Fees and other income................. 206 79 148 117 88 Factoring commissions................. 104 55 50 53 50 Income of international joint ventures............................. 36 44 35 21 23 ------- ------ ------ ------ ------ Operating revenues.................. 754 533 620 557 517 Operating expenses.................... 357 247 216 195 174 Provision for losses.................. 164 103 223 188 210 ------- ------ ------ ------ ------ Income before income taxes and minority interest.................. 233 183 181 174 133 Income tax provision.................. 66 43 49 51 11 Minority interest..................... 9 7 7 5 5 ------- ------ ------ ------ ------ Net income.......................... $ 158 $ 133 $ 125 $ 118 $ 117 ======= ====== ====== ====== ====== Net income applicable to common stock.............................. $ 144 $ 123 $ 115 $ 108 $ 107 Basic and diluted net income applicable to common stock per share(2)............................. 2.82 2.41 2.25 2.12 2.10 Pro forma net income applicable to common stock per share(3)............ 1.70 DECEMBER 31, --------------------------------------- 1997(1) 1996 1995 1994 1993 ------- ------ ------ ------ ------ (IN MILLIONS, EXCEPT PER SHARE DATA) BALANCE SHEET DATA: Receivables........................... $10,722 $8,529 $8,085 $7,616 $7,062 Allowance for losses of receivables... (261) (225) (229) (231) (221) Equity and real estate investments.... 488 419 428 399 167 Debt securities....................... 311 251 152 69 55 Operating leases...................... 195 135 113 166 148 Investment in international joint ventures............................. 198 272 233 174 144 Total assets.......................... 12,861 9,926 9,638 8,476 7,913 ======= ====== ====== ====== ====== Commercial paper and short-term borrowings........................... 3,432 2,745 2,223 2,451 1,981 Long-term debt........................ 6,004 4,761 5,145 3,930 3,968 ------- ------ ------ ------ ------ Total debt............................ $ 9,436 $7,506 $7,368 $6,381 $5,949 ======= ====== ====== ====== ====== Total liabilities..................... $11,096 $8,402 $8,208 $7,107 $6,625 Preferred stock....................... 275 125 125 125 125 Common equity......................... 1,403 1,342 1,259 1,205 1,128 ------- ------ ------ ------ ------ Total stockholders' equity........ $ 1,678 $1,467 $1,384 $1,330 $1,253 ======= ====== ====== ====== ====== Pro forma book value per common share(3)(4).......................... $ 16.59
22
AS OF, OR FOR THE YEAR ENDED, DECEMBER 31, --------------------------------------- 1997(1) 1996 1995 1994 1993 ------- ------ ------ ------ ------ (IN MILLIONS, EXCEPT NUMBER OF EMPLOYEES AND OFFICE LOCATIONS) SELECTED DATA AND RATIOS: PROFITABILITY Net interest income as a percentage of AFE(5).......................... 4.0% 4.1% 4.6% 4.7% 4.7% Non-interest operating revenues as a percentage of AFE(5)............... 3.5 2.0 2.7 2.5 2.2 Operating revenues as a percentage of AFE(5).......................... 7.5 6.1 7.3 7.2 6.9 Return on average common stockholders' equity(6)............ 10.5 9.4 9.3 9.2 10.0 Return on AFE(5).................... 1.6 1.5 1.5 1.5 1.6 Ratio of earnings to combined fixed charges and preferred stock dividends(7)....................... 1.39x 1.36x 1.34x 1.45x 1.44x Salaries and general operating expenses as a percentage of AFE(5). 3.5% 2.8% 2.6% 2.5% 2.3% Ratio of operating expenses to operating revenues................. 47.3 46.3 34.8 35.0 33.7 Common dividend payout ratio(8)..... 47.7 47.2 47.0 20.4 1.9 Cash dividends paid on common stock per share(9)....................... $ 0.84 $ 1.14 $ 1.06 $ 0.43 $ 0.04 CREDIT QUALITY Ratio of earning loans delinquent 60 days or more to receivables........ 1.4% 1.7% 1.4% 1.4% 2.1% Ratio of net writedowns to average lending assets..................... 1.5 1.3 2.9 2.4 2.8 Ratio of total nonearning assets to total lending assets............... 1.4 3.3 3.6 4.0 5.9 Ratio of allowance for losses of receivables to receivables......... 2.4 2.6 2.8 3.0 3.1 Ratio of allowance for losses of receivables to net writedowns...... 1.8x 2.1x 1.0x 1.3x 1.1x Ratio of allowance for losses of receivables to nonearning impaired receivables........................ 185.1% 85.2% 87.7% 81.3% 83.7% LEVERAGE Ratio of debt (net of short-term investments) to total stockholders' equity............................. 5.2x 5.0x 5.0x 4.7x 4.7x Ratio of commercial paper and short- term borrowings to total debt...... 36.4% 36.6% 30.2% 38.4% 33.3% OTHER Total lending assets and investments(10).................... $11,928 $9,620 $9,039 $8,443 $7,742 Funds employed(5)................... 10,673 9,030 8,542 7,991 7,309 Total managed assets(11)............ 11,800 9,574 9,137 8,414 7,422 Number of employees................. 2,339 1,527 1,487 1,404 1,307 Number of office locations.......... 63 52 36 33 24
- -------- (1) The financial data presented for 1997 reflect the Company's purchase (through its subsidiary, International Group) of its joint venture partner's interest in Factofrance in April 1997 for $174 million, which resulted in Factofrance being reported on a consolidated basis with the Company as of the date of acquisition. The Company financed this acquisition through the issuance of senior debt. The premium related to this purchase was allocated as follows: $78 million to 23 goodwill and $18 million to a noncompetition agreement. The consolidation of Factofrance resulted in increases of $2.0 billion, $94 million, $59 million and 570 in total assets, operating revenues, operating expenses and number of employees, respectively, during 1997 as compared to 1996. This acquisition had a modest favorable impact on the Company's 1997 net income, as earnings from the Company's increased ownership interest in Factofrance were partially offset by costs related to the acquisition (including interest on the senior debt issued to finance the acquisition). (2) Reflects historical net income applicable to common stock divided by weighted average common shares outstanding of 51,050,000 in each year. The historical net income applicable to common stock per share is not indicative of future net income applicable to common stock per share. In February 1998, the Company reclassified the 105 shares of the Company's common stock held by FAHI into Class B Common Stock and declared and paid a dividend of 51,049,895 shares of Class B Common Stock to FAHI. Such reclassification and dividend have been retroactively reflected in the Company's consolidated financial statements. (3) Based upon 84,550,000 shares of Common Stock to be outstanding upon consummation of the Offerings. Excludes (i) 505,912 shares of restricted Class A Common Stock and 1,242,250 shares of Class A Common Stock issuable upon the exercise of options, which shares of restricted Class A Common Stock and options are to be granted to certain officers and employees of the Company upon consummation of the Offerings, and (ii) 4,593,088 shares of Class A Common Stock reserved for issuance with respect to awards that may be granted in the future under the Heller Financial, Inc. 1998 Stock Incentive Plan. The Company will compute the cost of stock options in accordance with APB 25. If the Company were to use SFAS 123 and had the stock options been issued effective January 1, 1997, the compensation cost of these stock options would have reduced net income by $2.1 million, and pro forma net income applicable to common stock per share would have been $1.68 for 1997. The annual cost of the stock options was determined through the development of a valuation model which included assumptions of a ten- year option life, a risk-free interest rate of 5.67%, a dividend yield of 1.6%, and volatility of 19.44% based on industry peers' volatility. See "Management--Executive Compensation--The 1998 Stock Incentive Plan". (4) Book value represents total stockholders' equity, net of preferred stock. (5) Funds employed include lending assets and investments, less credit balances of factoring clients. The Company believes funds employed are indicative of the dollar amount which it has loaned to borrowers. Average funds employed ("AFE") reflect the average of lending assets and investments, less credit balances of factoring clients. (6) Return on average common stockholders' equity is computed as net income less preferred stock dividends paid divided by average total stockholders' equity net of preferred stock. (7) The ratio of earnings to combined fixed charges and preferred stock dividends is calculated by dividing (i) income before income taxes, minority interest and fixed charges by (ii) fixed charges plus preferred stock dividends. (8) Common dividend payout ratio is computed as common dividends paid, divided by net income applicable to common stock. (9) Reflects cash dividends paid on common stock, divided by the weighted average common shares outstanding of 51,050,000. The historical cash dividends paid on common stock per share are not indicative of the future cash dividends to be paid on common stock per share. (10) Total lending assets and investments consist of receivables, repossessed assets, equity and real estate investments, operating leases, debt securities and investments in international joint ventures. (11) Total managed assets include funds employed, plus receivables previously securitized or sold and currently managed by the Company. 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Selected Financial Data and consolidated financial statements, including the notes thereto, appearing elsewhere in this Prospectus. The following discussion and analysis contains certain "forward-looking statements" (as defined in Section 27A of the Securities Act), which are generally identified by the words "anticipates", "believes", "estimates", "expects", "plans", "intends" and similar expressions. Such statements are subject to certain risks, uncertainties and contingencies, including, but not limited to, those set forth under the heading "Risk Factors", which could cause the Company's actual results, performance or achievements to differ materially from those expressed in, or implied by, such statements. See "Special Note Regarding Forward-Looking Statements". GENERAL The Company is in the commercial finance business, providing primarily collateralized financing and leasing products and related services to mid- sized and small businesses in the United States and selected international markets. The Company's operating revenues can be classified in two broad categories: (i) net interest income and (ii) non-interest income. Net interest income represents the total interest income earned by the Company, principally through its financing and leasing activities, less the total interest expense paid by the Company on its interest bearing liabilities, which largely relate to the funding of these financing and leasing activities. Non-interest income consists of factoring commissions, income from investments in international joint ventures, and fees and other income. Fees include loan servicing income, late fees, structuring fees, syndication fees and prepayment fees. Other income includes real estate participation income, gains from investments and from sales and securitizations of lending assets, and equipment residual gains. The Company's primary expenses, other than interest expense, are operating expenses, including employee compensation and general and administrative expenses, and provisions for credit losses. Prior to 1990, the Company's portfolio was not well-diversified with regard to client concentration and consisted primarily of highly leveraged Corporate Finance and Real Estate Finance assets. The pre-1990 portfolio contained assets with a substantial amount of risk, which resulted in a significant amount of net writedowns. The aggregate net writedowns on the lending assets in the pre-1990 portfolio were $1.1 billion between 1991 and 1997. Since 1990, the Company has changed its strategy and focused its efforts on decreasing the risk of its Corporate Finance and Real Estate Finance businesses through higher cash flow and collateral coverages, smaller retained positions and greater liquidity, while building its Asset Based Finance businesses which rely on more liquid collateral with more predictable value. As a result, the Company has built a lower risk, though lower yielding, well-diversified portfolio, with stronger collateralization. For these reasons, the Company categorizes its pre-1990 Corporate Finance and Real Estate Finance portfolio (its "pre-1990 portfolio") and the portfolio of its ongoing business categories (its "current portfolio") separately. While building its current portfolio, the Company has substantially reduced its pre-1990 portfolio by over $5 billion since December 31, 1990 to $492 million at December 31, 1997 and expects such portfolio's impact to be insignificant beginning in 1998. In this Prospectus, the pre-1990 portfolio is excluded from discussions of the Company's ongoing business categories and business groups and from presentations (both textual and tabular) of the financial condition and results of these business categories and groups. This Prospectus includes certain separate discussions and presentations regarding the composition and performance of the pre-1990 portfolio. In April 1997, the Company's subsidiary, International Group, completed its acquisition of Factofrance, the leading factoring company in France, from the Company's joint venture partner. Through this acquisition, International Group increased its ownership interest in Factofrance from 25 48.8% to 97.6%, which resulted in Factofrance being reported on a consolidated basis with the Company as of the date of purchase. Operating revenues, operating expenses, factoring commissions and fees and other income increased by $94 million, $59 million, $51 million and $20 million, respectively, for the year ended December 31, 1997 as a result of the Company's accounting for Factofrance's results on a consolidated basis. In addition, income of international joint ventures declined by $8 million, primarily due to this consolidation of Factofrance. This acquisition had a modest favorable impact on the Company's 1997 net income, as earnings from the Company's increased ownership interest in Factofrance were partially offset by related costs (including interest on senior debt issued to finance the acquisition). Upon consummation of the Offerings, the Company plans to purchase the 21% interest of Fuji Bank in International Group for total cash consideration of approximately $83 million. The Company intends to finance this acquisition through the issuance of senior debt, which will bear interest at a market rate and have such other terms as are determined at the time of issuance. This acquisition is expected to be accounted for using the purchase method of accounting, and the Company's net income will no longer be reduced by a minority interest in International Group, which totalled $10 million in 1997. Subsequent to the acquisition, the Company will incur ongoing costs associated with this acquisition, including interest expense related to the purchase price and certain income tax expenses that will be incurred due to the inclusion of International Group in the Company's consolidated U.S. federal income tax return. The Company currently estimates that the effect on net income of these costs and expenses will be approximately $5 million per year. See "Certain Relationships and Related Transactions--Purchase of Interest in International Group from Fuji Bank". The Company's results of operations may vary significantly from quarter to quarter based upon the timing of certain events, such as securitizations and net investment gains, and upon other factors, including those discussed under the heading "Risk Factors". For example, the Company securitized approximately $1.1 billion of CMBS receivables in March 1998. The Company realized a gain on this securitization that may cause operating revenues and net income in the first quarter of 1998 to be higher than those in certain other quarters of 1998. See "Prospectus Summary--Recent Developments", "Business--Real Estate Finance" and Note 18 of the notes to the consolidated financial statements appearing elsewhere in this Prospectus. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 RESULTS OF OPERATIONS OVERVIEW. For the year ended December 31, 1997, the Company's net income totalled $158 million compared with $133 million for the prior year, an increase of 19%, representing the Company's fifth consecutive year of record net income. Net income applicable to common stock was $144 million for the year ended December 31, 1997, which represented an increase of 17%, from $123 million for the prior year. This reflected an increase of $221 million, or 41%, in operating revenues, due to growth in both net interest income and non- interest income. Of the increase in operating revenues, $94 million, or 43%, related to the consolidation of Factofrance. Operating revenues as a percentage of AFE rose to 7.5% in 1997 from 6.1% in 1996. See "--Operating Revenues--Non-Interest Income". For the year ended December 31, 1997, new business volume, which does not include factoring volume, totalled a record $6.0 billion, an increase of 47% over the prior year. This increase was the result of the Company's significant investment in building leadership positions in its businesses and in expanding market coverage. The Company's factoring volume totalled $15.5 billion in 1997, an $8.5 billion increase from the prior year, primarily due to the consolidation of Factofrance. The credit quality of the Company's portfolio was demonstrated by the low level of nonearning assets, which totalled $155 million, or 1.4% of lending assets, at December 31, 1997. In addition, the Company's allowance for losses of receivables at year end was significantly in excess of 100% of nonearning impaired 26 receivables. The Company's pre-1990 portfolio was substantially reduced during 1997 and, as of December 31, 1997, represented 4% of total lending assets and investments. See "Risk Management--Portfolio Quality--Pre-1990 Portfolio". OPERATING REVENUES. The following table summarizes the Company's operating revenues for the years ended December 31, 1997 and 1996:
FOR THE YEAR ENDED DECEMBER 31, ----------------------------- 1997 1996 -------------- -------------- PERCENT PERCENT AMOUNT OF AFE AMOUNT OF AFE ------ ------- ------ ------- (IN MILLIONS) Net interest income........................ $408 4.0% $355 4.1% Non-interest income: Fees and other income.................... 206 2.1 79 0.9 Factoring commissions.................... 104 1.0 55 0.6 Income of international joint ventures 36 0.4 44 0.5 ---- --- ---- --- Total operating revenues............... $754 7.5% $533 6.1% ==== === ==== ===
Excluding the impact of the consolidation of Factofrance, operating revenues increased by 24% in 1997 from the prior year. Net Interest Income. The following table summarizes the Company's net interest income for the years ended December 31, 1997 and 1996:
FOR THE YEAR ENDED DECEMBER 31, INCREASE/(DECREASE) ---------- --------------------- 1997 1996 AMOUNT PERCENT ---- ---- --------- ---------- (IN MILLIONS) Interest income....................... $924 $807 $ 117 14.5% Interest expense...................... 516 452 64 14.2 ---- ---- --------- Net interest income................. $408 $355 $ 53 14.9 ==== ==== ========= Net interest income as a percentage of AFE............................. 4.0% 4.1%
Net interest income totalled $408 million for the year ended December 31, 1997, an increase of $53 million, or 15%, from the comparable prior year period. This increase reflected growth in lending assets and investments and the consolidation of Factofrance, which contributed $28 million to this increase. Net interest margin as a percentage of AFE decreased to 4.0% at December 31, 1997 from 4.1% at December 31, 1996. This decline reflected the continued growth of the Company's lower risk, but lower yielding, Asset Based Finance products, competitive pricing pressures in certain product groups and higher originations of CMBS, which carry a lower yield than other products of the Company. Interest rates charged by the Company vary depending on risks and maturities of loans, competition, current costs of borrowing to the Company, state usury laws and other governmental regulations. The Company's portfolio of receivables earns interest at both variable and fixed rates. The variable rates float in accordance with various agreed upon reference rates, including LIBOR, the Prime Rate, the Treasury Bill Rate and corporate based lending rates. The Company uses interest rate swaps as an important tool for financial risk management, which enables it to match more closely the interest rate and maturity characteristics of its assets and liabilities. As such, interest rate swaps are used to change the characteristics of fixed rate debt to that 27 of variable rate liabilities, to alter the characteristics of specific fixed rate asset pools to more closely match the interest terms of the underlying financing and to modify the variable rate basis of a liability to more closely match the variable rate basis used for variable rate receivables. A comparative analysis of the year-end principal outstanding and average interest rates paid by the Company on its debt as of December 31, 1997 and 1996, before and after giving effect to interest rate swaps, is shown in the following table:
DECEMBER 31, -------------------------------------------- 1997 1996 --------------------- --------------------- YEAR-END BEFORE AFTER YEAR-END BEFORE AFTER BALANCE SWAPS SWAPS BALANCE SWAPS SWAPS -------- ------ ----- -------- ------ ----- (IN MILLIONS) Commercial paper--domestic and foreign............... $2,560 5.71% N/A $2,576 5.63% N/A Fixed rate debt............ 3,951 6.90 6.67% 2,905 7.02 6.62% Variable rate debt......... 2,051 5.44 6.01 1,859 4.85 5.78 ------ ------ Total.................... $8,562 6.19 6.44 $7,340 5.98 6.29 ====== ======
Non-Interest Income. The following table summarizes the Company's non- interest income for the years ended December 31, 1997 and 1996:
FOR THE YEAR ENDED DECEMBER 31, INCREASE/(DECREASE) ------------ ---------------------- 1997 1996 AMOUNT PERCENT ----- ----- --------- ---------- (IN MILLIONS) Factoring commissions............. $ 104 $ 55 $ 49 89.1% Income of international joint ventures......................... 36 44 (8) (18.2) Fees and other income: Fee income and other (1)........ 84 52 32 61.5 Net investment gains............ 69 3 66 N/M Real estate participation income......................... 27 24 3 12.5% Securitization gains............ 26 0 26 -- ----- ----- --------- Total fees and other income... $ 206 $ 79 $ 127 160.8 ----- ----- --------- Total non-interest income... $ 346 $ 178 $ 168 94.4 ===== ===== ========= Non-interest income as a percentage of AFE................ 3.5% 2.0%
-------- (1) Fee income and other consists primarily of loan servicing income, late fees, prepayment fees, other miscellaneous fees and equipment residual gains. The Company's non-interest income is composed of factoring commissions, income of international joint ventures and fees and other income. Factoring commissions increased $49 million, or 89%, from 1996 to 1997 due primarily to the consolidation of Factofrance in 1997, as a result of which the Company believes it became the largest factor in the world. Income of international joint ventures represents the Company's share of the annual earnings or losses of joint ventures. The Company includes this income as part of operating revenues because these joint ventures have been, and will continue to be, an integral part of the Company's strategy, as evidenced by investments in joint ventures with operations in 15 countries, many of which have been operating for over 25 years. The $8 million decrease in income from international joint ventures from 1996 to 1997 was due primarily to the consolidation of Factofrance. Fees and other income totalled $206 million for 1997, an increase of $127 million from the prior year, due to increases in net investment gains, securitization gains and fee income and other. Fee 28 income and other increased due to $20 million from the consolidation of Factofrance, and a $10 million gain resulting from the termination of the Company's agreement with Belgravia Financial Services ("Belgravia"). See "Business--Real Estate Finance". Net investment gains increased $66 million during 1997 due to a lower level of losses and writedowns in 1997, as compared to 1996. Gross investment gains were $119 million and $106 million, while losses and writedowns on investments were $50 million and $103 million, in 1997 and 1996, respectively. Losses and writedowns on equity investments were higher in 1996 primarily due to writedowns during the year totalling $53 million on one pre-1990 Corporate Finance investment. Net investment gains are generated primarily from investment activity by Corporate Finance and junior participating lending activity by Real Estate Finance. The Company also has certain investments from its pre-1990 portfolio and from direct equity investment activities, an area in which the Company is no longer pursuing new transactions, which historically have added significant volatility to the level of net investment gains. As a result of the pursuit of smaller individual transaction sizes by Corporate Finance and Real Estate Finance and the significant liquidation of the pre-1990 and direct equity portfolios, the Company expects that, while net investment gains will vary from year to year, the level of this volatility will be reduced. The Company also recognized a $7 million gain in 1997 as a result of changing to the equity method of accounting for limited partnerships and fund investments. During 1997, the Company generated $26 million of securitization gains, primarily through a CMBS securitization in the second quarter. The Company did not retain any residual risk in this securitization transaction, as all of the securities were sold to third parties on a non-recourse basis. The Company expects to periodically securitize CMBS and other receivables in the future. See "Business--Real Estate Finance". OPERATING EXPENSES. The following table summarizes the Company's operating expenses for the years ended December 31, 1997 and 1996:
FOR THE YEAR ENDED DECEMBER 31, INCREASE/(DECREASE) ------------ --------------------- 1997 1996 AMOUNT PERCENT ----- ----- --------- ---------- (IN MILLIONS) Salaries and other compensation..... $ 214 $ 154 $ 60 39.0% General and administrative expenses. 143 93 50 53.8 ----- ----- --------- Total............................. $357 $247 $ 110 44.5 ===== ===== ========= Operating expenses as a percentage of AFE............................. 3.5% 2.8%
Operating expenses, excluding the impact of the Factofrance consolidation, increased by $51 million, or 21%, in 1997, as compared to 1996. This increase was primarily due to the Company's continued investment in developing leadership positions for its Asset Based Finance businesses and expansion of loan origination and portfolio management resources in the Company's CMBS loan area, the opening of 11 new offices, increased investment in technology and higher costs associated with record new business originations. 29 ALLOWANCE FOR LOSSES. The following table summarizes the changes in the Company's allowance for losses of receivables, including the Company's provision for losses of receivables and repossessed assets, for the years ended December 31, 1997 and 1996:
FOR THE YEAR ENDED DECEMBER 31, INCREASE/(DECREASE) ------------ ---------------------- 1997 1996 AMOUNT PERCENT ----- ----- --------- ---------- (IN MILLIONS) Balance at the beginning of the year........................... $ 225 $ 231 $ (6) (2.6)% Provision for losses.......... 164 103 61 59.2 Writedowns.................... (169) (163) (6) (3.7) Recoveries.................... 23 55 (32) (58.2) Factofrance consolidation..... 18 -- 18 N/M Transfers and other........... -- (1) 1 N/M ----- ----- --------- Balance at the end of the year.. $ 261 $ 225 $ 36 16.0% ===== ===== =========
The provision for losses increased to $164 million in 1997 from $103 million in 1996. This increase primarily resulted from provisions due to growth in lending assets, combined with lower levels of recoveries in 1997. Gross writedowns were slightly higher than the prior year at $169 million for 1997 versus $163 million for 1996, while recoveries totalled $23 million in 1997 versus $55 million for 1996. Net writedowns on the current portfolio totalled $62 million, or 0.6% of total average lending assets, in 1997 versus $41 million, or 0.5% of total average lending assets, in 1996. The Company expects lower levels of writedowns in future periods due to significantly lower writedowns on the pre-1990 portfolio. As of December 31, 1997, the ratio of the Company's allowance for losses of receivables to receivables was 2.4%, compared to 2.6% as of December 31, 1996. This decrease in such ratio reflected the continued improvement of the credit quality of the Company's portfolio. The Company intends to continue to systematically evaluate the appropriateness of the allowance for losses of receivables and to adjust the allowance to reflect any changes in the credit quality of the Company's portfolio. INCOME TAXES. The Company's effective income tax rate was 28% for 1997 and 23% for 1996, in each case below the statutory rate due to the use of foreign tax credits, the effect of earnings from international joint ventures and certain favorable tax issue resolutions. The effective tax rates for 1997 and 1996 were reduced by the effects of nonrecurring items, including $15 million of net foreign tax credit carryover utilization in 1997. In future periods, the Company expects its effective tax rate to more closely approximate the statutory rate. 30 LENDING ASSETS AND INVESTMENTS Total lending assets and investments increased $2.3 billion, or 24%, during 1997 reflecting record new business originations of $6.0 billion, a $1.5 billion increase from the consolidation of Factofrance and $5.3 billion of paydowns, loan sales, syndications and securitizations. During 1997, new business volume represented a 47% increase over 1996, as the Company realized the benefit of the market positions held by Asset Based Finance, Corporate Finance and Real Estate Finance. In addition, the Company liquidated 50% of the remaining portion of its pre-1990 portfolio, which as of December 31, 1997 represented 4% of total lending assets and investments. The following table presents the Company's lending assets (which consist of receivables and repossessed assets) and investments by business line and asset type as of December 31, 1997 and 1996:
DECEMBER 31, ---------------------------------- 1997 1996 ------------------ -------------- AMOUNT PERCENT AMOUNT PERCENT ------- ------- ------ ------- (IN MILLIONS) BY BUSINESS CATEGORY: Asset Based Finance....... $ 4,726 40% $4,258 44% International Group (1)... 2,361(2) 20(2) 609 6 Real Estate Finance....... 2,093 18 1,514 16 Corporate Finance......... 2,010 17 2,016 21 Project Finance........... 144 1 160 2 Pre-1990 portfolio........ 492 4 979 10 Other..................... 102 -- 84 1 ------- --- ------ --- Total lending assets and investments............ $11,928 100% $9,620 100% ======= === ====== === BY ASSET TYPE: Receivables............... $10,722 90% $8,529 89% Repossessed assets........ 14 -- 14 -- ------- --- ------ --- Total lending assets.... 10,736(2) 90(2) 8,543 89 Equity and real estate investments.............. 488 4 419 4 Debt securities........... 311 3 251 3 Operating leases.......... 195 1 135 1 International joint ventures................. 198 2 272 3 ------- --- ------ --- Total lending assets and investments............ $11,928 100% $9,620 100% ======= === ====== === Total managed assets.... $11,800 $9,574 Funds employed.......... $10,673 $9,030
- -------- (1) Includes $198 million in investments in international joint ventures, representing 2% of total lending assets and investments, in 1997, and $272 million in investments in international joint ventures, representing 3% of total lending assets and investments, in 1996. (2) Reflects the consolidation of Factofrance in April 1997. The Company's portfolio is concentrated in secured asset based lending, as the combined domestic and consolidated international asset based finance portfolios totalled nearly $7 billion in lending assets and investments, or 58% of total lending assets and investments, at December 31, 1997. During 1997, the Asset Based Finance portfolio, substantially all of which is domestic, grew to $4.7 billion in lending assets and investments, or 40% of total lending assets and investments, at December 31, 1997, due to a 32% increase in new business originations. Real Estate Finance grew to $2.1 billion in lending assets and investments at December 31, 1997, as originations of CMBS receivables totalled $1.1 billion in 1997 versus $500 million in 1996. The Company securitized approximately $1.1 billion of its CMBS receivables in March 1998, and, as a result, Real Estate Finance assets declined in the first quarter of 1998. Corporate Finance generated new business volume of over $1.3 billion in 1997, but its lending assets and investments remained unchanged compared to 1996, due primarily to syndications and runoff in the portfolio. 31 Concentrations of lending assets of 5% or more at December 31, 1997 and 1996, based on the standard industrial classifications of the borrowers, were as follows:
DECEMBER 31, ----------------------------- 1997 1996 -------------- -------------- AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- (IN MILLIONS) General industrial machines................ $637 6% $500 6% Food, grocery and miscellaneous retail..... 603 6 669 8 Business services.......................... 556 5 435 5 Department and general merchandise retail stores.................................... 511 5 987 12
The general industrial machines classification is distributed among machinery used for many different industrial applications. The majority of lending assets in the food, grocery and miscellaneous retail category are revolving and term facilities with borrowers that are primarily in the business of manufacturing and retailing of food products. The business services category is primarily comprised of computer and data processing services, credit reporting and collection and miscellaneous business services. The department and general merchandise retail stores category is primarily comprised of factored accounts receivable, which represent short-term trade receivables from numerous customers. The reduction in department and general merchandise retail stores lending assets in 1997 reflected the sale of $500 million of factored accounts receivable under a $550 million factored accounts receivable facility. See "--Liquidity and Capital Resources". YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 RESULTS OF OPERATIONS OVERVIEW. During 1996, the Company made significant progress in developing the market positions and operating platforms of its Asset Based Finance businesses and strengthening asset quality through the addition of lower risk assets and the significant reduction of pre-1990 Corporate Finance and Real Estate Finance assets. Despite the costs of these efforts, the Company was able to increase net income to $133 million for the year ended December 31, 1996, representing a 6% increase over the prior year. This increase was due to a significantly lower provision for losses, which more than offset the reduction in operating revenues and the increase in spending for developing businesses. The decline in the provision for losses was a result of the continued strong credit quality of the newer Asset Based Finance businesses and the current Corporate Finance and Real Estate Finance portfolios, significant decrease in gross writedowns on the pre-1990 portfolio and the recognition of several large recoveries on the pre-1990 portfolio. The reduction in operating revenues reflected the shift in the Company's portfolio to lower risk, but also lower yielding, assets, coupled with lower net investment gains and a decline in the level of fee accelerations. OPERATING REVENUES. The following table summarizes the Company's operating revenues for the years ended December 31, 1996 and 1995:
FOR THE YEAR ENDED DECEMBER 31, ----------------------------- 1996 1995 -------------- -------------- PERCENT PERCENT AMOUNT OF AFE AMOUNT OF AFE ------ ------- ------ ------- (IN MILLIONS) Net interest income......................... $355 4.1% $387 4.6% Non-interest income: Fees and other income..................... 79 0.9 148 1.7 Factoring commissions..................... 55 0.6 50 0.6 Income of international joint ventures.... 44 0.5 35 0.4 ---- --- ---- --- Total operating revenues................ $533 6.1% $620 7.3% ==== === ==== ===
32 Net Interest Income. The following table summarizes the Company's net interest income for the years ended December 31, 1996 and 1995:
FOR THE YEAR ENDED DECEMBER 31, INCREASE/(DECREASE) -------------------- ---------------------- 1996 1995 AMOUNT PERCENT --------- --------- --------- ---------- (IN MILLIONS) Interest income........... $ 807 $ 851 $ (44) (5.2)% Interest expense.......... 452 464 (12) (2.6) --------- --------- --------- Net interest income..... $ 355 $ 387 $ (32) (8.3) ========= ========= ========= Net interest income as a percentage of AFE...... 4.1% 4.6%
Net interest income decreased by 8.3% in 1996 as compared to 1995, reflecting the continued shift of the portfolio to lower risk, but also lower yielding, Asset Based Finance products, competitive pricing pressures and lower levels of fee accelerations. Interest income yields decreased to 10.8% during 1996 from 11.7% in 1995. Interest expense decreased to 6.5% in 1996 from 6.9% in 1995 due to the decline in the average borrowing rate. A comparative analysis of the year-end principal outstanding and average interest rates paid by the Company on its debt as of December 31, 1996 and 1995, before and after giving effect to interest rate swaps, is shown in the following table:
DECEMBER 31, -------------------------------------------- 1996 1995 --------------------- --------------------- YEAR-END BEFORE AFTER YEAR-END BEFORE AFTER BALANCE SWAPS SWAPS BALANCE SWAPS SWAPS -------- ------ ----- -------- ------ ----- (IN MILLIONS) Commercial paper-- domestic and foreign............... $2,576 5.63% N/A $2,067 5.96% N/A Fixed rate debt............ 2,905 7.02 6.62% 2,699 7.26 6.91% Variable rate debt......... 1,859 4.85 5.78 2,449 5.59 6.36 ------ ------ Total.................... $7,340 5.98 6.29 $7,215 6.32 6.65 ====== ======
Non-Interest Income. The following table summarizes the Company's non- interest income for the years ended December 31, 1996 and 1995:
FOR THE YEAR ENDED DECEMBER 31, INCREASE/(DECREASE) ------------ ---------------------- 1996 1995 AMOUNT PERCENT ----- ----- --------- ---------- (IN MILLIONS) Factoring commissions............ $ 55 $ 50 $ 5 10.0% Income of international joint ventures........................ 44 35 9 25.7 ----- ----- --------- Fees and other income: Fee income and other(1)........ 52 49 3 6.1 Net investment gains........... 3 74 (71) N/M Real estate participation income........................ 24 24 -- -- Securitization gains........... -- 1 (1) N/M ----- ----- --------- Total fees and other income.. $ 79 $ 148 $ (69) (46.6)% ===== ===== ========= Total non-interest income.. $ 178 $ 233 $ (55) (23.6) ===== ===== ========= Non-interest income as a percentage of AFE............... 2.0% 2.7%
-------- (1) Fee income and other consists primarily of loan servicing income, late fees, prepayment fees, other miscellaneous income and equipment residual gains. 33 Factoring commissions during 1996 totalled $55 million, increasing 10% from 1995 due to an increase in factoring volume. Income of international joint ventures increased by 26% during 1996, primarily due to earnings growth from European joint ventures in the Netherlands and France. Net investment gains were $3 million for 1996, as compared to $74 million in 1995. Gross investment gains were $106 million and $133 million, while losses and writedowns were $103 million and $59 million, in 1996 and 1995, respectively. Losses and writedowns on equity investments were higher in 1996 primarily due to writedowns during the year totalling $53 million on one pre-1990 Corporate Finance investment. OPERATING EXPENSES. The following table summarizes the Company's operating expenses for the years ended December 31, 1996 and 1995:
FOR THE YEAR ENDED DECEMBER 31, INCREASE/(DECREASE) ------------ ---------------------- 1996 1995 AMOUNT PERCENT ----- ----- --------- ---------- (IN MILLIONS) Salaries and other compensation.................. $ 154 $ 135 $ 19 14.1% General and administrative expenses...................... 93 81 12 14.8 ----- ----- --------- Total........................ $ 247 $ 216 $ 31 14.4 ===== ===== ========= Operating expenses as a percentage of AFE............. 2.8% 2.6%
During 1996, operating expenses grew 14% versus 1995 primarily due to the Company's continued investments in developing the products and services of its Asset Based Finance businesses. ALLOWANCE FOR LOSSES. The following table summarizes the changes in the Company's allowance for losses of receivables, including the Company's provision for losses of receivables and repossessed assets, for the years ended December 31, 1996 and 1995:
FOR THE YEAR ENDED DECEMBER 31, INCREASE/(DECREASE) ------------ ---------------------- 1996 1995 AMOUNT PERCENT ----- ----- --------- ---------- (IN MILLIONS) Balance at the beginning of the year............................ $ 231 $ 237 $ (6) (2.5)% Provision for losses........... 103 223 (120) (53.8) Writedowns..................... (163) (259) (96) N/M Recoveries..................... 55 28 27 96.4% Transfers and other............ (1) 2 (3) N/M ----- ----- --------- Balance at end of the year....... $ 225 $ 231 $ (6) (2.6)% ===== ===== =========
The provision for losses decreased dramatically from 1995 to 1996 as a result of the lower writedowns and increased recoveries, primarily from the pre-1990 portfolio. Gross writedowns were $163 million and $259 million, while recoveries totalled $55 million and $28 million, for 1996 and 1995, respectively. The credit quality of the current portfolio was demonstrated by net writedowns on the current portfolio totalling $41 million, or 0.50% of total average lending assets, in 1996 versus $45 million, or 0.60% of total average lending assets, in 1995. INCOME TAXES. The Company's effective income tax rate was 23% for 1996 and 27% for 1995, in each case below the statutory rate due to the effect of earnings from international joint ventures, the use of foreign tax credits and favorable tax issue resolutions. 34 LENDING ASSETS AND INVESTMENTS Total lending assets and investments increased $581 million, or 6%, during 1996, as the Company continued to grow its lower risk Asset Based Finance businesses and reduce its pre-1990 portfolio. As of December 31, 1996, the domestic Asset Based Finance portfolio continued to be the largest business category, representing 44% of lending assets and investments. The following tables present lending assets and investments by business category and asset type as of December 31, 1996 and 1995:
DECEMBER 31, ----------------------------- 1996 1995 -------------- -------------- AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- (IN MILLIONS) BY BUSINESS CATEGORY: Asset Based Finance.......................... $4,258 44% $3,147 35% Corporate Finance............................ 2,016 21 2,328 26 Real Estate Finance.......................... 1,514 16 1,234 14 International Group(1)....................... 609 6 506 5 Project Finance.............................. 160 2 186 2 Pre-1990 portfolio........................... 979 10 1,526 17 Other........................................ 84 1 112 1 ------ --- ------ --- Total lending assets and investments....... $9,620 100% $9,039 100% ====== === ====== ===
-------- (1) Includes $272 million in investments in international joint ventures, representing 3% of total lending assets and investments, in 1996, and $233 million in investments in international joint ventures, representing 2% of total lending assets and investments, in 1995.
DECEMBER 31, ----------------------------- 1996 1995 -------------- -------------- AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- (IN MILLIONS) BY ASSET TYPE: Receivables.................................. $8,529 89% $8,085 89% Repossessed assets........................... 14 -- 28 1 ------ --- ------ --- Total lending assets....................... 8,543 89 8,113 90 Equity and real estate investments........... 419 4 428 5 Debt securities.............................. 251 3 152 2 Operating leases............................. 135 1 113 1 International joint ventures................. 272 3 233 2 ------ --- ------ --- Total lending assets and investments....... $9,620 100% $9,039 100% ====== === ====== === Total managed assets....................... $9,574 $9,137 Funds employed............................. $9,030 $8,542
The Company continued to develop a more balanced, lower risk asset based portfolio in 1996 while maintaining the strong market positions of Corporate Finance and Real Estate Finance. Asset diversification was improved with asset growth of over $1 billion in the Asset Based Finance businesses in 1996, with all five Asset Based Finance business groups contributing to this growth. None of the Company's business groups represented more than 21% of the Company's total portfolio at December 31, 1996. Corporate Finance had fundings of approximately $900 million in 1996, but its assets and investments decreased by $312 million in 1996, due primarily to syndications and runoff in the portfolio. 35 The Company's investment in international joint ventures increased due to the impact of undistributed income and an investment made in a factoring company in Chile. Concentrations of lending assets of 5% or more at December 31, 1996 and 1995, based on the standard industrial classifications of the borrowers, were as follows:
DECEMBER 31, ----------------------------- 1996 1995 -------------- -------------- AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- (IN MILLIONS) Department and general merchandise retail stores................................... $987 12% $774 10% Food, grocery and miscellaneous retail.... 669 8 568 7 General industrial machines............... 500 6 392 5 Business services......................... 435 5 387 5 Textile and apparel manufacturing......... 403 5 529 7
The department and general merchandise retail stores and the textiles and apparel manufacturing categories were primarily comprised of factored accounts receivable which represent short-term trade receivables from numerous customers. The majority of lending assets in the food, grocery and miscellaneous retail category were revolving and term facilities with borrowers primarily in the business of manufacturing and retailing of food products. The general industrial machines classification is distributed among machinery used for many different industrial applications. The business services category was primarily comprised of computer and data processing services, credit reporting and collection, and miscellaneous business services. LIQUIDITY AND CAPITAL RESOURCES The Company manages liquidity primarily by monitoring the relative maturities of assets and liabilities and by borrowing funds through the U.S. and international money and capital markets and bank credit markets to fund asset growth and to meet debt obligations. The Company's primary sources of funds are commercial paper borrowings, issuances of medium-term notes and other debt securities and the securitizations, syndications and sales of lending assets. During 1997, the Company's major funding requirements included $6.0 billion of longer-term loans, leases and investments funded, $526 million of short-term loans funded, the retirement of $1.4 billion of senior notes, the acquisition of its joint venture partner's interest in Factofrance for $174 million and common and preferred dividends of $57 million. The Company's major sources of funding these requirements, other than $406 million of cash flows from operations, included loan repayments and investment proceeds of $3.1 billion, the sale, securitization or syndication of $1.7 billion of loans and investments, and the issuance of $2.6 billion of senior notes and $150 million of Series B Preferred Stock. These sales reflected the Company's strategy to limit the size of retained positions and to securitize, retaining minimal to no residual risk, certain asset types, such as commercial mortgages and equipment leases. These financing activities also enabled the Company to reduce short-term debt by $279 million, excluding the effect of consolidating Factofrance, and left the Company with $821 million in cash and short-term investments at the end of 1997. While the portfolio demonstrated increasing liquidity in both its longer term loans and in the increased proportion of factored receivables and revolving loans, the Company continued to maintain a conservative funding posture, with commercial paper and short-term borrowings amounting to 36% of total debt at December 31, 1997 compared to 37% at the end of 1996. As of December 31, 1997, committed bank credit and asset sale facilities of the Company totalled $4.0 billion and represented 122% of the Company's outstanding commercial paper and short-term borrowings. Committed bank credit and asset sale facilities in the United States also were well in 36 excess of 100% of U.S. commercial paper borrowings at December 31, 1997. In April 1997, the Company extended and increased its primary committed bank credit facility, which provides $3.0 billion of liquidity support under two equal credit agreements, a 364-day facility, which has been renewed and will expire April 6, 1999, and a 5-year facility expiring April 8, 2002. In addition, the consolidated international subsidiaries are funded primarily through short-term money market and bank borrowings, which are supported by $625 million of committed foreign bank credit facilities in local currencies. The Company's factored accounts receivable facility allows the Company to sell an undivided interest of up to $550 million in a designated pool of its factored accounts receivable to five bank-supported conduits. As part of its array of financing options, the Company utilized this facility during the fourth quarter so that, as of December 31, 1997, the Company had sold approximately $500 million of factored accounts receivable. During the fourth quarter of 1997, the Company established a $400 million committed warehouse line, which expires in June 1998, to finance CMBS. As of December 31, 1997, the Company had borrowed $200 million under this facility, which borrowings were paid off in January 1998. In an effort to maintain a sound capital structure, in June 1997 the Company privately issued $150 million of its Series B Preferred Stock at a purchase price of $100 per share. Pursuant to registration rights of the holders of Series B Preferred Stock, as of January 1998, all of the shares of the Series B Preferred Stock had been exchanged for an equal number of shares of Series C Preferred Stock, and the Series B Preferred Stock was subsequently retired as a class. The Series C Preferred Stock is substantially identical to the Series B Preferred Stock, except that the issuance of the Series C Preferred Stock was registered under the Securities Act and therefore the certificates for the shares of Series C Preferred Stock do not bear restrictive legends. In addition to these alternate sources of liquidity, the Company has access to $500 million of additional liquidity support under the Keep Well Agreement between the Company and Fuji Bank. This agreement, which cannot be terminated by either party prior to December 31, 2002, also provides that Fuji Bank will maintain the net worth of the Company at an amount equal to $500 million. Fuji Bank has never been required to make any capital contribution or advance any funds to the Company under the Keep Well Agreement. See "Certain Relationships and Related Transactions--Relationship with Fuji Bank--Keep Well Agreement". The Company's ratio of debt (net of short-term investments) to total stockholders' equity remained conservative relative to commercial finance industry peers at 5.2 times at December 31, 1997 compared to 5.0 times at December 31, 1996. Leverage and the level of commercial paper and short-term borrowings continued to remain within ranges targeted by the Company to maintain a strong financial position. ACCOUNTING DEVELOPMENTS The Company adopted Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125"), as amended by Statement of Financial Accounting Standards No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125" ("SFAS 127") on January 1, 1997. SFAS 125 uses a "financial components" approach that focuses on control to determine the proper accounting for financial asset transfers and addresses the accounting for servicing rights on financial assets in addition to mortgage loans. Securitizations of finance receivables are accounted for as sales when legal and effective control over the related receivables is surrendered. Servicing assets or liabilities are recognized when the servicing rights are retained by the seller, provided that a market rate servicing fee is received which is above or below the costs of servicing. 37 In June 1997, the Financial Accounting Standards Board released Statement of Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which the Company has adopted effective January 1, 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" ("SFAS 131") was also released in June 1997 and has also been adopted effective January 1, 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. SFAS 130 and SFAS 131 address financial statement disclosures and, as a result, will not have an impact on the financial results of the Company. YEAR 2000 COMPLIANCE The Company has made, and will continue to make, certain investments in its software applications and systems to ensure the Company's systems function properly through and beyond the year 2000. The Company has three loan processing systems, a lease processing system, a factoring system, and systems for general ledger processing, payroll, accounts payable, fixed assets, treasury and other smaller applications. The Company has established plans to modify, upgrade or replace each of these systems for compliance with year 2000 and has established an overall plan to bring all of these systems into compliance by the end of 1999. The Company continues to assess the impact of the year 2000 issue on its consolidated international subsidiaries, which includes the performance of risk assessments and the evaluation of the extent of programming changes required to address the issue. The Company currently estimates that the total costs of year 2000 compliance for the Company will be below $25 million. Maintenance or modification costs will be expensed as incurred, while the costs of new software will be capitalized and amortized over the software's estimated useful life. The Company is also in the process of performing a risk assessment of its joint venture companies' plans for year 2000 compliance and of the resulting potential impact on the Company's investments in international joint ventures. This assessment is expected to be completed in 1998. The Company continues to bear some risk related to the year 2000 issue and could be adversely affected if other entities (e.g., vendors and borrowers) not affiliated with the Company do not appropriately address their own year 2000 compliance issues. The Company is working with its mainframe provider to validate its plans for year 2000 compliance. In addition, the Company is incorporating a year 2000 risk assessment into its underwriting and portfolio management activities in order to evaluate its exposure due to any lack of compliance on the part of its clients. 38 BUSINESS The following discussion contains certain "forward-looking statements" (as defined in Section 27A of the Securities Act), which are generally identified by the words "anticipates", "believes", "estimates", "expects", "plans", "intends" and similar expressions. Such statements are subject to certain risks, uncertainties and contingencies, including, but not limited to, those set forth under the heading "Risk Factors", which could cause the Company's actual results, performance or achievements to differ materially from those expressed in, or implied by, such statements. See "Special Note Regarding Forward-Looking Statements". GENERAL The Company is a leading diversified commercial financial services company which provides a broad array of financial products and services to mid-sized and small businesses in the United States and selected international markets. The Company provides its products and services principally in five business categories: (i) asset based finance ("Asset Based Finance"), which provides secured loans and factoring through five business groups, (ii) Heller Real Estate Financial Services ("Real Estate Finance"), which provides secured real estate financing, (iii) Heller International Group, Inc. ("International Group"), which provides international asset based financing and factoring, (iv) Heller Corporate Finance ("Corporate Finance"), which provides collateralized cash flow lending, and (v) Heller Project Finance ("Project Finance"), which provides structured financing for domestic energy-related projects. The Company's primary clients and customers are entities in the manufacturing and service sectors having annual sales generally in the range of $5 million to $250 million and in the real estate sector having property values generally in the range of $1 million to $40 million. The Company concentrates primarily on senior secured lending, with 89% of lending assets and investments at December 31, 1997 being made on such basis. Also, to a more limited extent, the Company makes subordinated loans and invests in select debt and equity instruments. The Company believes that, as of December 31, 1997, it was the fourth largest factoring operation in the United States in terms of factoring volume (and the largest factoring operation worldwide), the third largest originator of SBA 7(a) guaranteed small business loans (including leadership positions in California and Texas) and among the largest lenders to private equity-sponsored companies in the U.S. middle market. Additionally, the Company is a recognized leader in real estate finance, vacation ownership lending and middle-market equipment finance and leasing in the United States. The Company has built its portfolio through effective asset origination capabilities, disciplined underwriting and credit approval processes and effective portfolio management. Most of the Company's business groups have also developed the ability to manage asset, client and industry concentrations and enhance profitability by distributing assets through securitizations, syndications and/or loan sales. The Company was founded in 1919 and from its inception has targeted its commercial financing activities at mid-sized and small businesses in the United States. Since 1964, the Company has also competed in selected international markets through its consolidated subsidiaries and investments in international joint ventures. The Company was purchased by Fuji Bank in 1984, and between the time of such acquisition and 1990, the substantial majority of the Company's portfolio consisted of Corporate Finance and Real Estate Finance assets (together representing 76% of the Company's lending assets and investments at December 31, 1990). Since 1990, the Company has diversified its portfolio, investing major resources in building its Asset Based Finance businesses, through start-ups of new business groups and business units, as well as the acquisition of its small business lending operation and the expansion of smaller existing operations. During these years, the Company has also introduced a number of Asset Based Finance businesses, including asset based working capital and term financing, and commercial equipment finance in 1992; public finance and industrial equipment finance in 1996; and commercial funding in 1997. As a result, the Company's Asset Based Finance 39 business, which represented only 14% of the portfolio of lending assets and investments at December 31, 1990, constituted 40% of the Company's portfolio at December 31, 1997. In the past several years, the Company has also expanded its overseas operations, most significantly by completing the acquisition in April 1997 of the interest of its joint venture partner in Factofrance, the leading factoring company in France. A number of the Company's new or expanded businesses have only recently begun to contribute meaningfully to the Company's revenues and portfolio of lending assets and investments. The following chart shows the breakdown of the Company's portfolio as of December 31, 1997 and demonstrates the success of the Company's diversification efforts: [PIE CHART APPEARS HERE] Total Lending Assets and Investments Asset Based Finance 40% $4.7 billion Real Estate Finance 17% 2.1 billion Corporate Finance 17% 2.0 billion International Group 20% 2.4 billion Pre-1990 Portfolio 4% 0.5 billion Other 2% 0.2 billion Total Lending Assets and Investments: $11.9 billion 40% of Total Lending Assets and Investments Asset Based Finance Breakdown Equipment Finance and Leasing 11% $1.3 billion Sales Finance 10% 1.2 billion Business Credit 9% 1.0 billion Small Business Lending 7% 0.8 billion Current Asset Management 3% 0.4 billion Total Asset Based Finance Lending Assets and Investments: $4.7 billion The Company's total lending assets and investments were $11.9 billion and common stockholders' equity was $1.4 billion at December 31, 1997. For the year ended December 31, 1997, the Company's net income increased 19% to $158 million, from $133 million for the prior year, while new business volume increased 47% over the prior year, from $4.1 billion to $6.0 billion. Net income applicable to common stock was $144 million for the year ended December 31, 1997, which represented an increase of 17% from $123 million for the prior year. The credit quality of the Company's portfolio is reflected in nonearning assets of $155 million, or 1.4% of total lending assets, at December 31, 1997, the lowest level of nonearning assets in over 10 years. 40 Information with respect to the Company's business categories, strategic business groups, principal product offerings, principal industries and markets served and locations are provided in the following chart: ----------------------------------------------------- HELLER FINANCIAL, INC. ----------------------------------------------------- - ------------------------------------- ASSET BASED FINANCE - ------------------------------------- Lending Assets And Investments(1)(2) $4,726 Strategic Business Groups
Equipment Sales Finance Business Credit Current Asset Small Business Finance & Management Lending Leasing Lending Assets and Investments (1)(2) $1,316 $1,228 $1,025 $391(4) $766 Revenues(1)(2) $ 110 $ 106 $ 114 $122 $ 65
Principal Product Offerings
. Term Debt . Customized . Secured . Factoring . SBA guaranteed . Finance leases sales finance revolving lines . Import and 7(a) loans . Operating programs to of credit and export financing . SBA 504 loans leases manufacturers term loans . Letters of credit (senior to . Off-balance and distributors . Debtor-in- . Revolving lines associated sheet loans . Customized possession of credit and government . True leases financing financing term loans debentures) . Turn-key programs to . Credit protection . Conventional financing independent . Accounts commercial real . Lease leasing receivable estate loans discounting companies and management . Municipal leases timeshare . Subordinated developers debt (aircraft)
Principal Industries and Markets Served
. Manufacturers . Printing . Manufacturers . Apparel . Manufacturers . Retailers . Machine tools . Retailers . Textiles . Service . High-tech . Plastics . Wholesalers . Home providers . Grocery . High tech and and distributors furnishings . Retailers . Restaurant software . Service firms . Housewares . Wholesalers franchise . Medical . Agriculture . Golf . Distributors . Construction . Leasing . Frozen food . Graphic arts companies . Temporary . Energy . Resort services . Municipal, state developments and federal governments . Airline lessors
- -------- ------------- --------- ------- REAL ESTATE INTERNATIONAL CORPORATE PROJECT FINANCE GROUP FINANCE FINANCE - -------- ------------- --------- ------- $2,093 $2,361(3) $2,010 $144 Real Estate International Corporate Project Finance Finance Group Finance $2,093 $2,361(3) $2,010 $144 $ 252 $ 187 $ 245 $ 19
Principal Product Offerings . Fixed rate first . Factoring . Senior secured . Pre-construction mortgages . Import and business value development . Variable rate export financing lending through loans participating and . Letters of credit revolving lines . Junior and non-participating . Revolving lines of credit and senior first mortgages of credit and term loans construction and . Letters of credit term loans . Mezzanine term loans . Junior . Credit protection financing participating . Accounts . Equity fund financing receivable investments and management co-investments . Leasing
Principal Industries and Markets Served Income- Subsidiaries: Private equity . Energy generating . Factofrance sponsored . Oil and gas properties, . Singapore companies in: . Environmental including: . Mexico . Manufacturing . Coal and . Multi-family . Australia . Retail minerals mining housing . Health care . Forest products . Hotels Joint ventures: . Agriculture . Industrial . Europe . Food . Office . Latin America . Service . Retail . Asia/Pacific . Broadcasting . Senior housing . Transportation . Manufactured . Printing housing . Funeral communities services . Self-storage . Electronics . Tax credit/ affordable housing Locations . 18 . 9 . 9 .5 .24 .10 .19 countries .5 .1 - ---------
(1) In millions, as of, or for the year ended, December 31, 1997. (2) Excludes pre-1990 Corporate Finance, Real Estate Finance and other assets and revenues. (3) Includes $198 million in investments in international joint ventures. (4) Reflects the sale of approximately $500 million in factored accounts receivable. See "--Asset Based Finance--Current Asset Management". 41 STRATEGY The Company is dedicated to delivering consistent growth in earnings and assets, while maintaining the strong credit quality of its asset portfolio. Over the past five years, the Company has achieved growth in earnings and assets through its strong client orientation, productive origination network, disciplined adherence to prudent credit principles and its long-standing established positions in many of its target markets. Management believes that the following operating principles have been key to the Company's success and will continue to guide its business strategy in the future: . Maintain "superior client focus" in targeted mid-sized and small business markets throughout all economic cycles . Build and maintain a strong financial profile through a sound capital structure, a diversified and high-quality asset portfolio and conservative reserve levels . Adhere to prudent credit standards and actively manage the lending and investment asset portfolio . Enhance productivity by leveraging existing operating platforms, selectively investing in technology and people and practicing disciplined expense management . Develop, attract and retain experienced professionals by maintaining a vibrant culture that promotes delegation, accountability, creativity and teamwork Adhering to these operating principles, the Company intends to continue its earnings and asset growth by employing the following strategies: MAINTAIN AND BUILD LEADERSHIP POSITIONS IN SELECTED MID-SIZED AND SMALL BUSINESS MARKETS. The Company's proven ability to develop client relationships and originate transactions with mid-sized and small businesses throughout economic cycles has resulted in leadership positions in several of its businesses. In addition, since 1992, the Company has entered several markets in which the Company believes it has developed an effective infrastructure to enable it to establish leadership positions. This strategy has resulted in compound annual growth in new business volume of 25% over the past five years. The Company seeks further growth by (i) continuing to develop the well- established market position of its domestic and international factoring, Corporate Finance and Small Business Lending businesses, by offering a broad array of innovative financing products and services, (ii) continuing to expand the capabilities of Real Estate Finance, including origination of CMBS receivables, and (iii) further developing the market positions of certain other asset based lending businesses, such as Equipment Finance and Leasing, Business Credit and Sales Finance, by building upon its proven competencies and technical expertise. The lending assets and investments of Asset Based Finance have grown at a compound annual rate of 34% since 1992 and, as of December 31, 1997, accounted for approximately 40% of the Company's total portfolio. The Company believes that the businesses which comprise its Asset Based Finance portfolio represent an attractive combination of growth potential, earnings consistency and credit quality. CONTINUE TO GROW THE COMPANY'S INTERNATIONAL BUSINESSES. The Company has a significant international presence in factoring and asset based financing, and has had subsidiaries and joint ventures in many international markets for more than 25 years. These enterprises provide a solid base for consistent growth in international earnings and also provide the Company with the opportunity to meet the international financing needs of its domestic client base. MAINTAIN PRUDENT CREDIT STANDARDS AND ACTIVE PORTFOLIO MANAGEMENT. The Company has built a disciplined "credit culture" supported by portfolio and risk management processes. The Company establishes clearly defined credit strategies for each of its businesses, permitting them to make quick 42 credit decisions under disciplined guidelines. Additionally, the Company believes that it has developed an expertise in structuring sophisticated transactions that enables it to accommodate unique client needs without compromising credit quality. The Company has centralized the administration of credit policy and portfolio management to ensure consistency in credit strategy, efficiency in credit analysis and processing, and the ability to monitor credit quality and portfolio composition closely. The Company's emphasis on disciplined credit standards has resulted in a more diverse portfolio, smaller positions retained, net credit losses of 1.5% of average lending assets (0.7% excluding pre-1990 assets) in 1997 and nonearning assets representing 1.4% of lending assets (0.8% excluding pre-1990 assets) at December 31, 1997. The Company believes that its risk management systems, portfolio management and servicing capabilities, and client-oriented structuring capabilities will continue to support long-term profitability. ENHANCE CAPITAL MARKETS AND DISTRIBUTION EXPERTISE. As a complement to their strong origination capabilities, most of the Company's business groups have developed competencies in the syndication and/or securitization of lending assets. The Company has successfully syndicated and sold $2.4 billion of assets and securitized $994 million of assets from 1995 through 1997, and plans to prudently expand these capabilities. The Company believes that these skills will be increasingly important to the Company's ability to (i) maximize its origination strength by providing broader market access to higher quality credits, (ii) manage customer and asset concentrations, (iii) generate income growth in competitive markets through syndication fees and securitization gains and (iv) meet a broader array of the financial needs of its current clients. INCREASE OPERATING EFFICIENCIES WITHIN THE COMPANY. The Company has established a framework for its business categories that it believes can support the profitable addition of a significant level of assets. The Company believes it is recognizing significant economies of scale in certain of its established businesses (domestic factoring and Corporate Finance), and expects to improve economies of scale in its other businesses as they grow and achieve critical mass. The Company believes that its recent and ongoing investments in building its Asset Based Finance businesses and its Real Estate Finance CMBS capability provide effective operating platforms for these businesses, and that continued strong growth in new business using these existing platforms will generate productivity improvements in the future. The Company has also invested in technology and support systems, significantly upgrading its technology infrastructure in 1997 to streamline the management of portfolio accounts, increase its efficiency in processing high transaction volumes and enable Intranet and Internet communications and commerce. In addition, the Company will selectively pursue strategic acquisition opportunities of businesses and portfolios of assets that it believes will generate additional economies of scale and productivity improvements. ASSET BASED FINANCE Asset Based Finance is the Company's largest business category with total lending assets and investments of $4.7 billion, or 40% of the Company's total lending assets and investments, at December 31, 1997, and revenues of $517 million, or 41% of the Company's total revenues, for 1997. The Asset Based Finance portfolio is comprised of factored accounts receivable, secured working capital loans, equipment loans and leases to end users, vendor finance program loans and leases, small business loans, and loans to leasing companies and timeshare developers. Asset Based Finance consists of five distinct business groups: (i) Equipment Finance and Leasing, (ii) Sales Finance, (iii) Business Credit, (iv) Heller Current Asset Management (principally domestic factoring) ("Current Asset Management") and (v) Small Business Lending. The following tables present certain information regarding Asset Based Finance as of the end of, and for, each of the years in the three-year period ended December 31, 1997: 43
AS OF, OR FOR THE YEAR ENDED, DECEMBER 31, ------------------------ 1997 1996 1995 ------ ------ ------ (IN MILLIONS) Lending Assets and Investments: Equipment Finance and Leasing................. $1,316 $ 981 $ 697 Sales Finance................................. 1,228 1,090 849 Business Credit............................... 1,025 867 638 Small Business Lending........................ 766 403 208 Current Asset Management...................... 391(1) 917 755 ------ ------ ------ Total lending assets and investments........ $4,726 $4,258 $3,147 ====== ====== ====== Revenues: Current Asset Management...................... $ 122 $ 113 $ 98 Business Credit............................... 114 86 64 Equipment Finance and Leasing................. 110 73 53 Sales Finance................................. 106 80 72 Small Business Lending........................ 65 47 18 ------ ------ ------ Total revenues.............................. $ 517 $ 399 $ 305 ====== ====== ====== Revenues as of percentage of total revenues..... 40.7% 40.5% 28.1% Ratio of net writedowns to average asset based lending assets........................... 0.2 0.2 0.4 Ratio of nonearning assets to total asset based lending assets........................... 0.7 0.4 0.6
-------- (1) Reflects the sale of $500 million of factored accounts receivable during 1997. At December 31, 1997, the Asset Based Finance groups were contractually committed to finance an additional $1.2 billion to new and existing borrowers, generally contingent upon the maintenance of specific credit standards. Since many of the commitments are expected to remain unused, the total commitment amounts do not necessarily represent future cash requirements. No significant commitments exist to provide additional financing related to nonearning assets. EQUIPMENT FINANCE AND LEASING Equipment Finance and Leasing is comprised of the following four distinct business units: Heller Commercial Equipment Finance ("Commercial Equipment Finance"), which as of December 31, 1997 represented 70% of the Equipment Finance and Leasing portfolio; Heller Aircraft Finance ("Aircraft Finance"), which as of December 31, 1997 represented 21% of this portfolio; and two newer businesses, Heller Public Finance ("Public Finance") and Heller Industrial Equipment Finance ("Industrial Equipment Finance"). Commercial Equipment Finance, which has generated over $1.8 billion in new business volume since its inception in 1992, represents the largest unit in Equipment Finance and Leasing, with $913 million in lending assets and investments at December 31, 1997. Commercial Equipment Finance generated new business volume of $542 million in 1997. Commercial Equipment Finance provides general equipment term debt and lease financing directly to a diverse group of middle market companies, which use such financing to expand, replace or modernize their equipment or refinance existing equipment obligations. Typically, the equipment which serves as collateral for the financing is essential to the operations of the borrower, and the amount financed is generally not a substantial part of the borrower's capital structure. In 1997, the average transaction size was approximately $4 million. A typical borrower/lessee is a U.S. business with annual revenues of at least $35 million seeking 44 financing of between $1 million and $40 million. The Commercial Equipment Finance portfolio consisted of 18 industry classifications at December 31, 1997, of which transportation represented the largest with 18% of lending assets, followed by food/grocery and computer-related, each of which represented 14% of lending assets, and restaurants which represented 10% of lending assets. The portfolio's credit quality is reflected in cumulative net writedowns of $1 million since the business unit's inception in 1992. Aircraft Finance is a niche competitor in the commercial aircraft and aircraft engine finance industry, with total lending assets and investments of $280 million at December 31, 1997. Aircraft Finance provides financing through operating leases and senior and junior secured loans on both new and used equipment. Clients are typically mid-tier foreign or domestic airlines. Transaction sizes range from $3 million to $40 million, with an average transaction size in 1997 of approximately $17 million. Aircraft Finance generated new business volume of $198 million in 1997. Aircraft Finance has developed a reputation for responsiveness on single investor transactions, which generally involve one aircraft with lease terms of three to seven years. In addition, Aircraft Finance's reliability and industry knowledge has made it a frequently desired participant in larger financings by other aircraft lessors. Utilizing its industry and equipment expertise, Aircraft Finance is able to effectively shift its product offering mix during various phases of the aircraft finance equipment cycle and effectively remarket and dispose of equipment. Public Finance and Industrial Equipment Finance, both of which were started in 1996, together had total lending assets and investments of $123 million at December 31, 1997. Public Finance and Industrial Equipment Finance generated new business volume in the aggregate amount of $144 million in 1997. Public Finance provides equipment and project/facility financing to state and local governments, with an average transaction size in 1997 of approximately $2 million. The interest income earned by Public Finance is generally exempt from federal income taxes. Industrial Equipment Finance provides collateral based equipment financing to companies with annual revenues of less than $35 million in the machine tool, construction and printing industries. The average transaction size of Industrial Equipment Finance in 1997 was approximately $600,000. Equipment Finance and Leasing represents the largest business group within Asset Based Finance, with total lending assets and investments of $1.3 billion, or 28% of the lending assets and investments of Asset Based Finance, as of December 31, 1997. Each business unit of Equipment Finance and Leasing provides structured equipment finance in select markets through transactions sourced through multiple channels. Equipment Finance and Leasing serves a broad range of industries, including transportation, supermarket, manufacturing, computers, energy, restaurant and food processing. Major product offerings include finance leases, true leases, term loans, off-balance sheet loans, operating leases and turn-key financing. Through its broad market access, the group also generates new business referrals for other business groups of the Company, particularly Business Credit, Small Business Lending and Sales Finance. 45 The following table sets forth certain information regarding Equipment Finance and Leasing as of the end of, and for, each of the years in the three- year period ended December 31, 1997:
AS OF, OR FOR THE YEAR ENDED, DECEMBER 31, ------------------ 1997 1996 1995 ------ ---- ---- (IN MILLIONS) Total lending assets and investments.................. $1,316 $981 $697 New business volume................................... 884 534 386 Revenues.............................................. 110 73 53 Revenues as a percentage of total revenues............ 8.7% 7.4% 4.9% Ratio of net writedowns (recoveries) to average lending assets............................... 0.1 (0.4) (0.2) Ratio of nonearning assets to lending assets.......... 0.1 0.0 0.7
Equipment Finance and Leasing provides the Company broad, national access to the equipment finance marketplace through its 18 domestic offices. Unlike many of its competitors, Equipment Finance and Leasing emphasizes direct origination of its business, which the Company believes provides it with a competitive advantage and enables it to generate repeat business. In addition to direct origination, Equipment Finance and Leasing generates business through traditional broker and intermediary channels. The servicing of the Equipment Finance and Leasing portfolio is performed on a centralized basis. Commercial Equipment Finance's and Industrial Equipment Finance's approach to lending concentrates on the following three critical factors: (i) the cash flow of the borrower, (ii) the importance/value of the equipment to the borrower's overall operations and (iii) the relative strength of the borrower's balance sheet and capital structure. Aircraft Finance focuses on the strength of the underlying collateral and the credit worthiness of the underlying lessee. Public Finance generally lends to investment grade municipalities secured by essential use equipment. In addition to maintaining underwriting discipline, Equipment Finance and Leasing manages credit risk through industry and borrower diversification. The group's portfolio exhibited strong credit quality as of December 31, 1997, with nonearning assets of less than $1 million on a $1.3 billion portfolio, and net writedowns of $1 million (0.1% of lending assets) for the year ended December 31, 1997. Equipment Finance and Leasing is also able to assess residual value risk and effectively manage off-lease equipment exposures. Designated individuals establish all equipment residuals used in pricing lease transactions and continuously research secondary market values to establish current values, estimate future values and mark industry trends. As of December 31, 1997, no equipment was off-lease. Equipment Finance and Leasing distributes a portion of its assets through securitizations and syndications. In 1997, Equipment Finance and Leasing contributed $72 million of assets to an equipment securitization and syndicated an additional $102 million of assets. Through these capital markets capabilities, Equipment Finance and Leasing is able to provide broader market penetration, while managing borrower and industry concentrations. SALES FINANCE Sales Finance is comprised of two business units: (i) Heller Vendor Finance ("Vendor Finance"), which provides customized financing programs to manufacturers and distributors of a wide variety of commercial, industrial and technology products, and (ii) Heller Lender Finance ("Lender Finance"), which provides customized financing programs to independent leasing companies and timeshare developers. Vendor Finance, which comprised 50% of the Sales Finance portfolio at year end 1997, provides customized sales financing programs to manufacturers and distributors of a wide 46 variety of commercial, industrial and technology products. Vendor Finance offers products and services to two broad client categories: (i) commercial and industrial, for which Vendor Finance provides sales financing programs consisting of true leases, loans, conditional sales contracts and installment sales contracts secured by equipment; and (ii) healthcare, information and technology, for which Vendor Finance provides sales financing programs consisting of true leases, loans and conditional sales contracts, secured by health care and high-technology products. These sales financing programs enable the vendor to enhance its marketing and sales capabilities by offering financing and leasing options to its customers. Transactions under these programs generally have partial or, in some cases, full recourse to the vendor. Individual transaction sizes within these programs range from $50,000 to $5 million, with an average transaction size in 1997 of approximately $400,000. Terms generally range from two to six years. In 1997, Vendor Finance generated approximately $500 million in new business volume. Lender Finance, which comprised 50% of the Sales Finance portfolio at year-end 1997, provides (i) financing for the vacation ownership industry and (ii) lease portfolio financing. Lender Finance is one of the largest lenders to the U.S vacation ownership industry, providing timeshare resort developers with full life-cycle financing, primarily receivables hypothecation and inventory financing. Lender Finance also provides a wide range of financing to independent leasing companies, including term financing, residual financing, private securitization structures and warehouse financing. Lender Finance generated $254 million in new business volume in 1997. Vacation ownership transaction sizes range from $3 million to $50 million, with an average transaction size in 1997 of $14 million, secured by individual, underlying transactions with an average size in 1997 of approximately $100,000. Terms generally range from two to ten years. Lease portfolio financing transaction sizes range from $50,000 to $2 million, with an average transaction size in 1997 of $1 million. Terms generally range from two to seven years. Sales Finance, with $1.2 billion in lending assets and investments represented 26% of the Asset Based Finance portfolio as of December 31, 1997. Sales Finance provides financing and related support and servicing capabilities to assist its clients in selling their products and services by enabling them to provide financing for the end-customer of these products. The range of services provided by Sales Finance includes sales financing, transaction structuring, credit analysis, documentation, billing, collections, portfolio reporting and marketing support. In 1997, Sales Finance generated new business volume of $754 million, which represented a 39% increase over 1996. The following table sets forth certain information regarding Sales Finance as of the end of, and for, each of the years in the three-year period ended December 31, 1997:
AS OF, OR FOR THE YEAR ENDED, DECEMBER 31, -------------------- 1997 1996 1995 ------ ------ ---- (IN MILLIONS) Total lending assets and investments............ $1,228 $1,090 $849 New business volume..... 754 544 589 Revenues................ 106 80 72 Revenues as a percentage of total revenues...... 8.3% 8.1% 6.6% Ratio of net writedowns (recoveries) to average lending assets. -- (0.1) 0.1 Ratio of total nonearning assets to lending assets......... 1.2 0.9 0.4
The business strategy of Sales Finance is to focus on developing long-term relationships with clients by understanding its clients' businesses and the role that financing plays in their sales and 47 marketing processes. The sales force, which has expertise in originating and structuring customized programs for companies in its targeted industries, calls directly on prospective clients, using a database of pre-qualified prospects. Sales Finance's credit approach focuses on the structure of the underlying financing program and stresses a balance among three key factors: (i) credit strength of the underlying lessee or borrower, (ii) value and quality of the underlying collateral and (iii) financial support from the client, and Sales Finance's reliance upon that support, as many of its programs have full or partial recourse to the manufacturer or vendor. The group uses standard underwriting formats and documents to ensure strict credit controls, while still providing the quick response times demanded by clients. Credit quality of Sales Finance's portfolio is evidenced by nonearning assets constituting 1.2% of total lending assets and investments, and no net writedowns during 1997. Sales Finance is focusing increasingly on the use of syndications and securitizations to manage client and industry concentrations, and to generate fee income and increase returns. During 1997, the Company securitized $195 million of Sales Finance receivables in a single transaction. The Company did not retain any credit risk on this transaction, as all securities were sold to third parties on a non-recourse basis. The Company continues to generate servicing fees from these assets. BUSINESS CREDIT Business Credit, with $1.0 billion in total lending assets and investments, represented 22% of the Asset Based Finance portfolio as of December 31, 1997. Business Credit provides asset based working capital and term financing to middle-market companies for growth, refinancings, recapitalizations, acquisitions, seasonal borrowing, and debtor-in-possession ("DIP") and post- DIP transactions, through senior loans primarily secured by accounts receivable, inventory and, to a lesser extent, machinery and equipment and real estate. Middle-market companies served by Business Credit include manufacturers, retailers, wholesalers, distributors and service firms. The group's portfolio is well-diversified, consisting of 20 industries, with food/grocery and retail representing the largest concentrations at 22% and 13%, respectively, of total lending assets, and no other industry constituting more than 10% of total lending assets, as of December 31, 1997. Terms of transactions usually range from one to eight years, with an average commitment size and funds employed of $25 million and $10 million, respectively. The following table sets forth certain information regarding Business Credit as of the end of, and for, each of the years in the three-year period ended December 31, 1997:
AS OF, OR FOR THE YEAR ENDED, DECEMBER 31, ------------------ 1997 1996 1995 ------ ---- ---- (IN MILLIONS) Total lending assets and investments.................. $1,025 $867 $638 New business volume................................... 695 639 476 Revenues.............................................. 114 86 64 Revenues as a percentage of total revenues............ 9.0% 8.7% 5.9% Ratio of net writedowns to average total lending assets......................... -- 0.1 -- Ratio of nonearning assets to lending assets.......... -- -- --
Through its nine regional sales offices, Business Credit provides the Company with broad national coverage with a focus on regional market opportunities. Financing is typically provided as agent (lead lender), but also may be provided as a co-lender or a participant in senior secured transactions agented by other traditional asset-based lenders. Business Credit generates the majority of its new business through intermediaries such as investment and commercial banks, and private equity investors. The group is also expanding its direct marketing efforts through its use of proprietary databases of prospective borrowers. In 1997, Business Credit generated new business commitments 48 and related fundings of $1.7 billion and $695 million, respectively, up 26% and 9% over the prior year period. Business Credit underwrites transactions based on balancing collateral values, cash flow and capital structure. Business Credit protects its position against deterioration of a borrower's performance by using established advance rates against eligible collateral and cross-collateralizing revolving credit facilities and term loans. Credit risk is also actively managed through portfolio diversification by industry and individual client exposure. Business Credit manages its portfolio centrally, ensuring more consistent control over all of its accounts and efficient documentation and approval of transactions. The credit quality is reflected in cumulative net writedowns of $2 million since the group's inception in 1992, and no nonearning assets as of December 31, 1997. Business Credit has established a syndication capability, enabling it to commit to larger transactions while still managing the size of ultimate retained positions and to generate additional income. Although Business Credit can provide commitments of up to $200 million, the business generally syndicates its ultimate retained funds employed position to $35 million or less. Total syndication activity in 1997 amounted to $132 million in fundings. CURRENT ASSET MANAGEMENT Current Asset Management has been a leading provider of factoring services in the United States for over 50 years. For 1997, the Company believes Current Asset Management was the fourth largest factor in terms of volume in the United States, with factoring volume of over $7.3 billion, a 6% increase from the prior year. This group provides factoring, working capital and term loans, receivables management, import and export financing and credit protection to middle-market companies which have targeted annual sales in the range of $10 million to $100 million. Working capital and term loans consist of advances against inventory and equipment on a formula basis, as well as seasonal over- advances. In addition, during 1997, the group's commercial funding unit began making asset based loans in the $1 million to $10 million range secured by receivables and inventory. Current Asset Management serves a wide variety of markets, with specific expertise in apparel, textiles and home furnishings. As of December 31, 1997, the majority of Current Asset Management's lending assets consisted of short-term trade receivables from department and general merchandise retail stores. The group has also begun to service a broad range of additional markets such as golf, temporary staffing services, seafood and housewares. Clients use Current Asset Management's factoring products and services to address a broad range of needs, including improving cash flow, mitigating the risk of bad debt charge-offs, increasing sales, improving management information and converting the high fixed cost of operating a credit and collection department into a lower, variable expense. The following table sets forth certain information regarding Current Asset Management as of the end of, and for, each of the years in the three-year period ended December 31, 1997:
AS OF, OR FOR THE YEAR ENDED, DECEMBER 31, --------------------- 1997 1996 1995 ----- ----- ----- (IN MILLIONS) Total lending assets and investments.............. $ 391(1) $ 917 $ 755 Factoring volume(2)............................... 7,347 6,933 6,084 Revenues.......................................... 122 113 98 Revenues as a percentage of total revenues........ 9.6% 11.5% 9.0% Ratio of net writedowns to average lending assets. 1.0 1.0 1.3 Ratio of nonearning assets to total lending assets........................................... 0.5 0.4 1.1
-------- (1) Reflects the sale of $500 million of factored accounts receivable during 1997. (2) Due to the short-term nature of these purchased receivables, factoring volume is not included in new business volume. 49 Current Asset Management maintains two full service offices in New York and Los Angeles and operates sales offices in Atlanta and Dallas. Through its experienced sales force, Current Asset Management generates business through direct calling on manufacturers, and develops and maintains relationships with financial intermediaries that provide financing advice to prospective clients. In addition to its direct sales efforts, Current Asset Management generates business through its programmatic use of direct mail and advertising and through referrals from other business groups of the Company. The Company believes that its focused sales efforts, market research program, and advertising and marketing efforts have played a key role in the growth of its domestic factoring operation. Current Asset Management has developed sophisticated proprietary information storage and retrieval systems, such as electronic transmission of invoices and remittances, scanning technology and electronic linkage with clients, that streamline the management and processing of accounts receivable and enable the Company to efficiently process the high transaction volumes related to factoring invoices. Current Asset Management believes that the investments in technology associated with factoring represent a significant entry barrier to new competitors. Current Asset Management generally purchases the accounts receivable owed to clients by their customers, usually on a nonrecourse basis, and may provide funding to clients as an advance against those receivables. Customer credit coverage is extended based on an analysis of operating performance and sources of short-term liquidity, such as borrowing facilities and trade relationships. The Company also utilizes technology to electronically perform basic credit surveillance routines. The Current Asset Management portfolio's strong credit quality is evidenced by nonearning assets of only 0.5% of lending assets at December 31, 1997 and net writedowns of 1.0% of lending assets for 1997. The Company has a factored accounts receivable facility, which allows it to sell an undivided interest of up to $550 million in a designated pool of its factored accounts receivable to five bank-supported conduits. The Company utilized this facility during the fourth quarter of 1997. At December 31, 1997, the Company had sold approximately $500 million of factored accounts receivables through this facility, resulting in a decrease of Current Asset Management lending assets from the end of the prior year. SMALL BUSINESS LENDING Small Business Lending, with $766 million in lending assets and investments, represented 16% of the Asset Based Finance portfolio as of December 31, 1997. Small Business Lending provides long-term financing to the large and growing small business market, primarily under SBA loan programs. Small Business Lending's major product offerings are SBA 7(a) loans, which are guaranteed up to 80% by the SBA, and SBA 504 loans, which are senior to an accompanying SBA loan and have an average loan to collateral value of 50%. Small Business Lending is one of only fourteen non-banks licensed by the SBA to make SBA 7(a) loans and is the third largest originator of such loans. Small Business Lending provides long-term financing for real estate purchase, construction or refinance; business or equipment acquisition; working capital; and debt refinancing, primarily to companies in the manufacturing, retail or service sectors with annual sales of $500,000 to $3 million. While the portfolio is somewhat concentrated in California and Texas, it is geographically diversified within these states. The entire Small Business Lending portfolio is diversified by industry type, with concentrations of 13% in transportation services and 10% in miscellaneous consumer services and no other industry representing more than 10% of the portfolio as of December 31, 1997. The loans provided by Small Business Lending are generally for amounts up to $3 million, have an average size of $500,000 and have a contractual maturity ranging from five to 25 years. 50 The following table sets forth certain information regarding Small Business Lending as of the end of, and for, each of the years in the three-year period ended December 31, 1997:
AS OF, OR FOR THE YEAR ENDED, DECEMBER 31, ---------------- 1997 1996 1995 ---- ---- ---- (IN MILLIONS) Total lending assets and investments.................... $766 $403 $208 New business volume..................................... 472 393 165 Revenues................................................ 65 47 18 Revenues as a percentage of total revenues.............. 5.1% 4.8% 1.7% Ratio of net writedowns to average lending assets....... 0.3 0.3 0.5 Ratio of nonearning assets to lending assets............ 2.0 1.2 0.5
Small Business Lending operates out of 24 offices in 12 states and the portfolio is managed on a centralized basis. Small Business Lending focuses its marketing efforts on developing relationships with third party intermediaries, such as real estate brokers, mortgage brokers and business brokers. Additional business originates from referrals from existing customers, franchisors, targeted direct marketing and cross-referrals from other of the Company's business groups. Small Business Lending enjoys SBA Preferred Lender Program "PLP" status, which enables it to approve SBA 7(a) loans under SBA-delegated approval authority. The Company believes that Small Business Lending has maintained a position as one of the nation's three largest originators of SBA 7(a) loans since 1995, and placed first and second in volume growth in 1996 and 1997, respectively. In California and Texas, the two largest markets for SBA 7(a) loans, Small Business Lending was the largest originator of SBA 7(a) loans in 1997. Total new business for all products exceeded $470 million in 1997. Small Business Lending's underwriting and procedural guidelines are standardized to ensure a consistent and efficient process. Credit decisions are based on analysis of a prospective borrower's cash flow, the use of independent valuations for collateral and a review of management. Loans are generally secured by real estate and equipment, with additional collateral in the form of other business assets, personal residences and, in many instances, personal guarantees. The portfolio is comprised of approximately 2,800 individual loans, which provides diversified risk. Delinquent accounts are managed aggressively, beginning at five days past due, through a combination of collection calls and letters. At 60 days past due, accounts are transferred to a specialized workout area. Nonearning assets represented 2% of the portfolio as of December 31, 1997, of which 75% were the guaranteed portions of net SBA 7(a) loans which are held until a liquidation is complete and the SBA repurchases the loan. Net writedowns have remained at or below 0.5% annually for the past three years. The Company has developed the ability to sell the guaranteed portions of SBA 7(a) loans in the secondary market. The guaranteed portions of SBA 7(a) loans, which represented 45% of the lending assets of this group at December 31, 1997, can generally be sold and settled, at amounts in excess of book value, in less than 45 days. Small Business Lending has sold over $150 million in guaranteed 7(a) loans over the past two years. REAL ESTATE FINANCE Real Estate Finance had total lending assets and investments of $2.1 billion, or 17% of the Company's total lending assets and investments, as of December 31, 1997, and total revenues of $252 million, or 20% of the Company's total revenues, for 1997. Real Estate Finance provides financing to owners, investors and developers for the acquisition, refinancing and renovation of commercial income producing properties in a wide range of property types and geographic areas. The group serves these markets by offering structured financings using tailored senior secured debt and junior participating financings, as well as through its CMBS unit, which originates CMBS loans. Transactions are secured by a variety of property types including office, multi-family, retail, industrial, manufactured housing communities, self storage facilities and hotels. Typical transactions range in size from $1 million to $35 million, with an average transaction size in 1997 of approximately $4 million. 51 The following table sets forth certain information regarding Real Estate Finance as of the end of, and for, each of the years in the three-year period ended December 31, 1997:
AS OF, OR FOR THE YEAR ENDED, DECEMBER 31, ---------------------- 1997 1996 1995 ------ ------ ------ Lending assets and investments: CMBS lending assets and investments............ $1,092 $ 459 $ 99 Other lending assets and investments........... 1,001 1,055 1,135 ------ ------ ------ Total lending assets and investments......... $2,093 $1,514 $1,234 ====== ====== ====== New business volume: CMBS new business volume....................... $1,163 $ 549 $ 196 Other new business volume...................... 504 402 550 ------ ------ ------ Total new business volume.................... $1,667 $ 951 $ 746 ====== ====== ====== Revenues......................................... $ 252 $ 192 $ 185 Revenues as a percentage of total revenues....... 19.8% 19.5% 17.1% Ratio of net writedowns to average lending assets.......................................... 0.1 0.1 -- Ratio of nonearning assets to lending assets..... 0.2 0.3 1.0
Real Estate Finance has ten offices throughout the United States which generate new business by using a combination of direct calling on prospective borrowers and calling on intermediaries and brokers who have relationships with potential clients. Real Estate Finance also markets its products through the use of trade advertising, direct marketing, newsletters, and trade show attendance and sponsorship. In 1997, Real Estate Finance generated new fundings of approximately $1.7 billion, the majority of which were related to CMBS originations. The Company has made and expects to continue to make significant investments in CMBS originations and securitization capabilities to remain a leader in this business. In 1997, the Company terminated its agreement with Belgravia, whereby Belgravia provided CMBS loans to the Company for approval and financing and shared in CMBS loan and securitization profits. In 1997, Belgravia originated approximately 35% of the Company's total CMBS volume. The Company expects that the termination of this agreement will not have a material impact on the Company's origination of new CMBS loans, due to the Company's investment in loan origination capabilities. Real Estate Finance has a credit philosophy that emphasizes selecting properties that generate stable or increasing income cash flow streams and that have strong asset quality and proven sponsorship with defined business plans. Real Estate Finance's lending and investment philosophy emphasizes portfolio liquidity, relatively small individual transaction sizes, and maintenance of a diverse portfolio in terms of geographic location and property type. The CMBS product is underwritten to rating agency guidelines with the intent to sell through all credit risk at the time of securitization. This strategy has resulted in low levels of nonearning assets at December 31, 1997 and 1996. There were minimal net writedowns of Real Estate Finance assets during 1997, 1996 and 1995. The Real Estate Finance portfolio is diversified across a wide range of property types and geographic areas. At December 31, 1997 and 1996, Real Estate Finance lending assets and investments were distributed as follows:
PROPERTY TYPES -------------- 1997 1996 ---- ---- Apartments.............. 20% 11% Manufactured housing.... 16 21 Retail.................. 14 7 Self storage............ 12 13 General purpose office buildings.............. 8 6 Industrial.............. 8 10 Hotels.................. 6 14 Loan Portfolios......... 4 9 Other................... 12 9 --- --- 100% 100% === ===
GEOGRAPHIC AREAS ---------------- 1997 1996 ---- ---- California.............. 29% 28% Southwest............... 19 13 Midwest................. 12 10 Florida................. 7 12 Mid-Atlantic States..... 6 8 New England............. 5 4 New York................ 4 8 West.................... 4 3 Other................... 14 14 --- --- 100% 100% === ===
52 During 1997, the Company securitized over $500 million of CMBS loans and did not retain any residual interest in this transaction, as all of the receivable backed securities were sold to third parties on a non-recourse basis. Real Estate Finance also originated approximately $1.1 billion of CMBS loans which were originated to be held for securitization at December 31, 1997, a 138% increase over the prior year. The Company also securitized approximately $1.1 billion of these loans in March 1998 and did not retain any residual risk in this transaction. Real Estate Finance syndicates 50% to 75% of junior participation originations through a syndication arrangement with a real estate fund sponsored by a nationally known investment banking firm. The use of syndications has enabled the Company to reduce its average individual retained position in this portfolio to approximately $1 million. At December 31, 1997, Real Estate Finance was contractually committed to finance an additional $102 million to new and existing borrowers, generally contingent upon the maintenance of specific credit standards. Since many of the commitments are expected to remain unused, the total commitment amounts do not necessarily represent future cash requirements. No significant commitments exist to provide additional financing related to nonearning assets. INTERNATIONAL GROUP International Group has a significant international presence in factoring and asset based financing, and has had subsidiaries and joint ventures in many international markets for more than 25 years. International Group currently consists of four majority owned subsidiaries and joint ventures with operations in 15 countries in Europe, Asia/Pacific and Latin America. International Group had total lending assets and investments of $2.4 billion, or 20% of the Company's total lending assets and investments, at December 31, 1997, and total revenues (including the Company's share of income from international joint ventures) of $187 million, or 15% of the Company's total revenues, for 1997. International Group provides factoring and receivables management services, asset based financing, acquisition financing, leasing and vendor finance and/or trade finance programs. The largest of the Company's consolidated subsidiaries is Factofrance, which is the leading factoring company in France and the third largest factor in the world, with factoring volume of approximately $8 billion in 1997. The largest of the Company's joint ventures is NMB-Heller Holding N.V., which has operations primarily in the United Kingdom, Holland and Germany and accounted for 54% of the year-end 1997 investments in international joint ventures balance. The Company believes that International Group's subsidiaries and joint ventures provide a solid base for consistent growth in international earnings and also provide the Company with the opportunity to meet the international financing needs of its domestic client base. 53 The following is a list of the Company's consolidated subsidiaries and joint ventures, organized by geographic region, with information regarding country of existence and the Company's ownership interest as of December 31, 1997:
COMPANY YEAR OF OWNERSHIP INITIAL COUNTRY PERCENTAGE INVESTMENT ------- ---------- ---------- CONSOLIDATED SUBSIDIARIES: Europe ------ Factofrance France 98%(1) 1966 Asia/Pacific ------------ Heller Asia Capital Singapore 100% 1974 Heller Financial Services Australia 100 1969 Latin America ------------- Heller Financial Mexico Mexico 92% 1993 JOINT VENTURES: Europe ------ Belgo-Factors Belgium 50% 1987 Nordisk Factors Denmark 50 1965 NMB Heller Holland 50(2) 1967 Heller Bank A.G. Germany 50(2) 1964 NMB Heller Limited United Kingdom 50(2) 1964 O.B. Heller a.s. Czech Republic 25(2) 1995 O.B. Heller Factoring a.s. Slovakia 25(2) 1997 Handlowy-Heller S.A. Poland 25(2) 1994 Heller Portuguesa Portugal 40 1972 Heller Espanola Spain 50 1965 Asia/Pacific ------------ East Asia Heller Hong Kong 50% 1972 Heller Factoring (M) Sdn Malaysia 49 1992 Thai Farmers Heller Thailand 49 1990 Latin America ------------- Heller-Sud Servicios Financieros Argentina 50% 1994 HellerNet-Sud Chile 50 1996
-------- (1) International Group increased its ownership of Factofrance from 48.8% to 97.6% in April 1997 by acquiring the interests of its joint venture partner of over 30 years. (2) Represents the Company's effective ownership through its 50% interest in NMB-Heller Holding N.V. 54 The following table sets forth certain information regarding International Group as of the end of, and for, each of the years in the three-year period ended December 31, 1997:
AS OF, OR FOR THE YEAR ENDED, DECEMBER 31, ----------------------------------- 1997 1996 1995 ----------- --------- --------- (IN MILLIONS) Lending assets and investments of consolidated subsidiaries: Europe............................ $ 1,860(1) $ -- $ -- Asia/Pacific...................... 223 257 212 Latin America..................... 80 80 61 ----------- --------- --------- 2,163 337 273 Investments in international joint ventures: Europe............................ 160 238 216 Asia/Pacific...................... 16 14 12 Latin America..................... 22 20 5 ----------- --------- --------- 198 272 233 ----------- --------- --------- Total lending assets and investments.................... $ 2,361 $ 609 $ 506 =========== ========= ========= Revenues of consolidated subsidiaries: Europe............................ $ 121(1) $ -- $ -- Asia/Pacific...................... 25 26 23 Latin America..................... 5 12 6 ----------- --------- --------- 151 38 29 Income of international joint ventures: Europe............................ 32 42 35 Asia/Pacific...................... 1 2 1 Latin America..................... 3 -- (1) ----------- --------- --------- 36 44 35 ----------- --------- --------- Total international revenues.... $ 187 $ 82 $ 64 =========== ========= ========= Total international revenues as a percentage of total revenues....... 14.7% 8.3% 5.9% Ratio of net writedowns to average lending assets..................... 1.8 -- -- Ratio of nonearning assets to lending assets..................... 0.9 8.2 3.7
-------- (1) Reflects the consolidation of Factofrance in April 1997. International Group has broad, worldwide access to mid-sized and small businesses with operations in 19 countries. Each subsidiary and joint venture of International Group operates independently, with its own well-developed methods of originating business, and the majority of the international joint ventures are self-financed. International Group manages its investments through offices located in London, Singapore and Chicago. Each subsidiary and joint venture has its own well-developed credit philosophy, risk management policies and procedures and portfolio management processes, which are monitored by the Company through participation on their boards of directors, credit committees and other executive and administrative bodies. Net writedowns in consolidated subsidiaries totalled $23 million in 1997 and related primarily to the Company's Mexican subsidiary and the consolidation of Factofrance. CORPORATE FINANCE Corporate Finance is a leading provider of middle market financing to private equity-sponsored companies. Corporate Finance had total lending assets and investments of $2.0 billion, or 17% of the 55 Company's total lending assets and investments, as of December 31, 1997 and total revenues of $245 million, or 19% of the Company's total revenues, for 1997. Corporate Finance primarily provides secured financing for leveraged buyouts, acquisitions, recapitalizations, refinancings, expansion and growth of publicly and privately held entities in a wide variety of industries. In almost all cases, these transactions involve professional or private equity investors ("equity sponsors"), who acquire businesses for financial or strategic purposes. Corporate Finance provides secured term and revolving credit facilities, with durations of up to ten years, and to a lesser extent provides unsecured or subordinated financings and invests in private equity buy-out funds. Corporate Finance also from time to time makes modest non- voting equity investments in conjunction with senior debt facilities, receives warrants or equity interests as a result of providing financing, and makes stand-alone equity co-investments, primarily with known equity sponsors. Corporate Finance also serves as co-lender or participant in larger senior secured cash flow transactions originated by other lenders. The Corporate Finance portfolio has loans outstanding in a wide range of industries, including manufacturing, services, metals, plastics, consumer products, health care and defense. The portfolio is diversified among 26 industries with concentrations of 12% in both chemicals/plastics and general industrial machinery at December 31, 1997. No other industry represented more than 10% of the total portfolio. The following table sets forth certain information regarding Corporate Finance as of the end of, and for, each of the years in the three-year period ended December 31, 1997:
AS OF, OR FOR THE YEAR ENDED, DECEMBER 31, ----------------------- 1997 1996 1995 ------ ------ ------- (IN MILLIONS) Total lending assets and investments......... $2,010 $2,016 $2,328 New business volume.......................... 1,378 858 1,412 Revenues..................................... 245 257 310 Revenues as a percentage of total revenues... 19.3% 26.1% 28.6% Ratio of net writedowns to average lending assets...................................... 1.3 1.0 0.7 Ratio of nonearning assets to lending assets. 0.3 2.1 0.8
Corporate Finance serves its clients with teams of senior level originators located in five regional offices. Corporate Finance has developed and maintains close relationships with approximately 200 equity sponsors, many of whom have been clients of the Company for ten or more years and who have financed several transactions with this business group. The commitment to finance by this business group is predicated on the Company's assessment of the borrower's ability to generate cash flow to repay the loan based on the borrower's equity sponsor, market position, relationships with clients and suppliers and ability to withstand competitive challenges. Corporate Finance assets are generally cross-collateralized and secured by liens on the borrower's current and fixed assets and capital stock. Corporate Finance manages its portfolio centrally to ensure consistent application of credit policy and efficient documentation and approval of transaction modifications. Portfolio quality was demonstrated at December 31, 1997 by nonearning assets of $7 million, or 0.3% of lending assets. The portfolio had net writedowns of $25 million in 1997 versus $21 million in 1996. In 1997, Corporate Finance functioned as agent for 29 syndicated transactions. The Company believes its level of agented transactions makes it the fourth largest syndicator of private equity-sponsored deals in the United States. Total syndication activity in 1997 amounted to $602 million in funds. Although Corporate Finance can provide commitments of up to $150 million per transaction, the group generally syndicates its ultimate retained position to less than $20 million. As of December 31, 1997, the average retained transaction size was approximately $14 million in commitments and approximately $8 million of fundings, which reflects the group's significant use of the syndication market. 56 As of December 31, 1997, Corporate Finance was contractually committed to finance an additional $950 million to new and existing borrowers, generally contingent upon the maintenance of specific credit standards. Since many of the commitments are expected to remain unused, the total commitment amounts do not necessarily represent future cash requirements. No significant commitments exist to provide additional financing related to nonearning assets. PROJECT FINANCE Project Finance is a specialized financing business, which provides structured financing for individual projects to domestic independent oil and gas, coal, mining and power companies. Financing is provided in the form of senior and junior secured loans and equity investments. Project Finance had total lending assets and investments of $144 million, or 1.2% of the Company's total lending assets and investments, as of December 31, 1997 and revenues of $19 million, or 1.5% of the Company's revenues, for 1997. Transaction sizes generally range from $2 million to $20 million, and terms range from six to 17 years. Project Finance originates its financing opportunities primarily through intermediaries with which it has established long-standing relationships in its targeted industries. In 1997, Project Finance generated $36 million in new business volume, with an average transaction size of $5 million. The credit approval process involves a detailed financial and legal review of the contract and underlying project economic projections, together with a review of all industry relevant data. Portfolio management procedures involve the regular receipt of project status reports together with related financial and operating information, as well as periodic site visits. The Company expects Project Finance to remain a small percentage of its assets, relative to its other business units. The following table sets forth certain information concerning Project Finance as of the end of, and for, each of the years in the three-year period ended December 31, 1997:
AS OF, OR FOR THE YEAR ENDED, DECEMBER 31, ---------------------- 1997 1996 1995 ---- ----- --------- (IN MILLIONS) Total lending assets and investments............ $144 $ 160 $186 New business volume..... 36 23 52 Revenues................ 19 9 27 Revenues as a percentage of total revenues...... 1.5% 0.9% 2.5% Ratio of net writedowns to average lending assets................. -- 4.8 -- Ratio of nonearning assets to lending assets................. 14.2 11.5 4.5
The nonearning assets in Project Finance at December 31, 1997 and 1996 consisted of one transaction which the Company expects to liquidate in 1998 with little or no net writedown. At December 31, 1997, Project Finance was contractually committed to finance an additional $54 million to new and existing borrowers, generally contingent upon the maintenance of specific credit standards. Since many of the commitments are expected to remain unused, the total commitment amounts do not necessarily represent future cash requirements. No significant commitments exist to provide additional financing related to nonearning assets. PRE-1990 PORTFOLIO The lending philosophy of Corporate Finance and Real Estate Finance prior to 1990 emphasized larger, less liquid transactions and transactions with lower levels of cash flow and collateral coverage. Subsequent to 1990, the Company has developed a credit strategy which focuses on transactions with lower lending multiples, smaller retained positions and greater liquidity. As a result, the Company has separately managed the pre-1990 portfolio over the last several years in its effort to closely monitor 57 credit quality and effectively reduce this exposure. During this period, the Company has substantially reduced its pre-1990 portfolio from $2.5 billion, or 33% of lending assets and investments, at December 31, 1993 to $492 million, or 4% of lending assets and investments, at December 31, 1997. Approximately 70% of the remaining pre-1990 portfolio consists of real estate assets which have been independently appraised and written down to the appraised value. The net writedowns related to working out of the pre-1990 assets have been significant, with $1.1 billion of writedowns on pre-1990 accounts since 1991. The Company believes it has dealt with the negative effect of this portfolio and expects the impact of the pre-1990 portfolio to be insignificant beginning in 1998. See "Risk Management--Portfolio Quality--Pre-1990 Portfolio". The following table sets forth certain information concerning the pre-1990 Corporate Finance and Real Estate Finance portfolio as of the end of, and for, each of the years in the three-year period ended December 31, 1997:
AS OF, OR FOR THE YEAR ENDED, DECEMBER 31, ---------------------- 1997 1996 1995 ----- ----- -------- (IN MILLIONS) Total lending assets and investments........... $ 492 $ 979 $1,526 Revenues....................................... 40 30 148 Revenues as a percentage of total revenues..... 3.1% 3.0% 13.7% Ratio of net writedowns to average lending assets........................................ 11.5 5.9 11.3 Ratio of nonearning assets to lending assets... 15.5 17.8 14.2
Net writedowns as a percentage of average lending assets were higher in 1997 than 1996 due to a lower level of recoveries in 1997 than the prior year. SALES AND MARKETING The Company originates transactions in the United States through a dedicated sales force of over 260 employees in over 40 locations and through its network of wholly-owned and joint venture commercial finance companies with operations in 19 other countries around the world. These sales people have industry- specific experience that enables them to effectively structure commercial finance transactions to companies in the industries and market segments served by the Company. The Company's sales force originates business through a combination of (i) direct calling on prospective borrowers, (ii) relationships with manufacturers, dealers, and distributors, (iii) relationships with a wide variety of private equity investors, business brokers, investment bankers, and other intermediaries and referral sources, and (iv) relationships with financial institutions. The Company has invested in expanding and broadening its market coverage in several of its businesses, particularly Small Business Lending and CMBS, and expects these investments to enhance the Company's ability to generate new transactions and income. Sales force compensation encourages active, profitable new business development, client retention, credit quality, pricing margins and cross- referral of business opportunities to other business groups. The Company also markets its products and services through the use of general market advertising, trade advertising, direct mail, a web site, public relations, newsletters, trade show attendance and sponsorship, educational seminars, and a variety of other market- and industry-specific events. The Company maintains several proprietary databases for the purpose of generating targeted, customized direct marketing campaigns and for the purpose of tracking relationship history with certain of its clients and prospects. The Company regularly conducts client satisfaction surveys and other market research studies designed to assess its competitive position and to identify unfulfilled needs of its clients and prospects. 58 SECURITIZATION, SYNDICATION AND LOAN SALE ACTIVITIES The Company has developed strong capabilities in the areas of securitization, syndication and loan sales. These capital markets activities provide the Company with the ability to (i) maximize its origination strength by providing broader market access to higher quality credits, (ii) manage customer and asset concentrations, (iii) generate income growth in competitive markets through syndication fees and securitization gains and (iv) meet a broader array of the financial needs of its current clients. The Company also uses securitizations and syndications to provide attractive financial returns on high-quality, lower yielding assets. The Company believes that additional benefits are realized by its credit, operations and underwriting processes being subjected to capital markets disciplines. The following table sets forth certain information with respect to the Company's capital market activities in 1997, 1996 and 1995:
1997 1996 1995 ------ ------ ------ (IN MILLIONS) New business volume.............................. $5,970 $4,052 $3,854 Securitizations.................................. 774 -- 220 Syndications and loan sales...................... 964 757 708
SECURITIZATIONS The Company securitizes assets to generate fee income and to manage client and industry concentrations and leverage its origination capabilities. In 1997, the Company securitized $774 million of assets through the completion of a CMBS and an equipment based securitization. The Company did not retain any credit risk in either of these transactions, as all of the receivable backed notes were sold to third parties on a non-recourse basis. SYNDICATIONS AND LOAN SALES The Company syndicates assets and sells loans to manage client concentrations and generate fees, and has established syndication and loan sale capabilities in nearly all of its business categories. To facilitate its syndication activity, the Company has established and maintains relationships with a wide variety of financial institutions throughout the United States. In 1997, the Company completed syndications and sales of $964 million in receivables, investments and loans. COMPETITION The Company's markets are highly fragmented and extremely competitive and are characterized by competitive factors that vary by product and geographic region. The Company's competitors include other commercial finance companies, national and regional banks and thrift institutions, investment banks, leasing companies, investment companies, manufacturers and vendors. Competition from both traditional competitors and new market entrants has been intensified in recent years by an improving economy, growing marketplace liquidity and increasing recognition of the attractiveness of the commercial finance markets. In addition, the rapid expansion of the securitization markets is dramatically reducing the difficulty in obtaining access to capital, which is the principal barrier to entry into these markets. This is further intensifying competition in certain market segments, including competition from specialized securitization lenders that offer aggressive pricing terms. The Company competes primarily on the basis of pricing, terms, structure and service in many of its markets. Competitors of the Company often seek to compete aggressively on the basis of these factors and the Company may lose market share to the extent it is unwilling to match its competitors' pricing, terms and structure in order to maintain its spreads or to maintain its credit discipline. To the extent that the Company matches competitors' pricing, terms or structure, it may experience decreased spreads and/or increased risk of credit losses. Many of the Company's competitors are large 59 companies that have substantial capital, technological and marketing resources, and some of these competitors are larger than the Company and may have access to capital at a lower cost than the Company. Further, the size and access to capital of certain of the Company's competitors are being enhanced by the recent surge in consolidation activity in the commercial and investment banking industries. Also, the Company's competitors include businesses that are not affiliated with bank holding companies and therefore are not subject to the same extensive federal regulations that govern bank holding companies. As a result, such non-banking competitors may engage in certain activities which currently are prohibited to the Company. See "--Regulation". REGULATION Fuji Bank is a bank holding company within the meaning of the Bank Holding Company Act, and is registered as such with the Federal Reserve. As a result, the Company is subject to the Bank Holding Company Act and is subject to examination by the Federal Reserve. In general, the Bank Holding Company Act limits the activities in which the Company may engage to those which the Federal Reserve has generally determined to be "so closely related to banking . . . as to be a proper incident thereto" and generally requires the approval of the Federal Reserve before the Company may engage directly or through a subsidiary in such activities. To obtain the Federal Reserve's approval, Fuji Bank must submit a notice that provides information both about the proposed activity or acquisition and about the financial condition and operations of Fuji Bank and the Company. The Bank Holding Company Act will continue to apply to the Company for as long as Fuji Bank holds 25% or more of any class of the Company's voting stock or otherwise is deemed to control the management or operations of the Company under the Bank Holding Company Act and the Federal Reserve's regulations and interpretations thereunder. The Company's current business activities constitute permitted activities or have been authorized by the Federal Reserve. SBA loans made by the Company are governed by the Small Business Act and the Small Business Investment Act of 1958, as amended, and may be subject to the same regulations by certain states as are other commercial finance operations. The federal statutes and regulations specify the types of loans and loan amounts which are eligible for the SBA's guaranty as well as the servicing requirements imposed on the lender to maintain SBA guarantees. The operations of the Company are subject, in certain instances, to supervision and regulation by state and federal governmental authorities and may be subject to various laws and judicial and administrative decisions imposing various requirements and restrictions, which, among other things, (i) regulate credit granting activities, (ii) establish maximum interest rates, finance charges and other charges, (iii) require disclosures to customers, (iv) govern secured transactions and (v) set collection, foreclosure, repossession and claims handling procedures and other trade practices. Although most states do not regulate commercial finance, certain states impose limitations on interest rates and other charges and on certain collection practices and creditor remedies and require licensing of lenders and financiers and adequate disclosure of certain contract terms. The Company is also required to comply with certain provisions of the Equal Credit Opportunity Act that are applicable to commercial loans. Additionally, the Company is subject to regulation in those countries in which the Company has operations and in most cases has been required to obtain central governmental approval before commencing business. In the judgment of management, existing statutes and regulations have not had a material adverse effect on the business conducted by the Company. However, it is not possible to forecast the nature of future legislation, regulations, judicial decisions, orders or interpretations, nor their impact upon the future business, financial condition or results of operations or prospects of the Company. EMPLOYEES As of March 31, 1998, the Company had 2,362 employees. The Company is not subject to any collective bargaining agreements and believes that its employee relations are good. 60 PROPERTIES The Company leases office space for its corporate headquarters in Chicago, Illinois and leases other offices throughout the United States, Europe, Asia/Pacific and Latin America. The Company does not own any material real property. LEGAL PROCEEDINGS The Company is a party to a number of legal proceedings as plaintiff and defendant, all arising in the ordinary course of its business. The Company believes that the amounts, if any, which may be ultimately funded or paid with respect to these matters will not have a material adverse effect on the Company's business, financial condition or results of operations, but there can be no assurance that an adverse decision in any such legal proceeding would not have such a material adverse effect. RISK MANAGEMENT The Company's business activities contain elements of risk. The Company considers the principal types of risk to be credit risk and asset/liability risk (including interest rate and liquidity risk). The Company considers the management of risk essential to conducting its businesses and to maintaining profitability. Accordingly, the Company's risk management systems and procedures are designed to identify and analyze the Company's risks, to set appropriate policies and limits and to continually monitor these risks and limits by means of reliable administrative and information systems and other policies and programs. CREDIT RISK MANAGEMENT The Company manages credit risk through its underwriting procedures, centralized approval of individual transactions and active portfolio and account management. Underwriting procedures have been developed for each business line, enabling the Company to assess a prospective borrower's ability to perform in accordance with established loan terms. These procedures may include analyzing business or property cash flows and collateral values, performing financial sensitivity analyses and assessing potential exit strategies. For transactions originated with the intent of reducing the Company's ultimate retained asset size, the Company's syndication units assign a risk rating prior to approval of the underlying transaction, reflecting its confidence level, prior to funding, in syndicating the proposed transaction. Financing and restructuring transactions exceeding designated amounts are reviewed and approved by an independent corporate credit function, and larger transactions require approval by a centralized credit committee. During 1997, the Company further strengthened its credit risk management function through the appointment of a Chief Credit Officer, who reports to the Company's Chairman. Each business group is subject to a quarterly portfolio review of its significant assets with the Chief Credit Officer and, in some cases, the Chairman. The Company manages its portfolio by monitoring transaction size and diversification by industry, geographic area, property type and borrower. Through these methods, management identifies and limits exposure to unfavorable risks and seeks favorable financing opportunities. Loan grading systems are used to monitor the performance of loans by product category, and an overall risk classification system is used to monitor the risk characteristics of the total portfolio. These systems generally consider debt service coverage, the relationship of the loan to underlying business or collateral value, industry characteristics, principal and interest risk, and credit enhancements such as guarantees, irrevocable letters of credit and recourse provisions. When a problem account is identified, professionals that specialize in the relevant industry are brought in to more closely monitor the account and formulate strategies to optimize and accelerate the resolution process. Since 1994, the Internal Audit Department, independent of operations, has performed an independent review to evaluate the 61 risk identification and credit management processes, as well as validate the loan grading of assets in such portfolios and reports its findings to senior management and the Audit Committee of the Board of Directors. ASSET/LIABILITY MANAGEMENT INTEREST RATE AND FOREIGN CURRENCY RISK MANAGEMENT The Company uses derivatives as an integral part of its asset/liability management program to reduce its overall level of financial risk arising from normal business operations. These derivatives, particularly interest rate swap agreements, are used to manage liquidity, diversify sources of funding, alter interest rate exposure arising from mismatches between assets and liabilities and manage exposures to foreign exchange fluctuations. The Company is not an interest rate swap dealer nor is it a trader in derivative securities, and it has not used speculative derivative products for the purpose of generating earnings from changes in market conditions. Before entering into a derivative agreement, management determines that an inverse correlation exists between the value of a hedged item and the value of the derivative. At the inception of each agreement, management designates the derivative to specific assets, pools of assets or liabilities. The risk that a derivative will become an ineffective hedge is generally limited to the possibility that an asset being hedged will prepay before the related derivative expires. Accordingly, after inception of a hedge, asset/liability managers monitor the effectiveness of derivatives through an ongoing review of the amounts and maturities of assets, liabilities and swap positions. This information is reported to the Financial Risk Management Committee ("FRMC"), the members of which include the Company's Chairman, Chief Financial Officer and Treasurer. The FRMC determines the direction the Company will take with respect to its financial risk position. This position and the related activities of the FRMC are reported regularly to the Company's Executive Committee and Board of Directors. The Company uses interest rate swaps as an important tool for financial risk management, which enables it to match more closely the interest rate and maturity characteristics of its assets and liabilities. As such, interest rate swaps are used to change the characteristics of fixed rate debt to that of variable rate liabilities, to alter the characteristics of specific fixed rate asset pools to more closely match the interest terms of the underlying financing and to modify the variable rate basis of a liability to more closely match the variable rate basis used for variable rate receivables. At December 31, 1997, the Company had $6.6 billion in notional amount of swap agreements with commercial banks and investment banking firms. The average interest rates paid by the Company on its outstanding indebtedness, before and after the effect of swap agreements, as of December 31, 1997 and 1996 are summarized below:
DECEMBER 31, -------------------------------------------- 1997 1996 --------------------- --------------------- YEAR-END BEFORE AFTER YEAR-END BEFORE AFTER BALANCE SWAPS SWAPS BALANCE SWAPS SWAPS -------- ------ ----- -------- ------ ----- (IN MILLIONS) Commercial paper-- domestic and foreign........... $2,560 5.71% N/A $2,576 5.63% N/A Fixed rate debt................. 3,951 6.90 6.67% 2,905 7.02 6.62% Variable rate debt.............. 2,051 5.44 6.01 1,859 4.85 5.78 ------ ------ Total......................... $8,562 6.19 6.44 $7,340 5.98 6.29 ====== ======
The swap agreements had the effect of increasing interest expense by $8 million during 1997. At December 31, 1997, balance sheet assets that mature or reprice over the next three months exceeded balance sheet liabilities that mature or reprice over the same period by $1.1 billion. After the effect of 62 off-balance sheet instruments, liabilities that mature or reprice over the next three months exceeded assets that mature or reprice over the same period by $158 million. The largest such difference at a month end during 1997 was $695 million. The Company's sensitivity to changes in interest rates is regularly monitored and analyzed by measuring the repricing and amortization characteristics of assets, liabilities and off-balance sheet derivatives. The Company utilizes various models to assess interest rate risk in terms of the potential effect on net interest income, the market value of net assets and the value at risk of the firm in an effort to ensure that the Company is insulated from any significant adverse effects from changes in interest rates. The results of these models are reviewed each month with the FRMC. Based on the model used for the sensitivity of net interest income, if the balance sheet, when the month-end difference between the repricing of assets and liabilities was at its greatest during 1997, were to remain constant and no actions were taken to alter the existing interest rate sensitivity, a hypothetical immediate 100 basis point change in interest rates would have affected net interest income and net income by less than 1% over a six month horizon. Although management believes that this measure is indicative of the Company's sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size and composition of the balance sheet and other business developments that could affect net income. Accordingly, no assurance can be given that actual results would not differ materially from the potential outcome simulated by this model. In order to minimize the effect of fluctuations in foreign currency exchange rates on its financial results, the Company periodically enters into forward contracts or purchases options. These financial instruments serve as hedges of its foreign investment in international subsidiaries and joint ventures or effectively hedge the translation of the related foreign currency income. The Company held $623 million of forward contracts, $74 million of purchased options and $106 million of cross currency swap agreements at December 31, 1997. Through these contracts, the Company primarily sells the local currency and buys U.S. dollars. The Company also periodically enters into forward contracts to hedge receivables denominated in foreign currencies or may purchase foreign currencies in the spot market to settle a foreign currency denominated liability. In addition, the Company held $506 million of cross currency swap agreements used to hedge debt instruments issued in foreign currencies at December 31, 1997. The Company invests in and operates commercial finance companies throughout the world. Over the course of time, reported results from the operations and investments in foreign countries may fluctuate in response to exchange rate movements in relation to the U.S. dollar. While the Western European operations and investments are the largest areas of the Company's activities, reported results will be influenced to a lesser extent by the exchange rate movements in the currencies of other countries in which the Company's subsidiaries and investments are located. LIQUIDITY RISK MANAGEMENT The Company manages liquidity risk primarily by monitoring the relative maturities of assets and liabilities and by borrowing funds through the U.S. and international money and capital markets and bank credit markets. Such cash is used to fund asset growth and to meet debt obligations and other commitments on a timely and cost-effective basis. The Company's primary sources of funds are commercial paper borrowings, issuances of medium-term notes and other term debt securities and the syndication, securitization or sale of certain lending assets. At December 31, 1997, commercial paper borrowings were $2.6 billion and amounts due on term debt within one year were $2.0 billion. If the Company is unable to access such markets at acceptable terms, it could utilize its bank credit and asset sale facilities and cash flow from operations and portfolio liquidations to satisfy its liquidity needs. At December 31, 1997, the Company had committed liquidity support through its bank credit and asset sale facilities totalling $4.0 billion, including a 364-day facility which has been renewed and will expire April 6, 1999, representing, on a consolidated basis, 122% of outstanding commercial paper and short-term borrowings. The Company believes that such credit lines should provide sufficient liquidity to the Company under foreseeable conditions. See also "Management's Discussion and Analysis of Financial 63 Condition and Results of Operations--Liquidity and Capital Resources" for further information concerning the liquidity of the Company. PORTFOLIO QUALITY The credit quality of the Company's portfolio in 1997 reflected the effectiveness of the Company's credit strategies, underwriting and portfolio management and disciplined credit approval process. As of December 31, 1997 nonearning assets were at their lowest level in over 10 years, having been reduced to $155 million, or 1.4% of lending assets, from $278 million, or 3.3% of lending assets, at the end of 1996. In addition, the Company's allowance for losses of receivables represented 185% of nonearning impaired receivables as of December 31, 1997. The following table presents certain information with respect to the credit quality of the Company's portfolio:
DECEMBER 31, --------------------- 1997 1996 1995 ------- ------ ------ (IN MILLIONS) LENDING ASSETS AND INVESTMENTS: Receivables......................................... $10,722 $8,529 $8,085 Repossessed assets.................................. 14 14 28 ------- ------ ------ Total lending assets.............................. 10,736 8,543 8,113 Equity and real estate investments.................. 488 419 428 Debt securities..................................... 311 251 152 Operating leases.................................... 195 135 113 Investments in international joint ventures......... 198 272 233 ------- ------ ------ Total lending assets and investments.............. $11,928 $9,620 $9,039 ======= ====== ======
DECEMBER 31, ----------------- 1997 1996 1995 ----- ---- ---- (IN MILLIONS) NONEARNING ASSETS: Impaired receivables................................... $ 141 $264 $261 Repossessed assets..................................... 14 14 28 ----- ---- ---- Total nonearning assets.............................. $155 $278 $289 ===== ==== ==== Ratio of nonearning impaired receivables to receivables........................................... 1.3% 3.1% 3.2% Ratio of total nonearning assets to total lending assets................................................ 1.4% 3.3% 3.6% Nonearning assets in current portfolio................. $ 81 $115 $ 87 Ratio of nonearning assets in current portfolio to total lending assets.................................. 0.8% 1.3% 1.1% ALLOWANCES FOR LOSSES: Allowance for losses of receivables.................... $ 261 $225 $229 Valuation allowance for repossessed assets............. -- -- 2 ----- ---- ---- Total allowance for losses........................... $ 261 $225 $231 ===== ==== ==== Ratio of allowance for losses of receivables to receivables........................................... 2.4% 2.6% 2.8% Ratio of allowances for losses of receivables to net writedowns............................................ 1.8x 2.1x 1.0x Ratio of allowance for losses of receivables to nonearning impaired receivables....................... 185.1% 85.2% 87.7% DELINQUENCIES: Earning loans delinquent 60 days or more............... $ 151 $143 $117 Ratio of earning loans delinquent 60 days or more to receivables........................................... 1.4% 1.7% 1.4%
64
FOR THE YEAR ENDED DECEMBER 31, ---------------------- 1997 1996 1995 ------ ------ ------ (IN MILLIONS) NET WRITEDOWNS OF LENDING ASSETS: Net writedowns on receivables..................... $ 139 $ 104 $ 215 Net writedowns on repossessed assets.............. 7 4 16 ------ ------ ------ Total net writedowns............................ $ 146 $ 108 $ 231 ====== ====== ====== Ratio of net writedowns to average lending assets. 1.5% 1.3% 2.9% Net writedowns on current portfolio lending assets........................................... $ 62 $ 41 $ 45 Ratio of current portfolio net writedowns to average total lending assets..................... 0.6% 0.5% 0.6%
PRE-1990 PORTFOLIO While building its current portfolio, the Company has substantially eliminated its Corporate Finance and Real Estate Finance pre-1990 portfolio and expects such portfolio's impact to be insignificant beginning in 1998. The pre-1990 portfolio experienced a significant decline of $487 million or 50% in 1997 and now comprises 4% of the Company's total portfolio. Approximately 70% of the remaining pre-1990 portfolio consists of real estate assets which have been independently appraised and then written down to the appraised value. The following table provides a profile of the pre-1990 portfolio in 1997, 1996, 1995, 1994 and 1993:
FOR THE YEAR ENDED DECEMBER 31, ---------------------------------- 1997 1996 1995 1994 1993 ---- ---- ------ ------ ------ (IN MILLIONS) Pre-1990 lending assets and investments. $492 $979 $1,526 $2,012 $2,547 Ratio of pre-1990 lending assets and investments to total lending assets and investments............................ 4.1% 10.2% 16.9% 23.8% 32.9% Pre-1990 nonearning assets.............. $ 74 $163 $ 202 $ 274 $ 392 Net writedowns on pre-1990 lending assets................................. 84 67 186 153 194 Ratio of pre-1990 net writedowns to average total lending assets........... 0.9% 0.8% 2.3% 2.0% 2.6%
65 NONEARNING ASSETS Receivables are classified as nonearning when there is significant doubt as to the ability of the debtor to meet current contractual terms, as evidenced by loan delinquency, reduction of cash flows, deterioration in the loan to value relationship and other relevant considerations. Nonearning assets decreased from 3.3% of total lending assets at December 31, 1996 to 1.4% of total lending assets at December 31, 1997. This decrease reflects the credit performance of the current portfolio, combined with the continued resolution of the pre-1990 Corporate Finance and Real Estate Finance accounts. The table below presents nonearning assets by business line in 1997, 1996 and 1995:
FOR THE YEAR ENDED DECEMBER 31, -------------------------------------------- 1997 1996 1995 -------------- -------------- -------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- ------ ------- (IN MILLIONS) Asset Based Finance............ $ 32 21% $ 18 7% $ 16 5% International asset based finance....................... 19 12 25 9 9 3 Project Finance................ 18 12 18 6 8 3 Corporate Finance.............. 7 4 39 14 19 7 Real Estate Finance............ 3 2 3 1 10 3 Other.......................... 2 1 12 4 25 9 Pre-1990 portfolio............. 74 48 163 59 202 70 ---- --- ---- --- ---- --- Nonearning assets.............. $155 100% $278 100% $289 100% ==== === ==== === ==== ===
The current portfolio had nonearning assets of $81 million, or 0.8% of total lending assets, in 1997. The low level of nonearning assets in the current portfolio is the result of the credit quality of the domestic and international asset based portfolios and the current Corporate Finance and Real Estate Finance portfolios. ALLOWANCE FOR LOSSES The allowance for losses of receivables is a general reserve available to absorb losses in the entire portfolio. This allowance is established through direct charges to income, and losses are charged to the allowance when all or a portion of a receivable is deemed uncollectible. The allowance is reviewed periodically and adjusted when appropriate given the size and loss experience of the overall portfolio, the effect of current economic conditions and the collectibility and workout potential of identified risk and nonearning accounts. For repossessed assets, if the fair value declines after the time of repossession, a writedown is recorded to reflect this reduction in value. The allowance for losses of receivables totalled $261 million, or 2.4% of receivables, at December 31, 1997 versus $225 million, or 2.6% of receivables, at December 31, 1996. The decrease as a percentage of receivables was consistent with the strong credit profile of the Company's portfolio, as evidenced by the ratio of allowance for losses of receivables to nonearning impaired receivables of 185% at December 31, 1997, compared to 85% at December 31, 1996. DELINQUENT EARNING ACCOUNTS AND LOAN MODIFICATIONS The level of delinquent earning accounts changes between periods based on the timing of payments and the effects of changes in general economic conditions on the Company's borrowers. Troubled debt restructurings were $13 million at December 31, 1997, compared to $14 million at December 31, 1996. The Company had $13 million of receivables at December 31, 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. 66 WRITEDOWNS Net writedowns, as detailed below for the years ended December 31, 1997, 1996 and 1995, increased in 1997 due to a lower level of recoveries compared to 1996.
FOR THE YEAR ENDED DECEMBER 31, -------------------------------------------- 1997 1996 1995 -------------- -------------- -------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- ------ ------- (IN MILLIONS) NET WRITEDOWNS OF LENDING ASSETS: Asset Based Finance........ $ 11 8% $ 7 7% $ 11 5% Corporate Finance.......... 25 17 21 19 16 7 International Group........ 23 16 -- -- -- -- Real Estate Finance........ -- -- -- -- -- -- Project Finance............ -- -- 8 7 -- -- Other...................... 3 1 5 5 18 7 Pre-1990 portfolio......... 84 58 67 62 186 81 ---- --- ---- --- ---- --- Total net writedowns..... $146 100% $108 100% $231 100% ==== === ==== === ==== ===
Gross writedowns were slightly higher than 1996 at $169 million in 1997 compared to $163 million in the prior year, while gross recoveries totalled only $23 million in 1997 compared to $55 million in 1996. The increase in net writedowns for Corporate Finance was the result of lower recoveries in 1997 compared to 1996. The increase in net writedowns for the Company's international asset based finance business in 1997 was the result of writedowns in Mexico and the impact of the consolidation of Factofrance. Gross writedowns of pre-1990 lending assets represented 53% and 69% of total gross writedowns in 1997 and 1996, respectively. 67 MANAGEMENT The following table sets forth certain information with respect to the directors, executive officers and other senior management officers of the Company. Their biographies appear after the table. All of the directors and officers of the Company are elected at the annual meeting for a term of one year or until their successors are duly elected and qualified. DIRECTORS AND EXECUTIVE OFFICERS
NAME AGE POSITION - ---- --- -------- Richard J. Almeida (1)(2)(4).... 55 Chairman of the Board and Chief Executive Officer Yukihiko Chayama (1)(3)......... 50 Director Nina B. Eidell.................. 45 Executive Vice President and Chief Human Resources Officer Tsutomu Hayano.................. 51 Director Mark Kessel..................... 56 Director Michael J. Litwin (1)........... 50 Director, Executive Vice President and Chief Credit Officer Dennis P. Lockhart (1).......... 51 Director and President of International Group Lauralee E. Martin (1).......... 47 Director, Executive Vice President and Chief Financial Officer Hideo Nakajima.................. 49 Director Osamu Ogura (1)(3).............. 41 Director Masahiro Sawada (1)............. 44 Director and Senior Vice President Debra H. Snider................. 43 Executive Vice President, General Counsel, Chief Administrative Officer and Secretary Takeshi Takahashi............... 49 Director Atsushi Takano (1)(2)(3)(4)..... 52 Director Kenichiro Tanaka (1)(2)(4)...... 49 Director and Executive Vice President Kenichi Tomita.................. 48 Director Frederick E. Wolfert............ 43 President and Chief Operating Officer OTHER SENIOR MANAGEMENT OFFICERS (5) Mark A. Abbott.................. 37 Group President, Corporate Finance Michel Aussavy.................. 58 Chairman and Chief Executive Officer of Factofrance Anthony O'B. Beirne............. 49 Executive Vice President and Treasurer Michael P. Goldsmith............ 44 Group President, Real Estate Finance and Project Finance John L. Guy, Jr................. 45 Group President, Small Business Lending Jay S. Holmes................... 51 Group President, Equipment Finance and Leasing Karen Ann Hrzich................ 51 Executive Vice President and Director of Internal Audit Lawrence G. Hund................ 42 Executive Vice President and Controller James S. Jasionowski............ 39 Senior Vice President and Director of Tax Scott E. Miller................. 51 Group President, Business Credit Maureen G. Osborne.............. 41 Senior Vice President and Chief Information Officer James L. Prouty................. 50 Managing Director of Heller Europe Limited Michael J. Roche................ 46 Group President, Current Asset Management Charles G. Schultz.............. 51 Group President, Sales Finance
- -------- (1) Member of Executive Committee (2) Member of Compensation Committee (3) Member of Audit Committee (4) Member of Special Financing Committee (5) Beginning in 1998, these officers are not considered "executive officers" as defined in the Exchange Act. 68 Richard J. Almeida has served as the Chairman of the Board and Chief Executive Officer of the Company, International Group and Heller International Holdings, Inc. ("Holdings") since November 1995; and as Director of the Company and International Group since November 1987. He has also served as Director of FAHI since January 1998. He has served as Director of Holdings since December 1992. He previously served as the Chairman of the Board and Chief Executive Officer of HIC from November 1995 to January 1998; Director of HIC from November 1987 to January 1998; Executive Vice President and Chief Financial Officer of Holdings from December 1992 to November 1995; and Executive Vice President and Chief Financial Officer of the Company, HIC and International Group from November 1987 to November 1995. Prior to joining the Company in 1987, Mr. Almeida served in a number of operating positions, both in Corporate Banking and Investment Banking sectors, for Citicorp. Yukihiko Chayama has served as Director of the Company, International Group and Holdings since July 1996; Director of FAHI since January 1998; Chief Representative for the Washington, DC Representative Office of Fuji Bank since October 1996; and Executive Vice President and General Manager for the Americas Division of Fuji Bank since July 1996. He previously served as Director of HIC from July 1996 to January 1998; General Manager at the Oji Branch of Fuji Bank from May 1994 to 1996; and the Deputy General Manager in the Head Office Corporate Banking Division of Fuji Bank from April 1991 to 1994. Nina B. Eidell has served as Executive Vice President and Chief Human Resources Officer of the Company since joining the Company in March 1998. From February 1995 to February 1998, she served as Director, Human Resources of the American Bar Association. Ms. Eidell previously spent eight years with Citicorp, where she held a variety of human resources management roles. She has also held human resources leadership positions with Sara Lee Corporation and R.R. Donnelley & Sons Company. Tsutomu Hayano has served as Director of the Company since May 1996; Director of Fuji Bank since June 1997; General Manager at the New York Branch of Fuji Bank and Chairman of The Fuji Bank and Trust Co. since May 1996. He previously served as Director of HIC from May 1996 to January 1998; General Manager at the Hamamatsucho Branch of Fuji Bank from May 1994 to 1996; and President of Fuji Bank, Nederland N.V. from February 1990 to 1994. Mark Kessel has served as Director of the Company since July 1992. He previously served as Director of HIC from July 1992 to January 1998. Mr. Kessel has been a Partner of Shearman & Sterling since December 1977. Michael J. Litwin has served as Director of the Company since April 1990; Executive Vice President and Chief Credit Officer of the Company since January 1997; Executive Vice President of Holdings since December 1992; Director of International Group and Holdings since January 1997; and Executive Vice President of International Group since January 1989. He previously served as Director of HIC from April 1990 to January 1998; Executive Vice President of HIC from January 1997 to January 1998; and Senior Group President of the Company from October 1990 to January 1997. Mr. Litwin has served in various other positions since joining the Company in 1971, including Assistant General Counsel. Dennis P. Lockhart has served as Director of the Company and International Group and President of International Group since January 1988 and Director and President of Holdings since December 1992. In his current positions, he has principal responsibility for the Company's international operations. Mr. Lockhart has also served as a Director of Tri Valley Corporation since April 1981. He previously served as Director and Executive Vice President of HIC from January 1988 to January 1998. Prior to joining the Company in 1988, Mr. Lockhart was employed by Citicorp for 16 years, holding a number of positions in corporate/institutional banking domestically and abroad, including assignments in 69 Lebanon, Saudi Arabia, Greece, Iran, New York and Atlanta, with regional experience encompassing Europe, the Middle East, Africa and Latin America. Lauralee E. Martin has served as Executive Vice President and Chief Financial Officer of the Company, International Group and Holdings since May 1996; Director of the Company since May 1991; Director of International Group and Holdings since May 1996; and Director of Gables Residential Trust since January 1994. She previously served as Executive Vice President and Chief Financial Officer of HIC from May 1996 to January 1998; Director of HIC from May 1991 to January 1998; and Senior Group President of the Company from October 1990 to May 1996. Prior to joining the Company in 1986, Ms. Martin held a variety of senior management positions with General Electric Credit Corporation. Hideo Nakajima has served as Director of the Company since May 1996; and Executive Vice President and General Manager of Fuji Bank, Los Angeles Agency since May 1996. He previously served as Director of HIC from May 1996 to January 1998; Managing Director of Fuji Bank, Nederland N.V. from July 1993 to 1996; and Deputy General Manager in the Head Office Corporate Banking Division I of Fuji Bank from February 1990 to 1993. Osamu Ogura has served as Director of the Company since November 1994; Director of FAHI since January 1998; Director of International Group and Holdings since May 1996; and Senior Vice President and Deputy General Manager of the Americas Division of Fuji Bank since November 1994. He previously served as Director of HIC from November 1994 to January 1998 and Senior Manager of Fuji Bank, Americas Division from 1993 to 1994. Masahiro Sawada has served as Senior Vice President of the Company since January 1998 and as Director of the Company, International Group and Holdings since December 1995. He previously served as Director of HIC from December 1995 to January 1998; Senior Vice President of HIC from May 1995 to January 1998; and Joint General Manager of Fuji Bank, Paris Branch from May 1992 to 1995. Debra H. Snider has served as Chief Administrative Officer of the Company since February 1997; General Counsel of the Company, International Group and Holdings since October 1995; Executive Vice President and Secretary of the Company, International Group and Holdings since April 1995; and Secretary of FAHI since January 1998. She previously served as General Counsel of HIC from October 1995 to January 1998; Executive Vice President and Secretary of HIC from April 1995 to January 1998; and Acting General Counsel for the Company, HIC, International Group and Holdings from April 1995 to October 1995. Ms. Snider was a Partner at Katten Muchin & Zavis from February 1991 to March 1995 and previously served as First Vice President and Associate General Counsel at the Balcor Company. Takeshi Takahashi has served as Director of the Company, and as Executive Vice President and General Manager of Fuji Bank, Chicago Branch since June 1997. He previously served as Director of HIC from June 1997 to January 1998; Executive Vice President and General Manager of Fuji Bank, Houston Agency from May 1995 to June 1997; General Manager of HIC Project Finance II, Fuji Bank, Tokyo from May 1994 to May 1995; and Joint General Manager of Fuji Bank, London Branch from February 1990 to May 1994. Atsushi Takano has served as Director of the Company, International Group and Holdings since August 1997; Director and Chairman of FAHI since January 1998; Managing Director of Fuji Bank since June 1997; and Director of Fuji Bank since June 1995. He previously served as Director of HIC from August 1997 to January 1998; General Manager, Corporate Banking Division II, Fuji Bank, Tokyo from June 1996 to June 1997; General Manager of Fuji Bank, New York Branch from June 1994 to June 1996; and General Manager of Fuji Bank, Los Angeles Agency from June 1992 to June 1994. 70 Kenichiro Tanaka has served as Executive Vice President of the Company since January 1998; Director of the Company, International Group and Holdings since February 1997; and Director, President and Chief Executive Officer of FAHI since January 1998. Mr. Tanaka previously served as Director and Executive Vice President of HIC from February 1997 to January 1998; President and Chief Executive Officer of Fuji Bank, Canada from November 1994 to January 1997; and Deputy General Manager of Fuji Bank, Head Office Credit Division from May 1991 to November 1994. Kenichi Tomita has served as a Director of the Company since May 1996; and as Executive Vice President and General Manager in the Credit Division for the Americas of Fuji Bank since April 1996. He previously served as Director of HIC from May 1996 to January 1998, and as Deputy General Manager of the Credit Division for the Americas of Fuji Bank from March 1992 to 1996. Frederick E. Wolfert has served as President and Chief Operating Officer of the Company since January 1998. In this capacity, he has principal responsibility for all the Company's domestic businesses. He served as Chairman of Key Global Finance Ltd. from April 1996 to December 1997; Chairman, President and Chief Executive Officer of KeyCorp Leasing, Ltd. from June 1993 to December 1997; Chairman, President and Chief Executive Officer of KeyBank USA N.A. from June 1993 to December 1996; President and Chief Operating Officer of KeyCorp Leasing, Ltd. from December 1991 to June 1993; and Executive Vice President of KeyBank USA N.A. from December 1991 to June 1993. Mr. Wolfert also served for nine years in management positions with U.S. Leasing Corporation in its San Francisco headquarters. Mark A. Abbott has served as Group President of Corporate Finance since April 1997. He previously served as Executive Vice President of Corporate Finance from November 1992 to April 1997. Prior to joining the Company in 1989, Mr. Abbott held various positions with Continental Bank, most recently as a member of the bank's venture capital unit, which focused on investing in leveraged transactions. Michel Aussavy joined Factofrance in 1980 and has served as its Chairman and Executive Officer since 1988. He previously served as General Manager of Factofrance from 1982 to 1988 and Director of Factofrance from 1980 to 1982. Prior to joining Factofrance, Mr. Aussavy was employed by Credit du Nord from 1973 to 1980, holding various management positions, and by Delmas Vielgeux as Director from 1968 to 1973. Anthony O'B. Beirne has served as Executive Vice President of the Company since March 1998; Treasurer of the Company since May 1995 and Treasurer of FAHI since January 1998. He previously served as Senior Vice President of the Company from May 1995 to March 1998; Senior Vice President and Treasurer of HIC from May 1995 to January 1998; Senior Vice President and Controller of Holdings from December 1992 to May 1995; and Senior Vice President and Controller of the Company, HIC and International Group from March 1988 to May 1995. Before joining the Company in 1988, Mr. Beirne was Vice President and Corporate Controller of Kenner Parker Toys, Inc. and previously worked for General Mills, Inc., Arthur Andersen and Co. and Chemical Bank. Michael P. Goldsmith has served as Group President of Real Estate Finance and Project Finance since April 1994. He previously served as Executive Vice President and Division Manager for the Project Management Organization from May 1990 to April 1994. Prior to joining the Company in 1988, Mr. Goldsmith was a Vice President and Division Manager at Continental Bank, managing many of Continental's troubled loans. He has also held a variety of corporate finance positions involving buyouts and recapitalizations. John L. Guy, Jr. has served as Group President for Small Business Lending since April 1997; President of Heller First Capital Corp. since May 1996; and Director of Monetta Trust since November 1994. He previously served as Executive Vice President for the Heller First Capital Division of the Company from May 1996 to April 1997; Senior Vice President for the Heller First Capital Division of 71 the Company from May 1995 to May 1996; and Senior Vice President and Treasurer of the Company and HIC from July 1992 to May 1995. Before joining the Company in 1987, Mr. Guy was Assistant Treasurer for Borg Warner Financial Services. Jay S. Holmes has served as Group President of Equipment Finance and Leasing since December 1995 and as President of Heller Financial Leasing, Inc. since May 1996. He previously served as Executive Vice President for Commercial Equipment Finance from September 1992 to December 1995. Mr. Holmes, who joined the Company in 1992, has 26 years of equipment leasing industry experience and currently is a member of the Middle Market Business Council of the Equipment Leasing Association. Karen Ann Hrzich has served as Executive Vice President of the Company since March 1998 and as Director of Internal Audit of the Company since November 1995. Ms. Hrzich was also a Senior Vice President of the Company prior to March 1998. Before November 1995, she was Senior Vice President and Senior Manager of Credit and Portfolio Review within the Internal Audit Department. Prior to joining the Internal Audit Department in January 1995, Ms. Hrzich held the position of Senior Vice President and Portfolio Manager of Corporate Finance. Before joining the Company in 1989, Ms. Hrzich spent 15 years with Chemical Bank of New York, holding a number of lending and managerial positions in corporate banking, middle market lending and capital markets. Lawrence G. Hund has served as Executive Vice President of the Company, International Group and Holdings since March 1998 and as Controller of the Company, International Group and Holdings since March 1995. He previously served as Senior Vice President of the Company, International Group and Holdings from May 1995 to March 1998; Senior Vice President and Controller of HIC from May 1995 to January 1998; Senior Vice President, Liability Management and Assistant Treasurer of the Company and HIC from January 1995 to May 1995; and Senior Vice President for Accounting and Operations of the Company and HIC from January 1993 to December 1994. Prior to joining the Company in 1985, Mr. Hund was an Audit Manager with the accounting firm of Arthur Young & Company. James S. Jasionowski has served as Senior Vice President and Director of Tax of the Company and International Group since September 1997. He served as Senior Vice President and Tax Counsel of HIC from September 1997 to January 1998. From May 1993 to August 1997, Mr. Jasionowski was Vice President and Tax Counsel of the Company and HIC. Before joining the Company in 1993, Mr. Jasionowski was a Tax Senior Manager with the accounting firm of KPMG Peat Marwick, where he was employed for eight years in a variety of positions. Scott E. Miller has served as Group President of Business Credit since joining the Company in February 1998. From September 1993 to January 1998, he served as Senior Vice President and General Manager in Asset Based Lending for Bank of America NT&SA. Mr. Miller previously spent 17 years with Citicorp, holding a variety of management and lending roles. Maureen G. Osborne, has served as Senior Vice President and Chief Information Officer of the Company since joining the Company in April 1998. From 1992 through March 1998, Ms. Osborne was employed by IBM Global Services, where she most recently served as Senior Project Executive, Bank of America contact. From 1978 to 1991, Ms. Osborne held various management positions at Continental Bank Corporation. James L. Prouty has served as Managing Director of Heller Europe Limited ("Heller Europe") since November 1997. Prior to joining Heller Europe, Mr. Prouty spent 21 years with Bank of America, where he was most recently Senior Vice President and Regional Manager of Continental Europe, headquartered in Paris. Mr. Prouty also held a number of country management and regional responsibilities in Brussels, London and Frankfurt. Mr. Prouty headed Bank of America's Financial Institutions business in Europe and has held corporate banking positions in New York, Los Angeles 72 and Mexico City. He is currently Chairman of the U.S. Trade and Investment Center in Brussels and was previously the Chairman of the European Council for American Chambers of Commerce and the President of the American Chamber of Commerce in Belgium. Michael J. Roche has served as Group President of Current Asset Management since November 1994. He previously served as Senior Vice President and Chief Information Officer for Information Technology of the Company from October 1990 to November 1994; and as Senior Vice President and Chief Information Officer for Information Technology of HIC from May 1991 to October 1994. Prior to joining the Company in 1990, Mr. Roche was employed by Continental Bank for 17 years in a variety of information technology positions, including as Senior Vice President, Managing Director of Application Services. Charles G. Schultz has served as Group President of Sales Finance since February 1997. He previously served as Executive Vice President and Manager of Vendor Finance from September 1995, when he joined the Company, to April 1997. Prior to joining the Company in September 1995, Mr. Schultz was President of Financial Alliance Corporation, a company specializing in structuring, managing and funding manufacturer vendor finance programs, from January 1994 to September 1995. Prior to that, he was Executive Vice President of Sanwa Business Credit Corporation ("Sanwa"), where for 13 years he had primary responsibility for Sanwa's equipment financing and leasing businesses. Prior to joining Sanwa, Mr. Schultz spent 10 years with Ford Motor Credit Company in various treasury, marketing and credit positions. BOARD OF DIRECTORS The Company intends to appoint two additional persons who are not officers or employees of the Company, Fuji Bank or FAHI to the Board of Directors. The Company will be required to have at least two independent directors to maintain the listing of the Class A Common Stock on the NYSE. COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors has appointed an Audit Committee, a Compensation Committee, an Executive Committee and a Special Financing Committee. The current members of the Audit Committee are Messrs. Takano (Chairman), Chayama and Ogura. Following the consummation of the Offerings, the Audit Committee will consist solely of independent directors. The Audit Committee makes recommendations concerning the Company's engagement of independent public accountants, reviews the Company's annual audit, and reviews with the Company's independent public accountants the Company's internal controls and financial management policies. The current members of the Compensation Committee are Messrs. Takano (Chairman), Almeida and Tanaka. The Compensation Committee establishes the Company's general compensation and benefits policy and recommends to the Board of Directors compensation for the Company's officers and key employees. The current members of the Executive Committee are Messrs. Takano (Chairman), Almeida, Chayama, Litwin, Lockhart, Ogura, Sawada and Tanaka and Ms. Martin. With certain limited exceptions, the Executive Committee has the authority to exercise all powers of the Board of Directors in managing the business and affairs of the Company, including the declaration of dividends and issuance of securities. The members of the Special Financing Committee are Messrs. Takano (Chairman), Almeida and Tanaka. The Special Financing Committee sets the terms of securities issued by the Company. COMPENSATION OF DIRECTORS The Company anticipates that, following the consummation of the Offerings, the Company's directors will receive compensation for serving as directors at levels customary for publicly-held companies similar to the Company, except that no director of the Company who is also an employee of the Company or Fuji Bank will receive remuneration for serving as a director. Directors of the 73 Company who are not employees of the Company or Fuji Bank ("Non-Employee Directors") will receive an award of non-qualified stock options under the Heller Financial, Inc. 1998 Stock Incentive Plan. See "--Executive Compensation--The 1998 Stock Incentive Plan". COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Richard J. Almeida served as a member of the Compensation Committee throughout 1997. Atsushi Takano was appointed to the Compensation Committee on August 21, 1997 and Kenichiro Tanaka was appointed to the Compensation Committee on February 25, 1997. Messrs. Almeida, Takano and Tanaka also served concurrently as members of the Compensation Committees of HIC, International Group and Holdings. During 1997, Mr. Almeida also served as Chairman and Chief Executive Officer of the Company, International Group and Holdings. In addition, Mr. Almeida served as the Chairman of the Board, Chief Executive Officer and President of HIC and as a member of the compensation committees of HIC, International Group and Holdings. Mr. Tanaka also served as an executive officer of HIC and FAHI during his tenure as a member of the compensation committees. Mr. Lockhart, Mr. Litwin and Ms. Martin also served as executive officers of HIC, International Group and Holdings, for which companies Mr. Almeida served as a member of the Compensation Committee of the Board of Directors. No other relationships existed in 1997 or currently exist between the members of the Compensation Committee of the Company, FAHI, HIC, International Group or Holdings and the directors and executive officers of those companies. OWNERSHIP GUIDELINES The Company has adopted ownership guidelines that specify an expected level of Class A Common Stock ownership for executive and other senior management officers of the Company. The guidelines for ownership are expressed as a multiple of such person's base salary. The multiple varies according to the officer's position, with the Chairman and Chief Executive Officer expected to acquire ownership of Class A Common Stock having a value equal to three times his base salary within a specified time period. Shares of restricted stock count toward the ownership guidelines to the extent such shares of restricted stock are fully vested. If an officer fails to meet the ownership guidelines applicable to his or her position, the Company may, in its sole discretion, limit future awards under the Heller Financial, Inc. 1998 Stock Incentive Plan. 74 EXECUTIVE COMPENSATION The following table sets forth information with respect to all compensation received by the Chief Executive Officer of the Company and the four next most highly compensated executive officers of the Company (as determined at December 31, 1997 based on combined salary and bonus) (collectively, the "Named Officers") for services rendered in all capacities to the Company during the years ended December 31, 1997, 1996 and 1995. SUMMARY COMPENSATION TABLE (1)(2)
LONG TERM ANNUAL COMPENSATION COMPENSATION ------------------- ------------ LTIP PAYOUTS ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(3) COMPENSATION($)(4) - --------------------------- ---- --------- -------- ------------ ------------------ Richard J. Almeida 1997 637,500 450,000 548,871 4,000 (Chairman of the 1996 475,000 313,500 -- 4,750 Board and Chief 1995 318,375 225,000 310,905 4,620 Executive Officer) Michael P. Goldsmith 1997 247,682 450,000 222,742 4,000 (Group President, 1996 191,579 200,000 -- 4,050 Real Estate Finance 1995 184,500 90,732 67,838 4,128 and Project Finance) David J. Kantes(5) 1997 245,583 350,000 240,146 4,000 (Group President, 1996 237,128 225,000 -- 4,479 Business Credit) 1995 208,488 175,000 -- 4,620 Mark A. Abbott 1997 207,125 350,000 174,787 114,476(6) (Group President, 1996 192,833 276,000 -- 4,478 Corporate Finance) 1995 175,334 175,000 88,984 4,321 Lauralee E. Martin 1997 286,354 225,000 313,448 4,000 (Chief Financial 1996 270,000 160,000 -- 4,318 Officer) 1995 254,004 175,000 256,774 4,620
- -------- (1) The Company has an Executive Deferred Compensation Plan, a non-qualified deferred compensation plan in which certain employees of the Company may elect to defer a portion of their annual compensation on a pre-tax basis. The amount of deferred compensation remains an asset of the Company and may be invested in any of certain mutual funds at the participant's discretion. The Company has amended the Plan to permit the investment of deferred compensation in the Class A Common Stock. (2) Certain executive officers of the Company whose compensation is included above were employed and paid by HIC during 1997. Pursuant to a management agreement between the Company and HIC, the Company reimbursed HIC for their services. (3) Under the terms of each of the Company's Long Term Incentive Plans ("LTIPs"), payouts of all accruals are made after the termination of the LTIP to officers who are active employees of the Company and participants in the LTIP through its termination date (subject to exceptions in the case of disability, death or retirement). In 1997, cash payouts were made to the Named Officers under an LTIP for the performance and award period that began January 1, 1994 and ended December 31, 1996. In March, 1995, cash payouts were made to the Named Officers under an LTIP for the performance and award period that began January 1, 1992 and ended December 31, 1994. In prior years, the Company reported annual accruals under its LTIPs as other annual compensation. The Company revised the terms of its LTIPs commencing with the LTIP for the performance and award period beginning January 1, 1996 and ending December 31, 1998 (the 75 "1996-1998 LTIP"), as discussed below in greater detail. Perquisites and other personal benefit amounts for each of the Named Officers fall below the minimum level for disclosure and therefore have been excluded. (4) Amounts reported reflect the Company's contribution made in the form of a match on amounts deferred by the Named Officer in the Company's Savings and Profit Sharing Plan, which is qualified under Section 401(a) of the 1986 Internal Revenue Code, as amended (the "Code"). This Plan is available to all employees who work at least 900 hours per year. The Company makes matching contributions equal to 50% of the employee's contribution, except that the Company's contribution will not exceed 2.5% of the employee's base salary or $4,000, whichever is less. The Company has amended the Plan to permit the investment of contributions in the Class A Common Stock and intends to further amend the Plan such that the Company's matching contributions starting on July 1, 1998 will be in the form of Class A Common Stock. (5) Mr. Kantes resigned from the Company effective April 3, 1998. (6) Also includes an aggregate of $110,476 that was paid in respect of relocation expenses incurred on Mr. Abbott's behalf. LONG TERM INCENTIVE PLANS The Company currently maintains two different LTIPs covering the Named Officers and other employees of the Company. Under each of the LTIPs, performance shares have been granted for a three year performance and award period. The performance shares are earned out over the three-year performance and award period based on a targeted average return on equity goal. The Company has made grants under the 1996-1998 LTIP and under an LTIP for the performance and award period beginning January 1, 1997 and ending December 31, 1999 (the "1997-1999 LTIP"). The performance and award periods for the 1996- 1998 LTIP grants and the 1997-1999 LTIP grants will continue after the consummation of the Offerings, subject to the terms and conditions of the LTIPs. For each of the 1996-1998 LTIP and the 1997-1999 LTIP, a total of 46,000 units was allocated. If the Company achieves its return on equity target, this would create a pool of $4,600,000 for each LTIP. In the event an employee ceases to be an active employee prior to the end of the performance period, no incentive compensation will be deemed to be earned under the LTIPs. See "--The 1998 Stock Incentive Plan--Offering Awards". Following the Offerings, the Compensation Committee will administer the LTIPs. The following tables set forth certain information with respect to awards that were granted during 1996 to the Named Officers under the 1996-1998 LTIP and are currently outstanding: LONG TERM INCENTIVE PLANS--AWARDS IN 1996 1996-1998 LTIP
ESTIMATED FUTURE PAYOUTS PERFORMANCE OR UNDER NON-STOCK PRICE-BASED NUMBER OF OTHER PERIOD PLANS SHARES, UNITS UNTIL --------------------------- OR OTHER MATURATION OR THRESHOLD TARGET MAXIMUM NAME RIGHTS PAYOUT ($) ($) ($) ---- ------------- -------------- --------- -------- -------- Richard J. Almeida.... 4,060 3 Years $304,500 $406,000 $690,200 Michael P. Goldsmith.. 1,130 3 Years 84,750 113,000 192,100 David J. Kantes(1).... N/A N/A N/A N/A N/A Mark A. Abbott........ 800 3 Years 60,000 80,000 136,000 Lauralee E. Martin.... 1,580 3 Years 118,500 158,000 268,600
- -------- (1) Mr. Kantes resigned from the Company effective April 3, 1998 and is therefore ineligible to receive any payouts under this plan. 76 The following table sets forth certain information with respect to awards that were granted during 1997 to the Named Officers under the 1997-1999 LTIP and are currently outstanding: LONG TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR 1997-1999 LTIP
ESTIMATED FUTURE PAYOUTS PERFORMANCE OR UNDER NON-STOCK PRICE-BASED NUMBER OF OTHER PERIOD PLANS SHARES, UNITS UNTIL --------------------------- OR OTHER MATURATION OR THRESHOLD TARGET MAXIMUM NAME RIGHTS PAYOUT ($) ($) ($) - ---- ------------- -------------- --------- -------- -------- Richard J. Almeida.... 4,375 3 Years $328,125 $437,500 $743,750 Michael P. Goldsmith.. 500 3 Years 37,500 50,000 85,000 David J. Kantes(1).... N/A N/A N/A N/A N/A Mark A. Abbott........ 1,000 3 Years 75,000 100,000 170,000 Lauralee E. Martin.... 1,500 3 Years 112,500 150,000 255,000
- -------- (1) Mr. Kantes resigned from the Company effective April 3, 1998 and is therefore ineligible to receive any payouts under this plan. RETIREMENT AND OTHER DEFINED BENEFIT PLANS The Company has a defined benefit retirement income plan (the "Retirement Plan") for the benefit of its employees that is a qualified plan under Section 401 of the Code. Substantially all domestic employees of the Company who have one year of service, including executive officers and directors of the Company, certain employees of FAHI, and certain employees of International Group who are not employees of the Company participate in the Retirement Plan. Non-Employee Directors are not eligible for retirement benefits. Under a defined benefit plan, such as the Retirement Plan, contributions are not specifically allocated to individual participants. The Company adopted a Supplemental Executive Retirement Plan ("SERP"), effective October 28, 1987 and amended and restated effective January 1, 1996, which provides a benefit to all employees whose full benefit under the Retirement Plan is reduced by participation in the Company's Executive Deferred Compensation Plan and by limitations imposed by Sections 401(a)(17) and 415 of the Code. The following table shows estimated annual retirement benefits for executives in specified remuneration and service classifications: ESTIMATED ANNUAL RETIREMENT BENEFITS
YEARS OF CREDITED SERVICE ---------------------------------------------- FINAL AVERAGE PAY 5 10 15 20 25 AND OVER - ----------------- ------- -------- -------- -------- ----------- $200,000......................... $26,000 $ 52,000 $ 78,000 $104,000 $130,000 225,000......................... 29,250 58,500 87,750 117,000 146,250 250,000......................... 32,500 65,000 97,500 130,000 162,500 275,000......................... 35,750 71,500 107,250 143,000 178,750 300,000......................... 39,000 78,000 117,000 156,000 195,000 400,000......................... 52,000 104,000 156,000 208,000 260,000 450,000......................... 58,500 117,000 175,500 234,000 292,500 500,000......................... 65,000 130,000 195,000 260,000 325,000 600,000......................... 78,000 156,000 234,000 312,000 390,000
77 In general, remuneration covered by the Retirement Plan consists of the annual base salary determined before any salary reduction contributions to the Company's Savings and Profit Sharing Plan. The monthly accrued benefit under the Retirement Plan is calculated as a percentage of average monthly compensation over the sixty consecutive months during the employee's last 120 months of employment that yield the highest average, plus a certain percentage of the employee's monthly compensation above the Social Security wage base for the past 35 years. The figures shown in the table above include benefits payable under the Retirement Plan and SERP, as described above. However, the figures shown are prior to offsets for Social Security and Company matching benefits under its Savings and Profit Sharing Plan. The estimates assume that benefits commence at age 65 under a straight life annuity form. As of December 31, 1997, the number of years of credited service for the Named Officers and the actual average remuneration for their respective years of credited service with the Company were as follows: Richard J. Almeida, 10 years, 5 months, $400,058; Michael P. Goldsmith, 9 years, 1 month, $189,741; David J. Kantes, 4 years, 6 months, $196,642; Mark A. Abbott, 8 years, 5 months, $165,558; and Lauralee E. Martin, 11 years, 5 months, $256,308. THE 1998 STOCK INCENTIVE PLAN The Company's Board of Directors has adopted a stock-based incentive plan, the Heller Financial, Inc. 1998 Stock Incentive Plan (the "Stock Incentive Plan"), covering Non-Employee Directors and employees of the Company and its subsidiaries (collectively, "Participants"). The Compensation Committee of the Company's Board of Directors will administer the Stock Incentive Plan. The Stock Incentive Plan provides for the grant of incentive and non- qualified stock options, restricted stock, stock appreciation rights, performance shares and performance units ("Awards"). The terms of the Awards will be set forth in award agreements ("Award Agreements"). The Compensation Committee, in its sole discretion, will select the employees to whom Awards will be granted and will determine the type, size and terms and conditions applicable to each Award. The Compensation Committee also will have the authority to interpret, construe and implement the provisions of the Stock Incentive Plan. Awards to Non-Employee Directors will be made by members of the Company's Board of Directors who are not otherwise entitled to participate in the Stock Incentive Plan, or will be based on a formula developed by the Board of Directors or the Compensation Committee. The total number of shares of Class A Common Stock that may be subject to Awards under the Stock Incentive Plan will equal 7.5% of the shares of Common Stock outstanding upon consummation of the Offerings (6,341,250 shares, plus up to 376,875 additional shares if the Underwriters' over-allotment options are exercised). In connection with the Offerings, the Company has awarded 505,912 shares of Restricted Stock (as defined below) and non-qualified Options (as defined below) to purchase 1,242,250 shares of Class A Common Stock under the Stock Incentive Plan. The maximum number of shares of Class A Common Stock that may be subject to Awards to any Participant in any calendar year is 500,000 shares. Set forth below is a brief description of the Awards that may be granted under the Stock Incentive Plan. STOCK OPTIONS. The Compensation Committee may grant options (each an "Option") to purchase shares of Class A Common Stock, which may be incentive or non-qualified stock options. The Compensation Committee will determine the exercise price (the "Exercise Price") of the Options in its sole discretion, provided that the Exercise Price may not be less than the average of the high and the low trading prices of the Class A Common Stock on the NYSE on the date of grant. Notwithstanding the foregoing, the initial grants of Offering Awards (as defined below) will be granted with an Exercise Price equal to the initial public offering price set forth on the cover page of this Prospectus. Each Option represents the right to purchase one share of Class A Common Stock at the specified Exercise Price. Options will expire no later than ten years after the date on which they were granted and will become vested and exercisable at such times and in such installments as determined by the 78 Compensation Committee and specified in the applicable Award Agreement. In the first three years following the Offerings, additional grants of Options will be subject to achievement of certain annual financial performance hurdles. RESTRICTED STOCK. The Compensation Committee may award shares of Class A Common Stock that are subject to such restrictions as it deems appropriate, including forfeiture conditions and restrictions against transfer for a period the Compensation Committee specifies ("Restricted Stock"). The Compensation Committee may award Restricted Stock under the Stock Incentive Plan for services and/or payment of cash. Restrictions on Restricted Stock may lapse in installments based on factors selected by the Compensation Committee. Prior to the expiration of the restricted period, a Participant who has received a Restricted Stock Award generally has the rights of a stockholder of the Company, including the right to vote and to receive cash dividends on the shares subject to the Award. Stock dividends issued with respect to a Restricted Stock Award may be treated as additional shares under such Award with respect to which such dividends are issued. STOCK APPRECIATION RIGHTS. The Compensation Committee may award a stock appreciation right ("SAR") under the Stock Incentive Plan with respect to shares of Class A Common Stock. Generally, one SAR is granted with respect to one share of Class A Common Stock. A SAR entitles the Participant, upon the exercise of the SAR, to receive an amount equal to the appreciation in the underlying share of Class A Common Stock. The appreciation is equal to the difference between (i) the "base value" of the SAR (which is determined with reference to the average of the high and the low trading prices of the Class A Common Stock on the NYSE on the date the SAR is granted) and (ii) the average of the high and the low trading prices of the Class A Common stock on the NYSE on the date the SAR is exercised. Upon the exercise of a vested SAR, the exercising Participant will be entitled to receive the appreciation in the value of one share of Class A Common Stock as so determined, payable, at the discretion of the Participant, in cash, shares of Class A Common Stock, or some combination thereof, subject to availability of shares of Class A Common Stock to the Company. SARs will expire no later than ten years after the date on which they are granted. SARs become vested and exercisable at such times and in such installments as determined by the Compensation Committee and specified in the applicable Award Agreement. TANDEM OPTIONS/SARS. The Compensation Committee may grant an Option and a SAR "in tandem" with each other (a "Tandem Option/SAR"). An Option and a SAR would be considered in tandem with each other when the exercise of the Option aspect of the tandem unit automatically cancels the right to exercise the SAR of the tandem unit, and vice versa. The Option may be an incentive SAR in any proportionate relationship selected by the Compensation Committee. PERFORMANCE SHARES AND PERFORMANCE UNITS. The Compensation Committee may grant a performance share Award ("Performance Share") and/or a performance unit Award (a "Performance Unit") under the Stock Incentive Plan. Each Performance Unit will have an initial value that is established by the Compensation Committee at the time of grant. Each Performance Share will have an initial value equal to the average of the high and the low trading prices of one share of Class A Common Stock on the NYSE on the date of grant. Such Awards may be earned based upon satisfaction of certain performance criteria within a performance period specified in the applicable Award Agreement, and subject to such other terms and conditions as the Compensation Committee deems appropriate. Prior to the end of a performance period, the Compensation Committee, in its discretion, may adjust the performance conditions for a significant acquisition or disposition of assets or other property by the Company. The extent to which a grantee is entitled to payment in settlement of such an Award at the end of a performance period will be determined by the Compensation Committee, based on whether the performance criteria have been met. The Company will make payment in cash or in shares of Class A Common Stock, or some combination thereof, subject to availability of shares of Class A Common Stock to the Company, in accordance with the terms of the applicable Award Agreement. 79 OFFERING AWARDS. Effective upon consummation of the Offerings, the Company will grant Awards (the "Offering Awards") to the Named Officers and other selected Participants, as summarized in the following table: STOCK INCENTIVE PLAN OFFERING AWARDS (1)
SHARES UNDERLYING NON- SHARES OF QUALIFIED RESTRICTED STOCK NAME STOCK (2) OPTIONS (3) - ---- ---------- ----------- Richard J. Almeida...................................... 87,385 280,000 Michael P. Goldsmith.................................... 13,311 40,000 David J. Kantes(4)...................................... -- -- Mark A. Abbott.......................................... 13,311 40,000 Lauralee E. Martin...................................... 22,451 50,000 All executive officers as a group (seven persons)....... 211,983 626,000 All other employees as a group (including senior management officers)................................... 293,929 616,250 Non-Employee Directors.................................. -- --
- -------- (1) The Offering Awards to the executive officers and to 12 other senior management officers are the only Awards such officers will be eligible to receive until 2001. All other recipients will be eligible to receive annual Option grants subject to the terms of the Stock Incentive Plan. (2) Upon consummation of the Offerings, the Company will award shares of Restricted Stock to each of the Named Officers, other than Mr. Kantes, and to certain other senior management officers and employees. The Restricted Stock will vest on January 1, 2001 if the Company achieves net income goals specified in the Restricted Stock Award Agreements. If the Company does not achieve such goals by January 1, 2001, the Restricted Stock will vest on January 1, 2004. (3) Upon consummation of the Offerings, the Company will award non-qualified Options to each of the Named Officers, other than Mr. Kantes, and to certain other senior management officers and employees. The Options will vest 100% on January 1, 2001. The Exercise Price of the Options will be the initial public offering price set forth on the cover page of this Prospectus. (4) Mr. Kantes resigned from the Company effective April 3, 1998. EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS Richard J. Almeida, Chairman and Chief Executive Officer of the Company, is party to an employment contract with the Company, which became effective as of December 31, 1997 and expires on December 31, 1999. The contract will be automatically extended to December 31, 2000, unless either Mr. Almeida or the Company gives the other written notice to the contrary on or before June 30, 1999. The contract provides for the payment to Mr. Almeida of an annual base salary of not less than the amount Mr. Almeida receives during 1998. Mr. Almeida's base salary and performance bonus are to be reviewed by the Company during the term of the contract pursuant to the Company's normal practices. The contract provides for Mr. Almeida's participation in all executive bonus and incentive compensation plans of the Company. The contract further provides that if Mr. Almeida's employment is terminated by the Company without cause (as defined in the contract), or if he resigns with cause (as defined in the contract), he will be entitled to receive full salary through the date 24 months from the date of termination. In the event of a termination under either of the situations described above, Mr. Almeida is also entitled to receive his incentive plan bonus payment at the applicable target bonus 80 level for the full year in which such termination occurs, as well as certain minimum payments under each LTIP in which he was previously granted awards, and he will continue to be covered under certain benefit plans through the date 24 months from the date of termination. Frederick E. Wolfert is party to an employment contract with the Company, which became effective as of December 31, 1997, the date on which he was elected President and Chief Operating Officer, and expires on December 31, 1999. The contract provides for the payment to Mr. Wolfert of an annual base salary of not less than the amount Mr. Wolfert receives during 1998. Mr. Wolfert's base salary and performance bonus are to be reviewed by the Company during the term of the contract pursuant to the Company's normal practices. The contract provides for Mr. Wolfert's participation in all executive bonus and incentive compensation plans of the Company. The contract further provides that if Mr. Wolfert's employment is terminated by the Company without cause (as defined in the contract), or if he resigns with cause (as defined in the contract), he will be entitled to receive full salary through the later of December 31, 2000 or the date 18 months from the date of termination. In the event of a termination, Mr. Wolfert is also entitled to receive his incentive plan bonus payment at the applicable target bonus level for the full year in which such termination occurs, as well as payments under each LTIP in which he was previously granted awards through the year in which the termination occurs, and he will continue to be covered under certain benefit plans through the later of December 31, 2000 or the date 18 months from the date of termination. Seventeen other executive and other senior management officers of the Company (including the Named Officers other than Messrs. Almeida, Wolfert and Kantes) will become, effective upon consummation of the Offerings, party to termination of employment and change in control agreements (the "Change in Control Agreements"). Each such Change in Control Agreement will provide protection to the officer in the event of certain "changes in control" of the Company (as defined in the Change in Control Agreements) within three years of consummation of the Offerings. If the officer's employment is either actually or "constructively" terminated on or after such a change in control other than for "cause" (as defined in the Change in Control Agreements), the Company will pay to the officer the present value of the additional benefits the officer would have accrued under the Company's qualified and non-qualified retirement plans from the date of termination through the last day of the 24-month period following such employment termination and the officer will: (i) become fully vested in all Options and Restricted Stock granted under the Stock Incentive Plan, and any benefits under the Company's non-qualified retirement plans; (ii) be entitled to receive all payments under each LTIP in which he or she was previously granted awards through the year in which the termination occurs; (iii) become fully vested in the Cash Incentive Program (as hereinafter defined) at not less than the target bonus level for the year in which the change in control occurred; (iv) be entitled to continuation of base salary and certain benefits and perquisites for 24 months; and (v) be credited with 24 months of age and years of service for purposes of the Company's retiree medical benefit plan. Messrs. Almeida's and Wolfert's employment agreements will also be amended to provide comparable change in control protections. EMPLOYEE STOCK PURCHASE PLAN The Company has adopted the Heller Financial, Inc. Employee Stock Purchase Plan (the "ESPP") which offers the Company's employees the opportunity to purchase Class A Common Stock at a discount through payroll deductions. The ESPP is intended to meet the requirements of Section 423 of the Code. All regular full-time and part-time employees of the Company are eligible to participate in the ESPP after six months of employment. Employees desiring to purchase stock through the ESPP may elect to reduce their pay by up to 10% in any payroll period. These payroll deductions accumulate during the three-month "purchase period". At the end of each purchase period, the payroll deductions are used to purchase Class A Common Stock at a price equal to 85% of the fair market value of the Class A Common Stock on the last day of the purchase period. An employee will recognize no taxable income or gain until he or she sells the Class A Common Stock and, if the employee meets certain holding period requirements, he or she will also be entitled to favorable tax treatment upon such sale. 81 The Company will purchase shares of Class A Common Stock in the open market to satisfy purchases under the ESPP. ANNUAL CASH INCENTIVE PROGRAM The Company has adopted the Heller Financial, Inc. Annual Cash Incentive Program (the "Cash Incentive Program") pursuant to which certain executive and other senior management officers and employees will be eligible to receive annual incentive bonuses based on individual performance and the Company's results of operations. The Cash Incentive Program specifies a minimum, maximum and target award level based on achievement of the Company's financial performance goals. The Cash Incentive Program will be administered by the Compensation Committee of the Board of Directors. The Compensation Committee and the President and Chief Executive Officer will annually approve incentive awards and schedules under the Cash Incentive Program. Cash bonuses, if any, will be paid annually in the first quarter of the Company's next fiscal year. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS RELATIONSHIP WITH FUJI BANK Fuji Bank, headquartered in Tokyo, Japan, is currently the beneficial owner of all of the common stock of the Company through its wholly-owned U.S. subsidiary, FAHI. Fuji Bank is one of the largest banks in the world, with total deposits of $301 billion at September 30, 1997. See "--Keep Well Agreement". Upon consummation of the Offerings, Fuji Bank will beneficially own 100% of the outstanding Class B Common Stock, which will, due to the limitation on the voting power of the Class B Common Stock while held by Fuji Bank, represent, in the aggregate, 79.0% of the combined voting power of all of the outstanding Common Stock (regardless of whether the Underwriters' over- allotment options are exercised) and 60.4% of the economic interest (or rights of holders of common equity to participate in distributions in respect of the common equity) in the Company (57.0% if the Underwriters' over-allotment options are exercised in full). For as long as Fuji Bank continues to beneficially own shares of Common Stock representing more than 50% of the combined voting power of the Class A Common Stock and Class B Common Stock, Fuji Bank will be able to direct the election of all of the members of the Board of Directors and thereby exercise a controlling influence over the business and affairs of the Company, including any determinations with respect to (i) mergers or other business combinations involving the Company, (ii) the acquisition or disposition of assets by the Company, (iii) the incurrence of indebtedness by the Company, (iv) the issuance of any additional Common Stock or other equity securities and (v) the payment of dividends with respect to the Common Stock. Similarly, Fuji Bank will have the power to (i) determine matters submitted to a vote of the Company's stockholders without the consent of the Company's other stockholders, (ii) prevent or cause a change in control of the Company or (iii) take other actions that might be favorable to Fuji Bank. In the foregoing situations or otherwise, various conflicts of interest between the Company and Fuji Bank could arise. Fuji Bank has advised the Company that its current intent is to continue to hold all of the Common Stock beneficially owned by it following the Offerings. Fuji Bank, FAHI and the Company have agreed not to sell or otherwise dispose of any shares of Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of Goldman, Sachs & Co. See "Underwriting". From time to time the Company and Fuji Bank have entered into, and can be expected to continue to enter into, certain agreements and business transactions in the ordinary course of their respective businesses. See "Risk Factors--Control by and Relationship with Fuji Bank", "Risk Factors--Shares Eligible for Future Sale; Possible Future Sales by Fuji Bank" and "Shares Available for Future Sales". For a description of certain provisions of the Company's Amended and Restated Certificate of Incorporation concerning the allocation of business opportunities that may be suitable for both the 82 Company and Fuji Bank, see "Description of Capital Stock--Certain Certificate of Incorporation and By-Law Provisions--Corporate Opportunities". KEEP WELL AGREEMENT The Company entered into the Keep Well Agreement with Fuji Bank on April 23, 1983. The Keep Well Agreement was amended and supplemented on January 26, 1984, in connection with the consummation of the purchase of the Company by Fuji Bank and has been amended since that date from time to time. Under the Keep Well Agreement, as currently in effect, neither Fuji Bank nor any of its subsidiaries can sell, pledge or otherwise dispose of shares of the Company's common stock, or permit the Company to issue shares of its common stock, except to Fuji Bank or a Fuji Bank affiliate. However, prior to the consummation of the Offerings, the Keep Well Agreement will be amended to allow the Company or Fuji Bank or any of its affiliates to sell or dispose of Common Stock to any person or entity, provided that after any such sale or disposition, Fuji Bank (directly or indirectly, through one or more subsidiaries) continues to hold greater than 50% of the combined voting power of the outstanding Common Stock. This provision may be subject to further revision by the Company and Fuji Bank without the approval of any of the Company's securityholders. The Keep Well Agreement may not be terminated prior to the date (the "Termination Date") which is the earlier of (i) December 31, 2007 and (ii) the date on which the Company has received written certifications from Moody's and Standard & Poor's Ratings Services ("S&P") that, upon termination of the Keep Well Agreement, the ratings on the Company's senior unsecured indebtedness without the support provided by the Keep Well Agreement will be no lower than such ratings with the support of the Keep Well Agreement, but in no event may the Termination Date occur before December 31, 2002. In addition, the Keep Well Agreement includes certain restrictions on termination relating to the Company's Series A Preferred Stock and Series C Preferred Stock, which restrictions are discussed below. The Keep Well Agreement provides that Fuji Bank will maintain the Company's stockholders' equity in an amount equal to $500 million. Accordingly, if the Company should determine, at the close of any month, that its net worth is less than $500 million, then Fuji Bank will purchase, or cause one of its subsidiaries to purchase, shares of the Company's NW Preferred Stock, Class B, no par value (the "NW Preferred Stock"), in an amount necessary to increase the Company's stockholders' equity to $500 million. The NW Preferred Stock is a series of Junior Preferred Stock and, accordingly, if and when issued will rank junior to the Series A Preferred Stock and the Series C Preferred Stock and senior to the Common Stock as to payment of dividends, and in all other respects. If and when the NW Preferred Stock is issued, dividends thereon will be noncumulative and will be payable (if declared) quarterly at a rate per annum equal to 1% over the three-month LIBOR. Such dividends will not be paid during a default in the payment of principal or interest on any of the outstanding indebtedness for money borrowed by the Company. Subject to certain conditions, the NW Preferred Stock will be redeemable, at the option of the holder, within a specified period of time after the end of a calendar quarter in an aggregate amount not greater than the excess of the stockholders' equity of the Company as of the end of such calendar quarter over $500 million. See "Description of Capital Stock--Preferred Stock--NW Preferred Stock". The Keep Well Agreement further provides that if the Company should lack sufficient cash, other liquid assets or credit facilities to meet its payment obligations on its commercial paper, then Fuji Bank will lend the Company up to $500 million, payable on demand, which the Company may use only for the purpose of meeting such payment obligations. Any such loan by Fuji Bank to the Company (a "Liquidity Advance") will bear interest at a fluctuating interest rate per annum equal to the announced prime commercial lending rate of Morgan Guaranty Trust Company of New York plus 0.25% per annum. Each Liquidity Advance will be repayable on demand at any time after the business day following the 29th day after such Liquidity Advance was made. No repayment of the Liquidity Advance 83 will be made during a period of default in the payment of the Company's senior indebtedness for borrowed money. No Liquidity Advances or purchases of NW Preferred Stock have been made by Fuji Bank under the Keep Well Agreement; other infusions of capital in the Company have been made by Fuji Bank, the last one of which occurred in 1992. Under the Keep Well Agreement, the Company has covenanted to maintain, and Fuji Bank has undertaken to assure that the Company will maintain, unused short-term lines of credit, asset sales facilities and committed credit facilities in an amount approximately equal to 75% of the amount of its commercial paper obligations from time to time outstanding. Neither Fuji Bank nor the Company is permitted to terminate the Keep Well Agreement for any reason prior to the Termination Date. After the Termination Date, either Fuji Bank or the Company may terminate the Keep Well Agreement upon 30 business days' prior written notice, except as set forth below. So long as the Series A Preferred Stock is outstanding and held by third parties other than Fuji Bank, the Keep Well Agreement may not be terminated by either party unless the Company has received written certifications from Moody's and S&P that upon such termination the Series A Preferred Stock will be rated by them no lower than "a3" and "A-", respectively. Additionally, so long as the Series C Preferred Stock is outstanding and held by third parties other than Fuji Bank, the Keep Well Agreement may not be terminated by either party unless the Company has received written certifications from Moody's and S&P that upon such termination the Series C Preferred Stock will be rated no lower than "baa1" and "BBB" by Moody's and S&P, respectively. For these purposes, the Series A Preferred Stock and the Series C Preferred Stock will no longer be deemed outstanding at such time as an effective notice of redemption of all of the Series A Preferred Stock and the Series C Preferred Stock shall have been given by the Company and funds sufficient to effectuate such redemption shall have been deposited with the party designated for such purpose in the notice. So long as the Series A Preferred Stock is outstanding, if both Moody's and S&P shall discontinue rating the Series A Preferred Stock, then Goldman, Sachs & Co., or its successor, shall, within 30 days, select a nationally recognized substitute rating agency and identify the comparable ratings from such agency. So long as the Series A Preferred Stock is no longer outstanding but the Series C Preferred Stock is outstanding, if both Moody's and S&P shall discontinue rating the Series C Preferred Stock, then Lehman Brothers Inc., or its successor, shall, within 30 days, select a nationally recognized substitute rating agency and identify the comparable ratings from such agency. Any termination of the Keep Well Agreement by the Company must be consented to by Fuji Bank. Any such termination will not relieve the Company of its obligations in respect of any NW Preferred Stock outstanding on the date of termination or the dividends thereon, any amounts owed in respect of Liquidity Advances on the date of termination or the unpaid principal or interest on those Liquidity Advances or Fuji Bank's fee relating to the Liquidity Commitment. Any such termination will not adversely affect the Company's commercial paper obligations outstanding on the date of termination. The Keep Well Agreement can be modified or amended by a written agreement of Fuji Bank and the Company. However, no such modification or amendment may change the prohibition against termination before the Termination Date or the other restrictions on termination or adversely affect the Company's then- outstanding commercial paper obligations. Under the Keep Well Agreement, the Company's commercial paper obligations and any other debt instruments are solely the obligations of the Company. The Keep Well Agreement is not a guarantee by Fuji Bank of the payment of the Company's commercial paper obligations, indebtedness, liabilities or obligations of any kind. REGISTRATION RIGHTS AGREEMENT The Registration Rights Agreement to be entered into between the Company and Fuji Bank (the "Registration Rights Agreement") will provide that, upon the request of any of Fuji Bank, its 84 subsidiaries or certain transferees of Common Stock from Fuji Bank or its subsidiaries (each, a "Qualified Transferee"), the Company will use its reasonable efforts to effect the registration under the applicable federal and state securities laws of any of the shares of Class A Common Stock that it may hold or that are issued or issuable upon conversion of any other security that it may hold (including the shares of Class B Common Stock) and of any other securities issued or issuable in respect of the Class A Common Stock, in each case for sale in accordance with the intended method of disposition of the holder or holders making such demand for registration, and will take such other actions as may be necessary to permit the sale thereof in other jurisdictions, subject to certain specified limitations. Fuji Bank, its subsidiaries or any Qualified Transferee will also have the right, which it may exercise at any time and from time to time, subject to certain limitations, to include any such shares and other securities in other registrations of equity securities of the Company initiated by the Company on its own behalf or on behalf of other securityholders of the Company. The Company will agree to pay all costs and expenses in connection with each such registration which Fuji Bank, any subsidiary thereof or any Qualified Transferee initiates or in which any of them participates. The Registration Rights Agreement will contain indemnification and contribution provisions (i) by Fuji Bank and its permitted assigns for the benefit of the Company, and (ii) by the Company for the benefit of Fuji Bank and other persons entitled to effect registrations of Class A Common Stock pursuant to its terms, and related persons. PURCHASE OF INTEREST IN INTERNATIONAL GROUP FROM FUJI BANK The Company and Fuji Bank have agreed that, upon consummation of the Offerings, the Company will purchase Fuji Bank's interest in International Group for total cash consideration of approximately $83 million, $54 million of which is for the International Group common stock owned by Fuji Bank, valued at book value, and $29 million of which is for the International Group preferred stock owned by Fuji Bank, valued at a modest premium over book value. The shares of common and preferred stock of International Group currently owned by Fuji Bank represent 21% of the outstanding shares of capital stock of International Group. The Company intends to finance this acquisition through the issuance of senior debt, which will bear interest at a market rate and have such other terms as are determined at the time of issuance. CERTAIN OTHER TRANSACTIONS WITH FUJI BANK AND ITS SUBSIDIARIES Several financial, administrative or other service arrangements exist or have existed between the Company and Fuji Bank, FAHI, HIC or related affiliates. In management's opinion, the terms of these arrangements are similar to those the Company would have been able to obtain in like agreements with unaffiliated entities in arms-length transactions. TAX ALLOCATION AGREEMENT Under the terms of the tax allocation agreement between HIC and the Company, as amended, which was terminated after 1997, the Company has previously filed, and will file for 1997, consolidated U.S. federal income tax returns with HIC. The Company has reported, and will report for 1997, income tax expense as if it were a separate company and will record future tax benefits as soon as it is more likely than not that such benefits will be realized. Pursuant to the tax allocation agreement, each company covered by the agreement calculated its current and deferred income taxes based on its separate company taxable income or loss, utilizing separate company net operating losses, tax credits, capital losses and deferred tax assets or liabilities. In accordance with the provisions of such tax allocation agreement, net payments of $73 million, $43 million and $70 million were made by the Company to HIC in 1997, 1996 and 1995, respectively, and HIC made income tax payments of $49 million, $23 million and $25 million in 1997, 1996 and 1995, respectively. Under the terms of other tax allocation agreements with certain of the Company's subsidiaries, the Company and HIC, in calculating their current income taxes, utilized the taxable income or loss of the subsidiaries. The Company 85 anticipates that it will enter into a similar tax allocation agreement with FAHI for the period from January 2, 1998 through the date of the consummation of the Offerings. SERVICES PROVIDED BY FUJI BANK, HIC AND FAHI FOR THE COMPANY Certain employees of Fuji Bank and HIC performed managerial, administrative and other related functions for the Company during 1997. The Company compensated Fuji Bank and HIC for the use of such individuals' services at a rate which reflects current costs to Fuji Bank and HIC. The amounts paid to Fuji Bank and HIC for these services in 1997 were $2 million and $77 million, respectively. See "Management--Executive Compensation." In conjunction with the transfer of ownership of the Company to FAHI, the majority of the employees of HIC who were providing services to the Company were transferred to the Company. Additionally, certain subsidiaries of Fuji Bank periodically serve as managers for various offerings of the Company's debt securities and may act as registrar and paying agent for certain debt issuances by the Company. These services are provided at market rates. The Company has entered into similar agreements with FAHI. In the Company's opinion, the amounts to be paid under such agreements will be significantly less than the amounts paid in 1997. SERVICES PROVIDED BY THE COMPANY FOR AFFILIATES The Company performs services for its affiliates, including FAHI, and charges them for the cost of the work performed. The Company may also guarantee the obligations of its clients or the clients of certain joint ventures under letters of credit issued by financial institutions, some of which are affiliates of the Company. Additionally, the Company guaranteed payment under a deferred compensation arrangement between HIC and certain of its employees. The Company had agreements with HIC and certain other subsidiaries of HIC which provided for the Company to receive an annual negotiated fee for servicing assets which had been sold by the Company to HIC and these affiliates. The amount of fees for servicing these assets in 1997 was approximately $200,000. Heller Capital Markets Group, Inc. ("CMG"), a wholly-owned subsidiary of the Company, acted as placement agent for the sale of commercial paper issued by HIC during 1997. CMG received compensation based upon the face amount of the commercial paper notes sold. For the year ended December 31, 1997, HIC paid compensation to CMG pursuant to this arrangement of $61,000. The HIC commercial paper program was terminated during 1997. INTERCOMPANY RECEIVABLES, PAYABLES, TRANSACTIONS AND FINANCIAL INSTRUMENTS At December 31, 1997, the net amount due to affiliates was $29 million. This amount is comprised principally of interest bearing demand notes representing amounts due to or from the Company arising from an interest rate swap agreement with HIC, advances, administrative fees and costs charged to other subsidiaries of HIC. The notes bear interest at rates which approximate the average rates on the Company's commercial paper obligations or short-term bank borrowing rates outstanding during the period. During 1997 the Company paid interest of $3 million to HIC related to these notes. Fuji Bank and one of its subsidiaries provided uncommitted lines of credit to international subsidiaries of the Company totalling approximately $29 million at December 31, 1997. Borrowings under these facilities totalled $5 million at December 31, 1997. In addition, Fuji Bank provides lines of credit to certain international joint ventures of the Company. The Company is a party to a $200 million notional amount interest rate swap agreement with FAHI, which expires December 15, 2000. The purpose of this agreement is to manage the Company's exposure to interest rate fluctuations. Under this agreement, the Company pays interest to FAHI at a variable rate based on the commercial paper rate published by the Board of Governors of the Federal Reserve and FAHI pays interest to the Company at a fixed rate of 5.57%. This agreement, which FAHI assumed from HIC effective January 1998, increased the Company's interest expense by $295,000 in 1997. 86 During 1997, HIC converted all of its shares of Cumulative Convertible Preferred Stock, Series D (the "Series D Preferred Stock") into common stock of the Company. Prior to the conversion, the Company paid a dividend to HIC on the Series D Preferred Stock of approximately $500,000. Also, during 1997, the Company paid to Fuji Bank a commitment fee of approximately $317,000, related to the Keep Well Agreement. The trust department of Fuji Bank may purchase commercial paper of the Company for its clients. Interest expense paid by the Company related to such commercial paper borrowings was $235,000 in 1997. In the ordinary course of its business, the Company participates in joint financings with Fuji Bank or certain affiliates. During 1997, the Company sold $10 million of an outstanding $25 million commitment to Fuji Bank at book value. No gain or loss was recorded on the transaction. The Company has an accounts receivable sale facility which allows the Company to sell an undivided interest of up to $550 million in a designated pool of its factored accounts receivable to five bank-supported conduits. The Company sold approximately $500 million of receivables under this facility as of December 31, 1997. The underlying liquidity support for the conduit is provided by unaffiliated entities. One of the conduits has an operating agreement with Fuji Bank. The Company paid fees of $346,000 to Fuji Bank during 1997 for services provided under this agreement. In conjunction with the formation of FAHI, the Company purchased, at book value, less than $10 million of assets from HIC on December 31, 1997. These assets are primarily recorded as real estate receivables at the purchase price. On February 15, 1985, the Company issued to HIC 1,000 shares of previously subscribed Series D Preferred Stock, which had a dividend yield established quarterly at the rate of 1/2% under the announced prime commercial lending rate of Morgan Guaranty Trust Company of New York, cumulative from March 30, 1984 and payable quarterly commencing on March 31, 1989. During 1997, HIC converted all of its shares of Series D Preferred Stock into common stock of the Company. The conversion was accounted for as a stock dividend and therefore has been retroactively restated in the Company's consolidated financial statements. All dividends paid on the Series D Preferred Stock have been retroactively reclassified to common dividends. CERTAIN OTHER RELATIONSHIPS Mr. Kessel, a director of the Company, is a partner of the law firm of Shearman & Sterling, which from time to time acts as counsel in certain matters for Fuji Bank, the Company and FAHI. OWNERSHIP OF COMMON STOCK FAHI directly owns 100% of the Common Stock outstanding prior to the Offerings, and as the sole stockholder of FAHI, Fuji Bank is also deemed to beneficially own 100% of such Common Stock. Upon consummation of the Offerings, FAHI will directly own 100% of the outstanding Class B Common Stock and none of the outstanding Class A Common Stock and, by virtue of its ownership of FAHI, Fuji Bank will also be deemed to beneficially own 100% of such Class B Common Stock and none of such Class A Common Stock. Accordingly, upon consummation of the Offerings, FAHI and Fuji Bank will beneficially own Common Stock representing 60.4% of the economic interest in the Company (57.0% if the Underwriters' over-allotment options are exercised in full) and, due to the limitation on the voting power of the Class B Common Stock while held by Fuji Bank, 79.0% of the combined voting power of all of the outstanding Common Stock (regardless of whether the Underwriters' over-allotment options are exercised). See "Certain Relationships and Related Transactions--Relationship with Fuji Bank". 87 The principal executive offices of Fuji Bank are located at 1-5-5 Otemachi, Chiyoda-ku, Tokyo, Japan. The principal executive offices of FAHI are located at 500 West Monroe Street, Chicago, Illinois 60661. As of March 31, 1998, none of the outstanding equity securities of the Company was held by any of its directors or executive officers. The following table sets forth, as of March 31, 1998, certain information with respect to the beneficial ownership of common stock of Fuji Bank, the Company's ultimate parent, by (i) each director of the Company, (ii) each of the Named Officers and (iii) all directors and executive officers of the Company as a group.
NAME OF NUMBER OF SHARES BENEFICIAL OWNER BENEFICIALLY OWNED ---------------- ------------------ Richard J. Almeida.......................................... -- Yukihiko Chayama............................................ 701 Tsutomu Hayano.............................................. 11,315 Mark Kessel................................................. -- Michael J. Litwin........................................... -- Dennis P. Lockhart.......................................... -- Lauralee E. Martin.......................................... -- Hideo Nakajima.............................................. 13,428 Osamu Ogura................................................. -- Masahiro Sawada............................................. 2,205 Takeshi Takahashi........................................... 4,000 Atsushi Takano.............................................. 13,714 Kenichiro Tanaka............................................ 4,174 Kenichi Tomita.............................................. 620 Michael P. Goldsmith........................................ -- David J. Kantes (1)......................................... -- Mark A. Abbott.............................................. -- All directors and executive officers as a group (seven persons)................................................... 50,157
- -------- (1) Mr. Kantes resigned from the Company effective April 3, 1998. In addition, Messrs. Chayama, Hayano, Nakajima, Ogura, Sawada, Takahashi, Takano, Tanaka and Tomita participate in a Fuji Bank employee stock purchase plan and, as of March 31, 1998, beneficially owned an aggregate of approximately 34,634 shares of Fuji Bank common stock through this plan. The number of shares of Fuji Bank common stock that are beneficially owned by (i) each of the Company's directors, (ii) each of the Named Officers or (iii) the Company's directors and executive officers as a group, including those shares held in the Fuji Bank employee stock purchase plan, does not exceed 1% of the outstanding shares of such stock. SHARES AVAILABLE FOR FUTURE SALE Upon consummation of the Offerings, the Company will have 33,500,000 shares of Class A Common Stock and 51,050,000 shares of Class B Common Stock issued and outstanding. All of the shares of Class A Common Stock to be sold in the Offerings will be freely tradeable without restriction under the Securities Act, except for any shares held by an "affiliate" of the Company (as that term is defined in Rule 144 adopted under the Securities Act ("Rule 144")), which will be subject to the resale limitations of Rule 144. Immediately following the consummation of the Offerings, all of the outstanding shares of Class B Common Stock will be beneficially owned by Fuji Bank and will not have been 88 registered under the Securities Act. Such shares owned by Fuji Bank may be sold only pursuant to an effective registration statement under the Securities Act or in accordance with Rule 144 or another exemption from the registration requirements of the Securities Act. Fuji Bank has certain rights to require the Company to effect registration of shares of Class A Common Stock, and certain other securities issued or issuable in respect thereof, owned by Fuji Bank. See "Certain Relationships and Related Transactions--Relationship with Fuji Bank--Registration Rights Agreement". In general, under Rule 144 as currently in effect, a person (or persons whose shares are required to be aggregated) who has beneficially owned shares of Common Stock for at least one year, including a person who may be deemed an "affiliate", is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of (i) one percent (1%) of the total number of outstanding shares of the class of stock being sold or (ii) the average weekly reported trading volume of the class of stock being sold during the four calendar weeks preceding such sale. A person who is not deemed an "affiliate" of the Company at any time during the three months preceding a sale and who has beneficially owned shares for at least two years is entitled to sell such shares under Rule 144 without regard to the volume limitations described above. As defined in Rule 144, an "affiliate" of an issuer is a person that directly or indirectly through the use of one or more intermediaries controls, is controlled by, or is under common control with, such issuer. Rule 144A under the Securities Act ("Rule 144A") provides a non- exclusive safe harbor exemption from the registration requirements of the Securities Act for specified resales of restricted securities to certain institutional investors. In general, Rule 144A allows unregistered resales of restricted securities to a "qualified institutional buyer", which generally includes an entity, acting for its own account or for the account of other qualified institutional buyers, that in the aggregate owns or invests at least $100 million in securities of unaffiliated issuers. Rule 144A does not extend an exemption to the offer or sale of securities that, when issued, were of the same class as securities listed on a national securities exchange or quoted on an automated quotation system. The shares of Class B Common Stock outstanding as of the date of this Prospectus would be eligible for resale under Rule 144A because such shares, when issued, were not of the same class as any listed or quoted securities. The foregoing summary of Rule 144 and Rule 144A is not intended to be a complete description thereof. Prior to the Offerings, there has been no market for the Class A Common Stock, and no prediction can be made as to the effect, if any, that market sales of outstanding shares of Common Stock by Fuji Bank, or the availability of such shares for sale, will have on the market price of the Class A Common Stock prevailing from time to time. Nevertheless, sales by Fuji Bank of substantial amounts of Common Stock in the public market, or the perception that such sales could occur, could adversely affect prevailing market prices for the Class A Common Stock offered hereby. See "Risk Factors--Shares Eligible for Future Sale; Possible Future Sales by Fuji Bank". Fuji Bank has advised the Company that its current intent is to continue to hold all of the Common Stock beneficially owned by it following the Offerings. Fuji Bank, FAHI and the Company have agreed not to sell or otherwise dispose of any shares of Common Stock for a period of 180 days after the date of this Prospectus, without the prior written consent of Goldman, Sachs & Co. See "Underwriting". Prior to the consummation of the Offerings, the Keep Well Agreement will be amended to allow the Company or Fuji Bank or any of its affiliates to sell or dispose of Common Stock to any person or entity, provided that after any such sale or disposition, Fuji Bank (directly or indirectly, through one or more subsidiaries) continues to hold greater than 50% of the combined voting power of the outstanding Common Stock. This provision may be subject to further amendment by the Company and Fuji Bank without the approval of any of the Company's other securityholders. As a result, there can be no assurance as to the period of time during which Fuji Bank will continue to maintain the same beneficial ownership of Common Stock to be beneficially owned by it immediately following the Offerings. 89 DESCRIPTION OF CAPITAL STOCK The following summary of the capital stock of the Company does not purport to be complete and is subject to, and qualified in its entirety by reference to, the Company's Amended and Restated Certificate of Incorporation (the "Restated Certificate") and the Company's Amended and Restated By-Laws (the "Restated By-Laws"), forms of which have been filed with, and are available from, the Commission, and to the Delaware General Corporation Law (the "DGCL"). GENERAL The Restated Certificate will authorize the Company to issue 852,000,000 shares of capital stock, of which 500,000,000 shares will be designated Class A Common Stock, $0.25 par value per share, 300,000,000 shares will be designated Class B Common Stock, par value $0.25 per share, 2,000,000 shares will be designated preferred stock, no par value per share ("Junior Preferred Stock"), and 50,000,000 shares will be designated senior preferred stock, $0.01 par value per share ("Senior Preferred Stock" and, together with the Junior Preferred Stock, "Preferred Stock") . As of February 24, 1998, there were no shares of Class A Common Stock and 51,050,000 shares of Class B Common Stock issued and outstanding. As of March 31, 1998, there were 6,600,000 shares of Preferred Stock authorized and issued or reserved for issuance as follows: 5,000,000 shares of Series A Preferred Stock, a series of Senior Preferred Stock, all of which were issued and outstanding; 1,500,000 shares of Series C Preferred Stock, a series of Senior Preferred Stock, all of which were issued and outstanding; and 100,000 shares of NW Preferred Stock, a series of Junior Preferred Stock, none of which were issued and outstanding. All outstanding shares of Common Stock and Preferred Stock are fully paid and nonassessable. Of the 500,000,000 authorized shares of Class A Common Stock, 33,500,000 shares are being offered in the Offerings, 51,050,000 shares will be reserved for issuance upon conversion of shares of Class B Common Stock into Class A Common Stock, and 4,593,088 shares (plus up to an additional 376,875 shares if the Underwriters' over-allotment options are exercised) will be reserved for issuance under the Stock Incentive Plan. There will continue to be 51,050,000 shares of Class B Common Stock outstanding upon consummation of the Offerings, all of which will be beneficially owned directly by FAHI and indirectly by Fuji Bank. Upon consummation of the Offerings, all outstanding shares of Common Stock will be fully paid and nonassessable. COMMON STOCK VOTING RIGHTS The holders of Class A Common Stock and Class B Common Stock generally have identical rights except that holders of Class A Common Stock are entitled to one vote per share and holders of Class B Common Stock are entitled to three votes per share on all matters to be voted on by stockholders, subject to the right of Fuji Bank or the Class B Transferee (as defined below), as the case may be, to reduce from time to time the number of votes per share of Class B Common Stock by written notice to the Company specifying the reduced number of votes per share. Notwithstanding the foregoing, in the event that at any time while held by Fuji Bank the shares of Class B Common Stock would represent greater than 79% of the combined voting power of all outstanding classes of voting stock of the Company, then for voting purposes the number of votes per share of Class B Common Stock shall be automatically reduced so that the shares of Class B Common Stock held by Fuji Bank represent 79% of such combined voting power. Holders of shares of Class A Common Stock and Class B Common Stock are not entitled to cumulate their votes for the election of directors. Generally, all matters to be voted on by stockholders must be approved by a majority (or, in the case of the election of directors, by a plurality) of the votes entitled to be cast by all holders of shares of Class A Common Stock and Class B Common Stock present in person or represented by proxy, voting together as a single class, 90 subject to any voting rights granted to holders of any Preferred Stock. Except as otherwise provided by law or the Restated Certificate, and subject to any voting rights granted to holders of any outstanding Preferred Stock, amendments to the Restated Certificate must be approved by the vote of the holders of Common Stock having a combined voting power of a majority of all shares of Class A Common Stock and Class B Common Stock, voting together as a single class. Amendments to the Restated Certificate that would alter or change the powers, preferences or special rights of the Class A Common Stock or the Class B Common Stock so as to affect them adversely also must be approved by a majority of the votes entitled to be cast by the holders of the shares adversely affected by the amendment, voting as a separate class. DIVIDENDS Holders of Class A Common Stock and Class B Common Stock will share ratably on a per share basis in any dividends declared by the Board of Directors, subject to any preferential rights of any outstanding Preferred Stock, except that holders of Class A Common Stock shall not be entitled to receive the cash dividend which the Company expects to pay to FAHI, as the sole holder of the Class B Common Stock, with a portion of the net proceeds of the Offerings. The Company is prohibited from paying dividends on the Common Stock unless all declared dividends on all outstanding shares of Series C Preferred Stock and full cumulative dividends on all outstanding shares of Series A Preferred Stock have been paid. In the case of dividends or other distributions payable in Common Stock, including distributions pursuant to stock splits or divisions of Common Stock, only shares of Class A Common Stock shall be paid or distributed to holders of shares of Class A Common Stock, and only shares of Class B Common Stock shall be paid or distributed to holders of Class B Common Stock. See "Use of Proceeds" and "Dividend Policy". The Company may not reclassify, subdivide or combine shares of one class of Common Stock without at the same time proportionally reclassifying, subdividing or combining shares of the other class of Common Stock. CONVERSION Each share of Class B Common Stock is convertible at any time while held by Fuji Bank and/or any of its subsidiaries or the Class B Transferee (as defined below) and/or any of its subsidiaries at the option of the holder thereof into one share of Class A Common Stock. Except as provided below, any shares of Class B Common Stock transferred to a person other than Fuji Bank or any of its subsidiaries or the Class B Transferee or any of its subsidiaries shall automatically convert into shares of Class A Common Stock upon such disposition. Shares of Class B Common Stock representing more than a 50% voting interest in the outstanding shares of Common Stock transferred by Fuji Bank and/or any of its subsidiaries in a single transaction or series of related transactions to one unaffiliated person (the "Class B Transferee") and/or any of its subsidiaries shall not automatically convert into shares of Class A Common Stock upon such disposition. Any shares of Class B Common Stock retained by Fuji Bank or any of its subsidiaries following any such disposition of more than a 50% voting interest in the outstanding shares of Common Stock to the Class B Transferee and/or any of its subsidiaries shall automatically convert into shares of Class A Common Stock upon such disposition. All shares of Class B Common Stock will automatically convert into Class A Common Stock if the number of outstanding shares of Class B Common Stock beneficially owned by Fuji Bank and its subsidiaries or the Class B Transferee and its subsidiaries, as the case may be, falls below 30% of the aggregate number of outstanding shares of Common Stock. This will prevent Fuji Bank and its subsidiaries or the Class B Transferee and its subsidiaries, as the case may be, from decreasing their economic interest in the Company to less than 30% while still retaining control of a majority of the 91 Company's voting power. The foregoing automatic conversion is intended to ensure that Fuji Bank and/or its subsidiaries or the Class B Transferee and/or its subsidiaries, as the case may be, retain voting control by virtue of their ownership of Class B Common Stock only if they continue to have a significant economic interest in the Company. All conversions will be effected on a share- for-share basis. OTHER RIGHTS In the event of any merger, reorganization or consolidation of the Company with or into another entity in connection with which shares of Common Stock are converted into or exchangeable for shares of stock, other securities or property (including cash), all holders of Common Stock, regardless of class, will be entitled to receive the same kind and amount of shares of stock and other securities and property (including cash), except that shares of stock or other securities receivable upon such reorganization, consolidation or merger by a holder of a share of Class B Common Stock may differ from the shares of stock or other securities receivable upon such reorganization, consolidation or merger by a holder of a share of Class A Common Stock to the extent that the Class B Common Stock and Class A Common Stock differ as provided in the Restated Certificate. On liquidation, dissolution or winding up of the Company, after payment in full of the amounts required to be paid to holders of Preferred Stock, if any, all holders of Common Stock, regardless of class, are entitled to share ratably in any assets available for distribution to holders of shares of Common Stock. No shares of either class of Common Stock are subject to redemption. Shares of Class A Common Stock do not have preemptive rights to purchase additional shares. Holders of shares of Class B Common Stock have preemptive rights to subscribe for and receive additional securities of the Company upon all additional issuances by the Company of shares of Class A Common Stock, or any other securities convertible into shares of Class A Common Stock (other than in connection with certain issuances pursuant to employee stock or stock option benefit plans or in connection with any stock split or stock dividend), such that such holder of Class B Common Stock may, by purchasing such additional securities, maintain the percentage beneficial ownership interest (including voting and economic interest) it had immediately prior to such issuance. PREFERRED STOCK Under the Restated Certificate, the Board of Directors of the Company may provide for the issuance of Senior Preferred Stock or Junior Preferred Stock in one or more series from time to time, and the rights, preferences, privileges and restrictions, including dividend rights, voting rights, conversion rights, terms of redemption and liquidation preferences, of the Senior Preferred Stock or Junior Preferred Stock of each series will be fixed or designated by the Board of Directors pursuant to a certificate of designation without any further vote or action by the Company's stockholders, except as required pursuant to the terms of the Series A Preferred Stock and Series C Preferred Stock. SERIES A PREFERRED STOCK Dividends on the Series A Preferred Stock are payable at an annual rate of 8.125%. Dividends are cumulative and payable quarterly. The Company is prohibited from declaring or paying cash dividends on Common Stock, Junior Preferred Stock or other series of Senior Preferred Stock on parity with the Series A Preferred Stock, unless full cumulative dividends on all outstanding shares of Series A Preferred Stock for all past dividend periods have been paid. The Series A Preferred Stock is not redeemable prior to September 22, 2000. On or after that date, the Series A Preferred Stock will be redeemable at the option of the Company, in whole or in part, at a redemption price of $25 per share, plus accrued and unpaid dividends. Except as required by law and as set forth herein, the holders of 92 Series A Preferred Stock have no voting rights. In case the Company shall be in arrears in the payment of six consecutive quarterly dividends on the outstanding Series A Preferred Stock, the holders of Series A Preferred Stock, voting separately as a class and in addition to any voting rights that holders of the Series A Preferred Stock shall have as required by law, shall have the exclusive right to elect two additional directors beyond the number to be elected by the stockholders at the next annual meeting of the stockholders called for the election of directors, and at every subsequent such meeting at which the terms of office of the directors so elected by the Series A Preferred Stock expire, provided such arrearage exists on the date of such meeting or subsequent meetings, as the case may be. Any such elected directors shall serve until the dividend default shall cease to exist. In addition, without the vote of the holders of at least two-thirds of the outstanding shares of Series A Preferred Stock, the Company shall not (i) issue, from any class or series of stock now existing or to be created in the future, any shares of stock ranking senior to the outstanding shares of Series A Preferred Stock as to the payment of dividends and upon liquidation or (ii) amend the Restated Certificate or the Restated By-laws, as amended, if such amendment would increase or decrease the aggregate number of authorized shares of Series A Preferred Stock, increase or decrease the par value of the shares of Series A Preferred Stock or alter or change the powers, preferences or special rights of the Series A Preferred Stock so as to affect the holders of the Series A Preferred Stock adversely. The Series A Preferred Stock carries a liquidation preference of $25 per share, plus accrued and unpaid dividends. The Series A Preferred Stock ranks senior with respect to payment of dividends and liquidation preferences to the Common Stock and Junior Preferred Stock. SERIES C PREFERRED STOCK Dividends on the Series C Preferred Stock are noncumulative and, if declared by the Board of Directors or a duly authorized committee thereof, will be payable quarterly at an annual rate of 6.687%. The amount of dividends payable will be adjusted in the event of certain amendments to the Internal Revenue Code of 1986, as amended, in respect of the dividends received reduction. The Company is prohibited from declaring or paying cash dividends on Common Stock, Junior Preferred Stock or other series of Senior Preferred Stock on parity with the Series C Preferred Stock, unless all declared dividends on all outstanding shares of Series C Preferred Stock for all past dividend periods have been paid. The Series C Preferred Stock is not redeemable prior to August 15, 2007. On or after that date, the Series C 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 accrued and unpaid dividends (whether or not declared) for the then-current dividend period and, if declared, accrued and unpaid dividends for prior dividend periods. Except as required by law and as set forth herein, the holders of Series C Preferred Stock have no voting rights. If dividends payable on any share or shares of the Series C Preferred Stock or on any other class or series of Senior Preferred Stock for which dividends are noncumulative ("Noncumulative Preferred Stock") ranking on a parity with the Series C Preferred Stock and upon which like voting rights have been conferred and are exercisable (excluding any class or series of Noncumulative Preferred Stock entitled to elect additional directors by a separate vote, "Voting Preferred Stock") have not been paid or declared and set aside for payment for the equivalent of six full quarterly dividend periods (whether or not consecutive), the number of directors of the Company will be increased by two (without duplication of any increase made pursuant to the terms of any other class or series of Voting Preferred Stock), and the holders of the Series C Preferred Stock, voting as a single class with the holders of the Voting Preferred Stock, will be entitled to elect such two directors to fill such newly-created directorships. Such right of the holders of the Series C Preferred Stock and the Voting Preferred Stock shall continue until dividends on the Series C Preferred Stock and the Voting 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). Any such elected directors shall serve until the Company's next annual meeting of stockholders and until their respective successors are elected and qualified (notwithstanding that prior to the end of such term the dividend default shall cease to exist). In addition, the affirmative vote or consent of the holders of at least two-thirds of the outstanding 93 shares of the Series C Preferred Stock will be required for any amendment, alteration or repeal of any provisions of the Restated Certificate or of any other certificate amendatory of or supplemental to the Restated Certificate which would adversely affect the powers, preferences, privileges or rights of the Series C Preferred Stock. The affirmative vote or consent of the holders of at least two-thirds of the outstanding shares of the Series C Preferred Stock and any other series of Noncumulative Preferred Stock ranking on a parity with the Series C Preferred Stock either as to dividends or upon liquidation, voting as a single class without regard to series, will be required to issue, authorize or increase the authorized amount of, or issue or authorize any obligation or security convertible into or evidencing a right to purchase, any additional class or series of stock ranking prior to the Series C Preferred Stock as to dividends or upon liquidation, or to reclassify any authorized stock of the Company into such prior shares, but such vote will not be required for the Company to take any such actions with respect to any stock ranking on a parity with or junior to the Series C Preferred Stock. The Series C Preferred Stock is entitled to a liquidation preference of $100.00 per share, plus an amount equal to the sum of all accrued and unpaid dividends (whether or not earned or declared) for the then-current dividend period to the date of final distribution (without accumulation of accrued and unpaid dividends for prior dividend periods unless previously declared), that is senior to payments to holders of the Common Stock, the Junior Preferred Stock or any other class or series of stock of the Company ranking junior to the Series C Preferred Stock and pari passu with payments to holders of each other series of Senior Preferred Stock outstanding on the date of original issue of the Series C Preferred Stock. NW PREFERRED STOCK The Company has authorized the issuance of 100,000 shares of NW Preferred Stock pursuant to the Keep Well Agreement wherein, among other things, Fuji Bank has agreed to purchase NW Preferred Stock in an amount required to maintain the Company's net worth at $500 million. The Company's net worth was approximately $1.7 billion at December 31, 1997. If and when the NW Preferred Stock is issued, dividends will be payable thereon at an annual rate equal to 1% per annum above the three-month rate at which deposits in United States dollars are offered by Fuji Bank in London, England to prime banks in the London interbank market. Dividends on the NW Preferred Stock will be noncumulative and payable (if declared) quarterly, and the Company will be prohibited from paying cash dividends on the Common Stock unless full dividends for the then-current dividend period (without accumulation of accrued and unpaid dividends for prior dividend periods unless previously declared) on all outstanding shares of NW Preferred Stock have been declared and paid or declared and a sum sufficient set aside for such payment. Subject to certain conditions, NW Preferred Stock will be redeemable at the option of the holder, in whole or in part, within a specified period of time after the end of a calendar quarter in an aggregate amount not greater than the excess of the net worth of the Company as of the end of such calendar quarter over $500 million and at a redemption price equal to the price paid to the Company upon the issuance thereof, plus accrued and unpaid dividends for the then- current dividend period (without accumulation of accrued and unpaid dividends for prior dividend periods unless previously declared). Except as required by law, the holders of NW Preferred Stock will have no voting rights. The NW Preferred Stock will carry a liquidation preference equal to the price paid for each share upon issuance thereof, plus accrued and unpaid dividends for the then-current dividend period (without accumulation of accrued and unpaid dividends for prior dividend periods unless previously declared). The NW Preferred Stock will rank senior to the Common Stock and junior to the Senior Preferred Stock with respect to payment of dividends and liquidation preference. No purchases of NW Preferred Stock have been made to date by Fuji Bank under the Keep Well Agreement. 94 CERTAIN CERTIFICATE OF INCORPORATION AND BY-LAW PROVISIONS CORPORATE OPPORTUNITIES The Restated Certificate will provide that Fuji Bank shall have no duty to refrain from engaging in the same or similar activities or lines of business as the Company, and neither Fuji Bank nor any director, officer or other employee thereof (except as provided below) will be liable to the Company or its stockholders for breach of any fiduciary duty by reason of any such activities of Fuji Bank. In the event that Fuji Bank acquires knowledge of a potential transaction or matter which may be a corporate opportunity for both Fuji Bank and the Company, Fuji Bank shall have no duty to communicate or offer such corporate opportunity to the Company and shall not be liable to the Company or its stockholders for breach of any fiduciary duty as a stockholder of the Company by reason of the fact that Fuji Bank pursues or acquires such corporate opportunity for itself, directs such corporate opportunity to another person or does not communicate information regarding such corporate opportunity to the Company. In the event that a director, officer or other employee of the Company who is also a director or officer or other employee of Fuji Bank acquires knowledge of a potential transaction or matter which may be a corporate opportunity for both the Company and Fuji Bank, such director, officer or other employee of the Company shall have fully satisfied and fulfilled the fiduciary duty of such director, officer or other employee of the Company and its stockholders with respect to such corporate opportunity if such director, officer or other employee acts in a manner consistent with the following policy: (i) a corporate opportunity offered to any person who is an officer or other employee of the Company, and who is also a director but not an officer or other employee of Fuji Bank, shall belong to the Company; (ii) a corporate opportunity offered to any person who is a director but not an officer or other employee of the Company, and who is also a director or officer or other employee of Fuji Bank, shall belong to the Company if such opportunity is expressly offered to such person in writing solely in his or her capacity as a director of the Company, and otherwise shall belong to Fuji Bank; and (iii) a corporate opportunity offered to any person who is an officer or other employee of both the Company and Fuji Bank, or an officer of one and a non-officer employee of the other, shall belong to the Company if such opportunity is expressly offered to such person in writing solely in his or her capacity as an officer or employee of the Company, and otherwise shall belong to Fuji Bank. For purposes of the foregoing: (i) A director of the Company who is Chairman of the Board of Directors or of a committee thereof shall not be deemed to be an officer or employee of the Company by reason of holding such position (without regard to whether such position is deemed an officer of the Company under the Restated By-Laws), unless such person is a full-time employee of the Company; and (ii)(A) The term "Company" shall mean the Company and all corporations, partnerships, joint ventures, associations and other entities controlled directly or indirectly by the Company through the ownership of the outstanding voting power of such corporation, partnership, joint venture, association or other entity or otherwise and (B) the term "Fuji Bank" shall mean Fuji Bank and all corporations, partnerships, joint ventures, associations and other entities (other than the Company, defined in accordance with clause (A) of this section (ii)) controlled (directly or indirectly) by Fuji Bank through the ownership of the outstanding voting power of such corporation, partnership, joint venture, association or other entity or otherwise. The foregoing provisions of the Restated Certificate will expire on the date that Fuji Bank ceases to own beneficially Common Stock representing at least 30% of the voting power of all classes of outstanding Common Stock and no person who is a director, officer or employee of the Company is also a director, officer or employee of Fuji Bank or any of its subsidiaries (other than the Company). 95 Any person purchasing or otherwise acquiring Common Stock will be deemed to have notice of, and to have consented to, the foregoing provisions of the Restated Certificate. PROVISIONS THAT MAY HAVE AN ANTI-TAKEOVER EFFECT Certain provisions to be contained in the Restated Certificate and the Restated By-Laws summarized below may be deemed to have an anti-takeover effect and may delay, deter or prevent a tender offer or takeover attempt that a stockholder might consider to be in its best interest, including an attempt that might result in a premium being paid over the market price for the shares held by stockholders. The Restated By-Laws will provide that subject to any rights of holders of Preferred Stock to elect additional directors under specified circumstances, the number of directors will be fixed from time to time exclusively by resolution of the Board of Directors adopted by the affirmative vote of directors constituting not less than a majority of the total number of the directors that the Company would have if there were no vacancies on the Company's Board of Directors, but shall consist of not more than 16 nor less than eight directors. In addition, the Restated Certificate and Restated By- Laws will provide that, subject to any rights of holders of Preferred Stock, any vacancies, other than vacancies occurring by reason of removal by the stockholders, may be filled by the affirmative vote of a majority of the remaining members of the Board of Directors, though less than a quorum, or by a sole remaining director, and except as otherwise provided by law, any such vacancy may not be filled by the stockholders. The Restated By-Laws will provide for an advance notice procedure for the nomination, other than by or at the direction of the Board of Directors, of candidates for election as directors as well as for other stockholder proposals to be considered at annual meetings of stockholders. In general, notice of intent to nominate a director or raise matters at such meetings will have to be received in writing by the Company at its principal executive offices not less than 90 days prior to the first anniversary of the date of the previous year's annual meeting of stockholders, subject to adjustment in certain situations, and must contain certain information concerning the person to be nominated or the matters to be brought before the meeting and concerning the stockholder submitting the proposal. The Restated Certificate and the Restated By-Laws will also provide that special meetings of stockholders may be called only by certain specified officers of the Company or by the Secretary of the Company at the request of a majority of the total members of the Board of Directors; special meetings of stockholders cannot be called by stockholders. In addition, the Restated By-laws will provide that any action required or permitted to be taken by stockholders may be effected by written consent; provided, however, that on and after the date on which neither Fuji Bank and its subsidiaries nor the Class B Transferee and its subsidiaries continue to beneficially own more than 50% of the total voting power of the outstanding Common Stock, any action required or permitted to be taken by stockholders may be effected only at a duly called annual or special meeting of stockholders and may not be effected by a written consent by stockholders in lieu of such a meeting. The Company's Restated Certificate will also provide that, subject to the rights of holders of Preferred Stock, the affirmative vote of the holders of at least 66 2/3% of the total voting power of all classes of outstanding Common Stock, voting together as a single class, is required to amend, repeal or adopt any provision inconsistent with the foregoing provisions of the Restated Certificate. The Restated Certificate and the Restated By-Laws will further provide that, subject to the rights of holders of Preferred Stock, the Restated By-Laws may be altered, amended or repealed by the affirmative vote of directors constituting not less than a majority of the entire Board of Directors (if effected by action of the Board of Directors) or by the affirmative vote of the holders of at least 66 2/3% of the total voting power of all outstanding Common Stock, voting together as a single class (if effected by action of the stockholders). Upon the consummation of the Offerings, the Company will be subject to the provisions of Section 203 of the DGCL. In general, this statute prohibits a publicly held Delaware corporation from engaging, under certain circumstances, in a "business combination" with an "interested stockholder" for a period 96 of three years after the date of the transaction in which the person becomes an interested stockholder, unless either (i) prior to the date at which the stockholder becomes an interested stockholder the board of directors approved either the business combination or the transaction in which the person becomes an interested stockholder, (ii) the stockholder acquires more than 85% of the outstanding voting stock of the corporation (excluding shares held by directors who are officers or held in certain employee stock plans) upon consummation of the transaction in which the stockholder becomes an interested stockholder or (iii) the business combination is approved by the board of directors and by two-thirds of the outstanding voting stock of the corporation (excluding shares held by the interested stockholder) at a meeting of the stockholders (and not by written consent) held on or subsequent to the date of the business combination. An "interested stockholder" is a person who, together with affiliates and associates, owns (or at any time within the prior three years did own) 15% or more of the corporation's voting stock. Section 203 defines a "business combination" to include, without limitation, mergers, consolidations, stock sales and asset based transactions and other transactions resulting in a financial benefit to the interested stockholder. LIMITATIONS ON DIRECTORS' LIABILITY The Company's Restated Certificate will provide that no director of the Company shall be liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) in respect of certain unlawful dividend payments or stock redemptions or repurchases or (iv) for any transaction from which the director derived an improper personal benefit. The effect of these provisions will be to eliminate the rights of the Company and its stockholders (through stockholders' derivative suits on behalf of the Company) to recover monetary damages against a director for breach of fiduciary duty as a director (including breaches resulting from grossly negligent behavior), except in the situations described above. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Class A Common Stock will be The Bank of New York. VALIDITY OF SHARES OF CLASS A COMMON STOCK The validity of the shares of Class A Common Stock offered hereby will be passed upon for the Company by Katten Muchin & Zavis, Chicago, Illinois, and for the Underwriters by Sullivan & Cromwell, New York, New York. Upon consummation of the Offerings, certain partners of, and attorneys associated with, Katten Muchin & Zavis will own less than 1% of the outstanding shares of Class A Common Stock. INDEPENDENT PUBLIC ACCOUNTANTS The consolidated balance sheets of the Company as of December 31, 1997 and 1996 and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997 included in this Prospectus have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report. 97 HELLER FINANCIAL, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Public Accountants.................................. F-2 Consolidated Balance Sheets as of December 31, 1997 and 1996.............. F-3 Consolidated Statements of Income for the Years Ended December 31, 1997, 1996 and 1995..................................................................... F-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995...................................................... F-5 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995................................... F-6 Notes to Consolidated Financial Statements................................ F-7
F-1 HELLER FINANCIAL, INC. AND SUBSIDIARIES REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Heller Financial, Inc.: We have audited the accompanying consolidated balance sheets of HELLER FINANCIAL, INC. (a Delaware corporation) AND SUBSIDIARIES as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Heller Financial, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Arthur Andersen LLP Chicago, Illinois January 23, 1998 (Except with respect to the matters discussed in Notes 20 and 21, as to which the date is February 24, 1998) F-2 HELLER FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, -------------- ASSETS 1997 1996 ------ ------- ------ (IN MILLIONS) Cash and cash equivalents....................................... $ 821 $ 296 Receivables (Note 3) Commercial loans Term loans.................................................. 2,597 2,434 Revolving loans............................................. 1,674 1,493 Real estate loans............................................. 2,238 1,994 Factored accounts receivable.................................. 2,223 994 Equipment loans and leases.................................... 1,990 1,614 ------- ------ Total receivables........................................... 10,722 8,529 Less: Allowance for losses of receivables (Note 3)............ 261 225 ------- ------ Net receivables............................................. 10,461 8,304 Equity and real estate investments (Note 4)..................... 488 419 Debt securities (Note 4)........................................ 311 251 Operating leases (Note 4)....................................... 195 135 Investments in international joint ventures (Note 4)............ 198 272 Other assets (Note 4)........................................... 387 249 ------- ------ Total assets................................................ $12,861 $9,926 ======= ====== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Senior debt (Note 5) Commercial paper and short-term borrowings.................... $ 3,432 $2,745 Notes and debentures.......................................... 6,004 4,761 ------- ------ Total debt.................................................. 9,436 7,506 Credit balances of factoring clients............................ 1,255 590 Other payables and accruals..................................... 405 306 ------- ------ Total liabilities........................................... 11,096 8,402 Minority interest............................................... 87 57 Stockholders' equity (Notes 9 and 10) Cumulative Perpetual Senior Preferred Stock, Series A......... 125 125 Noncumulative Perpetual Senior Preferred Stock, Series B...... 150 -- Class A Common Stock ($.25 par; 500,000,000 shares authorized; no shares issued or outstanding) (Note 20)................... -- -- Class B Common Stock ($.25 par; 300,000,000 shares authorized; 51,050,000 shares issued and outstanding) (Notes 9 and 20)... 13 13 Additional paid in capital.................................... 672 675 Retained earnings............................................. 718 654 ------- ------ Total stockholders' equity.................................. 1,678 1,467 ------- ------ Total liabilities and stockholders' equity.................. $12,861 $9,926 ======= ======
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. F-3 HELLER FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, ----------------- 1997 1996 1995 ----- ----- ----- (IN MILLIONS) Interest income.............................................. $ 924 $ 807 $ 851 Interest expense............................................. 516 452 464 ----- ----- ----- Net interest income........................................ 408 355 387 Fees and other income (Note 11).............................. 206 79 148 Factoring commissions........................................ 104 55 50 Income of international joint ventures....................... 36 44 35 ----- ----- ----- Operating revenues......................................... 754 533 620 Operating expenses (Note 12)................................. 357 247 216 Provision for losses (Note 3)................................ 164 103 223 ----- ----- ----- Income before taxes and minority interest.................. 233 183 181 Income tax provision (Note 14)............................... 66 43 49 Minority interest............................................ 9 7 7 ----- ----- ----- Net income................................................. $ 158 $ 133 $ 125 ===== ===== ===== Dividends on preferred stock............................... $ 14 $ 10 $ 10 ===== ===== ===== Net income applicable to common stock...................... $ 144 $ 123 $ 115 ===== ===== ===== Basic and diluted net income applicable to common stock per share (Note 21) ................................................ $2.82 $2.41 $2.25 ===== ===== ===== Pro forma basic and diluted net income applicable to common stock (Note 22) (unaudited)............................... $1.70 =====
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. F-4 HELLER FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, ------------------------- 1997 1996 1995 ------- ------- ------- (IN MILLIONS) OPERATING ACTIVITIES Net income........................................ $ 158 $ 133 $ 125 Adjustments to reconcile net income to net cash provided by operating activities: Provision for losses............................ 164 103 223 Losses from equity investments.................. 50 103 59 Amortization and depreciation................... 23 14 11 Provision for deferred tax asset (benefit)...... (19) 12 (50) Increase (decrease) in accounts payable and accrued liabilities............................ 29 (1) 34 Undistributed income of international joint ventures....................................... (19) (38) (26) Increase (decrease) in interest payable......... 11 (11) 12 Other........................................... 9 (36) (4) ------- ------- ------- Net cash provided by operating activities..... 406 279 384 INVESTING ACTIVITIES Longer-term loans funded.......................... (5,311) (3,372) (3,202) Collections of principal.......................... 2,904 2,521 2,248 Loan sales, securitizations and syndications...... 2,238 757 708 Net increase in short-term loans and advances to factoring clients Due to consolidation of Factofrance............. (1,018) -- -- Other........................................... (526) (427) (510) Investment in operating leases.................... (119) (33) (14) Investment in equity interests and other investments...................................... (369) (272) (172) Sales of investments and equipment on lease....... 365 168 148 Factofrance goodwill and noncompetition agreement. (96) -- -- Other............................................. 26 3 (17) ------- ------- ------- Net cash used for investing activities........ (1,906) (655) (811) FINANCING ACTIVITIES Senior note issues................................ 2,599 976 1,674 Retirement of notes and debentures................ (1,411) (1,358) (459) Increase (decrease) in commercial paper and other short-term borrowings Due to consolidation of Factofrance............. 966 -- -- Other........................................... (279) 522 (228) Proceeds from preferred stock issuance............ 147 -- -- Net decrease in advances to affiliates............ 49 5 4 Dividends paid on preferred and common stock...... (57) (68) (64) Other............................................. 11 (4) -- ------- ------- ------- Net cash provided by financing activities..... 2,025 73 927 Increase (decrease) in cash and cash equivalents.... 525 (303) 500 Cash and cash equivalents at the beginning of the year............................................... 296 599 99 ------- ------- ------- Cash and cash equivalents at the end of the year.... $ 821 $ 296 $ 599 ======= ======= =======
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. F-5 HELLER FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NONCUM. PERP. CLASS CLASS SR. A B PERPETUAL PREF. COMMON COMMON SR. PREF. STOCK STOCK STOCK ADD'L STOCK SERIES (NOTE (NOTE PAID IN RETAINED SERIES A B 20) 20) CAPITAL EARNINGS TOTAL --------- ------- ------ ------ ------- -------- ------ (IN MILLIONS) BALANCE AT DECEMBER 31, 1994................... $125 -- -- $13 $675 $517 $1,330 Net income.............. -- -- -- -- -- 125 125 Preferred stock dividends (Notes 9 and 10).................... -- -- -- -- -- (10) (10) Common stock dividends (Note 10).............. -- -- -- -- -- (54) (54) Changes in unrealized gains and losses on securities available for sale, net of tax (Note 4)............... -- -- -- -- -- (10) (10) Change in deferred translation adjustment, net of tax............. -- -- -- -- -- 3 3 ---- ---- ---- --- ---- ---- ------ BALANCE AT DECEMBER 31, 1995................... $125 -- -- $13 $675 $571 $1,384 Net income.............. -- -- -- -- -- 133 133 Preferred stock dividends (Notes 9 and 10).................... -- -- -- -- -- (10) (10) Common stock dividends (Note 10).............. -- -- -- -- -- (58) (58) Changes in unrealized gains and losses on securities available for sale, net of tax (Note 4)............... -- -- -- -- -- 18 18 Change in deferred translation adjustment, net of tax............. -- -- -- -- -- -- -- ---- ---- ---- --- ---- ---- ------ BALANCE AT DECEMBER 31, 1996................... $125 -- -- $13 $675 $654 $1,467 Net income.............. -- -- -- -- -- 158 158 Issuance of Noncumulative Perpetual Senior Preferred Stock, Series B (Note 9)...... -- 150 -- -- (3) -- 147 Preferred stock dividends (Notes 9 and 10).................... -- -- -- -- -- (14) (14) Common stock dividends (Note 10).............. -- -- -- -- -- (69) (69) Changes in unrealized gains and losses on securities available for sale, net of tax (Note 4)............... -- -- -- -- -- (5) (5) Change in deferred translation adjustment, net of tax............. -- -- -- -- -- (6) (6) ---- ---- ---- --- ---- ---- ------ BALANCE AT DECEMBER 31, 1997................... $125 $150 $-- $13 $672 $718 $1,678 ==== ==== ==== === ==== ==== ======
The retained earnings balance included $8 of unrealized gains, $13 of unrealized gains and $5 of unrealized losses on securities available for sale at December 31, 1997, 1996 and 1995, respectively. Retained earnings also included deferred foreign currency translation adjustments, net of tax, of $(20), $(14) and $(14) at December 31, 1997, 1996 and 1995, respectively. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. F-6 HELLER FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of the Reporting Entity-- Heller Financial, Inc. and its subsidiaries (the "Company") are engaged principally in furnishing commercial finance services to businesses in the United States and investing in and operating commercial finance companies throughout the world. The Company operates in the middle and emerging middle market segments of the commercial finance industry, which generally includes entities in the manufacturing and service sectors with annual sales in the range of $5 million to $250 million and in the real estate sector with property values generally in the range of $1 million to $40 million. The Company currently provides services in five product categories: 1) asset based finance, 2) corporate finance, 3) real estate finance, 4) international asset based finance and factoring and 5) project finance. During 1997, all of the common stock of the Company was owned by Heller International Corporation ("HIC"), which is a wholly-owned subsidiary of The Fuji Bank, Limited ("Fuji Bank"), of Tokyo, Japan. Fuji Bank directly owned 21% of the outstanding shares of Heller International Group, Inc. ("International Group"), a consolidated subsidiary, through which the Company holds its international operations. The remaining 79% of the outstanding shares of International Group were owned by the Company. See Note 20 for the potential purchase by the Company of Fuji Bank's 21% interest in International Group. Effective January 2, 1998, Fuji Bank formed Fuji America Holdings, Inc. ("FAHI"), to combine Fuji Bank's United States non-bank operations under one holding company. On that day, Fuji Bank transferred ownership of the Company from HIC to FAHI. As of January 2, 1998, all of the outstanding Common Stock of the Company is owned by FAHI. Basis of Presentation-- The accompanying consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Investments in affiliated companies owned 50% or less are accounted for by the equity method. Certain temporary interests are included in investments and carried at cost. Use of Estimates-- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents-- Cash and cash equivalents consist of cash deposits maintained in banks and short-term debt securities with original maturities of less than 60 days. F-7 HELLER FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Receivables-- Receivables are presented net of unearned income which generally includes deferred loan origination and commitment fees, direct loan origination costs and other amounts attributed to the fair value of equity interests and other investments received in connection with certain financings. These amounts are amortized to interest income using the effective interest method over the life of the related loan or commitment period. The Company originates certain loans which may be syndicated or portions sold to participants to manage borrower, industry or product concentrations. These receivables are also presented net of unearned income. In the event the Company sells a portion of a loan that it had originated, any deferred fees or discounts relating to the portion of the loan sold are recognized in interest income. For loan sales that qualify as participations, income is recognized, subject to certain yield tests, when the participation is complete. Income recognition is reviewed on an account by account basis. Collateral is evaluated regularly, primarily by assessing the related current and future cash flow streams. Loans are classified as nonearning and all interest and unearned income amortization is suspended when there is significant doubt as to the ability of the debtor to meet current contractual terms. Numerous factors including loan covenant defaults, deteriorating loan-to-value relationships, delinquencies greater than 90 days, the sale of major income generating assets or other major operational or organizational changes may lead to income suspension. An account taken nonearning may be restored to earning status either when all delinquent principal and interest have been paid under the original contractual terms or the account has been restructured and has demonstrated both the capacity to service the amended terms of the debt and has adequate loan to value coverage. Allowance for Losses-- The allowance for losses of receivables is established through direct charges to income. Losses are charged to the allowance when all or a portion of a receivable is deemed impaired and uncollectible as determined by account management procedures. These procedures include assessing how the borrower is affected by economic and market conditions, evaluating operating performance and reviewing loan-to-value relationships. Impaired receivables are measured based on the present value of expected future cash flows discounted at the receivable's effective interest rate, at the observable market price of the receivable or at the fair value of the collateral if the receivable is collateral dependent. When the recorded balance of an impaired receivable exceeds the relevant measure of value, impairment is recorded through an increase in the provision for losses. Management evaluates the allowance for losses on a quarterly basis. Nonearning assets and loans with certain loan grading characteristics are reviewed to determine if there is a potential risk of loss under varying scenarios of performance. The estimates of potential loss for these individual loans are aggregated and added to a general allowance requirement, which is based on the total of all other loans in the portfolio. This total allowance requirement is then compared to the existing allowance for losses and adjustments are made, if necessary. Securitized Receivables-- Certain commercial mortgage and equipment loans have been securitized and sold to investors. In the securitization process, loans are originated and sold to trusts which, in turn, issue asset-backed securities to investors. Upon the sale of the loans in a securitization, a gain is recognized for the F-8 HELLER FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) difference between the carrying value of the receivables and the fair value of the securities sold, in accordance with Statement of Financial Accounting Standards 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS 125"). If the Company does not retain any risk in the transaction and sells all of the securities to third party investors on a nonrecourse basis, the gain recorded equals the proceeds on the transaction less the carrying value of the securities sold. If the Company retains any of the securities, then the gain on sale is reduced by any reserve established for estimated future losses. Retained securities, if any, are recorded as debt securities available for sale. The gain recognized is recorded in fees and other income. In general, the Company does not establish servicing assets or liabilities because in securitization transactions to date the servicing fees earned are considered consistent with market rates and the Company's cost of servicing. Income from the acceleration of discounts and deferred fees attributed to the loans sold is recorded as interest income. The Company adopted SFAS 125 as amended by Statement of Financial Accounting Standards No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125" on January 1, 1997, collectively referred to as SFAS 125. 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. Securitizations of finance receivables are accounted for as sales when legal and effective control over the related receivables is surrendered. Servicing assets or liabilities are recognized when the servicing rights are retained by the seller. The adoption of this pronouncement did not have a material impact on the Company's consolidated financial statements. Investments in Joint Ventures-- Investments in unconsolidated joint ventures represent investments in companies with operations in 15 foreign countries. The Company accounts for its investments in joint ventures under the equity method of accounting. Under this method, the Company recognizes its share of the earnings or losses of the joint venture in the period in which they are earned by the joint venture. These amounts are recorded as income of international joint ventures in the consolidated statements of income. Dividends received from joint ventures reduce the carrying amount of the investment. Investments-- Equity interests and investments--Investments in warrants, certain common and preferred stocks and certain equity investments, which are not subject to the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," are carried at cost. The valuation of all of these investments is periodically reviewed and the investment balance is written down to reflect declines in value determined to be other than temporary. Gains or losses recognized upon sale or write-down of these investments are recorded as a component of fees and other income. Certain other equity investments in limited partnership funds are accounted for under the equity method of accounting in accordance with Accounting Principles Board Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock". These investments in limited partnerships were previously carried at cost. The impact of this change in accounting method, net of tax, was $4 million in 1997. The Company changed its policy to be consistent with industry practice. F-9 HELLER FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Equipment on lease--Aircraft and equipment under operating lease are recorded at cost and depreciated over their estimated useful lives using the straight line method for financial reporting purposes and accelerated methods for tax purposes. Rental revenue is reported over the lease term as it becomes receivable according to the provisions of the lease. Available for sale, trading, and held to maturity securities--Investments designated as available for sale securities are carried at fair value using the specific identification method with unrealized gains or losses included in stockholders' equity, net of related taxes. Trading securities, if any, are carried at fair value with the related unrealized gains or losses included currently in fees and other income. Securities that are held to maturity are recorded at amortized cost. Available for sale and held to maturity securities may be written down to fair value to reflect declines in value determined to be other than temporary. The amount of the writedown is included in fees and other income. Real Estate Investments--The Company provides financing through certain real estate loan arrangements that are recorded as acquisition, development and construction investment transactions by the Company. Income is generally recognized only to the extent that cash received exceeds the investment carrying amount. Other Assets-- Repossessed Assets--Assets which have been legally acquired in satisfaction of receivables are carried at fair value less selling costs and are included in other assets. After repossession, operating costs are expensed and cash receipts are applied to reduce the asset balance. Goodwill--The excess of the cost of an acquisition of an entity over the book value of the acquired entity's net assets is recorded as goodwill and amortized on a straight line basis over the expected beneficial period of the acquisition not to exceed 25 years. Income Taxes-- The Company and its wholly-owned domestic subsidiaries are included in the consolidated United States federal income tax return of HIC. International Group files a separate United States federal income tax return. The Company reports income tax expense as if it were a separate taxpayer and records future tax benefits as soon as it is more likely than not that such benefits will be realized. Derivative Financial Instruments-- Derivatives are used as an integral part of asset/liability management to reduce the overall level of financial risk arising from normal business operations. These derivatives, particularly interest rate swap agreements, are used to lower funding costs, diversify sources of funding or alter interest rate exposure arising from mismatches between assets and liabilities. The swap agreements are generally held to maturity and the differential paid or received under these agreements is recognized over the life of the related agreement. 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. The Company is not an interest rate swap dealer nor is it a trader in derivative securities, and it has not used speculative derivative products for the purpose of generating earnings from changes in market conditions. Unrealized gains and receivables and unrealized losses and payables on derivative financial instruments are immaterial and are reported as other payables in the consolidated balance sheet. F-10 HELLER FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company periodically enters into forward currency exchange contracts which are designated as hedges of its exposure to foreign currency fluctuations from the translation of its foreign currency denominated investments in certain European, Asian and Latin American joint ventures and subsidiaries. Through these contracts, the Company primarily sells the local currency and buys U.S. dollars. Gains or losses resulting from translation of foreign currency financial statements and the related effects of the hedges of net investments in joint ventures and subsidiaries outside the United States are accumulated in stockholders' equity, net of related taxes, until the international investment is sold or substantially liquidated. 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. Unrealized gains and receivables and unrealized losses and payables on derivative financial instruments are immaterial and are reported as other payables in the consolidated balance sheet. The Company also periodically enters into forward contracts or purchases options. These financial instruments serve as hedges of its foreign investment in international subsidiaries and joint ventures or effectively hedge the translation of the related foreign currency income. The contracts which serve as hedges of investments in international subsidiaries and joint ventures are carried at fair value with gains or losses deferred and included in the stockholders' equity section of the consolidated balance sheets. The change in fair value of contracts which serve to effectively hedge the translation of foreign currency income is included in the determination of net income. Reclassifications-- Certain prior year amounts have been reclassified to conform to the current year's presentation. 2. ACQUISITION OF FACTOFRANCE On April 2, 1997, 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 included $18 million for a noncompetition agreement which is being amortized over the five year life of the agreement. The following table presents unaudited pro forma combined income statements of the Company and Factofrance and its subsidiaries for the years ended December 31, 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 the Company 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. F-11 HELLER FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 YEAR ENDED DECEMBER 31, ----------- 1997 1996 ----- ----- (IN MILLIONS) (UNAUDITED) Interest income.............................................. $ 940 $ 889 Interest expense............................................. 526 497 ----- ----- Net interest income........................................ 414 392 Fees and other income........................................ 215 108 Factoring commissions........................................ 118 128 Income of international joint ventures....................... 33 28 ----- ----- Operating revenues......................................... 780 656 Operating expenses........................................... 377 338 Provision for losses......................................... 167 114 ----- ----- Income before income taxes and minority interest........... 236 204 Income tax provision......................................... 67 55 Minority interest............................................ 10 12 ----- ----- Net income................................................. $ 159 $ 137 ===== =====
3. LENDING ASSETS Lending assets include receivables and repossessed assets. Total receivables at December 31, 1997 consist of $8.6 billion of domestic receivables and $2.1 billion of foreign receivables. Of the foreign receivables, $2.0 billion represent factored accounts receivable of which $1.8 billion relate to Factofrance and $0.2 billion are from the other foreign consolidated subsidiaries. Total receivables at December 31, 1996 consist of $8.2 billion of domestic receivables and $301 million of foreign receivables. Diversification of Credit Risk-- Concentrations of lending assets of 5% or more at December 31, 1997 and 1996, based on the standard industrial classification of the borrower, are as follows:
DECEMBER 31, ----------------------------- 1997 1996 -------------- -------------- AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- (IN MILLIONS) General industrial machines................ $637 6% $500 6% Food, grocery and other miscellaneous retail.................................... 603 6 669 8 Business services.......................... 556 5 435 5 Department and general merchandise retail stores.................................... 511 5 987 12
F-12 HELLER FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The general industrial machines classification is distributed among machinery used for many different industrial applications. The majority of lending assets in the food, grocery and miscellaneous retail category are revolving and term facilities with borrowers primarily in the business of manufacturing and retailing of food products. Business services is primarily comprised of computer and data processing services, credit reporting and collection, and miscellaneous business services. The department and general merchandise retail stores category is primarily comprised of factored accounts receivable which represent short-term trade receivables from numerous customers. Contractual Maturity of Loan Receivables-- The contractual maturities of the Company's receivables at December 31, 1997, which are presented in the table below, should not be regarded as a forecast of cash flows (in millions):
AFTER 1998 1999 2000 2001 2002 2002 TOTAL ------ ------ ------ ---- ---- ------ ------- Commercial loans............... $ 677 $ 650 $ 571 $494 $621 $1,258 $ 4,271 Real estate loans.............. 375 179 158 205 100 1,221 2,238 Factored accounts receivable... 2,223 -- -- -- -- -- 2,223 Equipment loans and leases..... 504 398 321 266 171 330 1,990 ------ ------ ------ ---- ---- ------ ------- Total........................ $3,779 $1,227 $1,050 $965 $892 $2,809 $10,722 ====== ====== ====== ==== ==== ====== =======
Commercial loans consist principally of asset based and corporate finance receivables. Asset based receivables are collateralized by receivables, inventory, or property, plant and equipment owned by the borrowers. Real estate loans are principally collateralized by first mortgages on commercial and residential real estate. Corporate finance receivables are predominantly collateralized by senior liens on the borrower's assets. Factored accounts receivable are purchased from clients and the Company provides credit and collection services in return for a commission. Equipment loans and leases are secured by the underlying equipment and the Company may have at least partial recourse to the equipment vendor. Of the loans maturing after 1998, $2.7 billion have fixed interest rates and $4.2 billion have floating interest rates. Impaired Receivables, Repossessed Assets, and Troubled Debt Restructurings-- 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:
DECEMBER 31, ---------- 1997 1996 ---- ---- (IN MILLIONS) Impaired receivables.......................................... $141 $264 Repossessed assets............................................ 14 14 ---- ---- Total nonearning assets..................................... $155 $278 ==== ==== Ratio of total nonearning assets to total lending assets...... 1.4% 3.3% Ratio of allowance for losses to nonearning assets............ 168 81
Nonearning assets include $19 million and $25 million in 1997 and 1996, respectively, for consolidated international subsidiaries. F-13 HELLER FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The average investment in impaired receivables was $236 million and $283 million for the years ended December 31, 1997 and 1996 respectively. The Company had $13 million and $14 million of loans that are considered troubled debt restructurings at December 31, 1997 and December 31, 1996, respectively. The following table indicates the effect on income if interest on nonearning impaired receivables and troubled debt restructurings outstanding at year-end had been recognized at original contractual rates during the year:
FOR THE YEAR ENDED FOR THE YEAR ENDED DECEMBER 31, DECEMBER 31, ---------------------- ---------------------- 1997 1996 1995 1997 1996 1995 ------ ------ ------ ------ ------ ------ DOMESTIC FOREIGN ---------------------- ---------------------- (IN MILLIONS) Interest income which would have been recorded. $ 16 $ 40 $ 40 $ 12 $ 6 $ 3 Interest income recorded.. 3 13 20 1 1 1 ------ ------ ------ ------ ------ ------ Effect on interest income. $ 13 $ 27 $ 20 $ 11 $ 5 $ 2 ====== ====== ====== ====== ====== ======
Loan Modifications-- The Company had $13 million of receivables at December 31, 1997 that were restructured at a market rate of interest and written down from the original loan balance. The recorded investment of these receivables is expected to be fully recoverable. Interest income of approximately $1 million has been recorded on these receivables under modified terms, along with approximately $1 million of cash interest collections during 1997. At December 31, 1997, the Company was not committed to lend significant additional funds under the restructured agreements. Allowance for Losses-- The changes in the allowance for losses of receivables and repossessed assets were as follows:
FOR THE YEAR ENDED DECEMBER 31, ---------------- 1997 1996 1995 ---- ---- ---- (IN MILLIONS) Balance at the beginning of the year.................... $225 $231 $237 Provision for losses.................................. 164 103 223 Writedowns............................................ (169) (163) (259) Recoveries............................................ 23 55 28 Factofrance consolidation............................. 18 -- -- Transfers and other................................... -- (1) 2 ---- ---- ---- Balance at the end of the year.......................... $261 $225 $231 ==== ==== ====
A valuation allowance for repossessed assets of $2 million at December 31, 1995 is included in other assets on the balance sheet. Writedowns occurring at the time of repossession are considered writedowns of receivables. F-14 HELLER FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Impaired receivables with identified reserve requirements were $62 million and $176 million at December 31, 1997 and 1996, respectively.
DECEMBER 31, ---------- 1997 1996 ---- ---- (IN MILLIONS) Identified reserve requirements for impaired receivables..... $ 27 $ 57 Additional allowance for losses of receivables............... 234 168 ---- ---- Total allowance for losses of receivables.................. $261 $225 ==== ==== Ratio of total allowance for losses of receivables to nonearning impaired receivables............................. 185% 85% ==== ====
The Company maintains an allowance for losses of receivables based upon management's estimate of future possible losses in the portfolio of receivables. Management's estimate is based upon current and forecasted economic conditions, previous loss history and knowledge of clients' financial positions and values of underlying collateral. Changes in these estimates could result in an increase or decrease in the reserve maintained. 4. INVESTMENTS AND OTHER ASSETS Investments in International Joint Ventures-- The following table sets forth a summary of the financial results of the international joint ventures on a combined basis:
DECEMBER 31, --------------- 1997 1996 ------- ------- (IN MILLIONS) Total receivables......................................... $ 3,356 $ 5,161 Factoring volume.......................................... 18,154 29,501 Net income................................................ 55 90
The following table shows the investment in international joint ventures by geographic region:
DECEMBER 31, --------- 1997 1996 ---- ---- (IN MILLIONS) Europe.......................................................... $160 $238 Latin America................................................... 22 20 Asia-Pacific.................................................... 16 14 ---- ---- Total......................................................... $198 $272 ==== ====
The decrease in total receivables, factoring volume, net income and investment in European joint ventures is due to the consolidation of Factofrance. The Company owns interests of from 40% to 50% of these joint ventures. The Company's largest investment in international joint ventures is NMB-Heller Holding N.V., which accounts for 54% of the total investments in international joint ventures. NMB-Heller Holding N.V. operates finance companies primarily located in the Netherlands, Germany and the United Kingdom. NMB-Heller Holding N.V. had total assets of $2.3 billion and $1.8 billion, total liabilities of $2.1 billion and $1.6 billion and F-15 HELLER FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) total stockholders' equity of $0.2 billion at December 31, 1997 and 1996. NMB- Heller Holding N.V. had revenues of $151 million and $157 million, operating expenses of $42 million and $43 million and net income of $35 million and $36 million, for the years ended December 31, 1997 and 1996, respectively. Other Investments-- The following table sets forth a summary of the major components of investments (in millions):
DECEMBER 31, --------- 1997 1996 ---- ---- Investments: Real estate investments...................................... $268 $205 Equity interests and investments............................. 205 171 Available for sale equity securities......................... 15 43 ---- ---- Equity and real estate investments......................... $488 $419 ==== ==== Available for sale debt securities........................... $311 $223 Trading securities........................................... -- 28 ---- ---- Debt securities............................................ $311 $251 ==== ==== Equipment on lease........................................... $195 $135 ==== ====
Real estate investments are acquisition, development and construction investment transactions. At December 31, 1997, the Company held investments in 176 projects with balances ranging up to $10 million. Equity interests and investments principally include common and preferred stock and investments in limited partnerships and warrants. The available for sale equity securities are principally comprised of shares of common stock. Net unrealized holding gains on these securities were $7 million at December 31, 1997, net unrealized holding gains were $28 million at December 31, 1996 and net unrealized holding losses were $2 million at December 31, 1995. These amounts are recorded in stockholders' equity on a net of tax basis. The available for sale debt securities consist of purchased investments in debt securities which mature on various dates through 2015 as well as $79 million of subordinated securities retained in connection with the 1994 and 1995 securitizations of certain receivables on mobile home parks, self storage facilities and limited service hotels. The subordinated securities mature on various dates through 2005 based on the related stated maturity dates of the underlying receivables. The Company has established a reserve of $2 million for possible losses related to the subordinated securities, which is included in other payables and accruals on the consolidated balance sheet. No losses have been realized on these securities to date. Net unrealized holding gains on total available for sale debt securities were $6 million at December 31, 1997 and net unrealized holding losses were $7 million at December 31, 1996 and 1995. These amounts are recorded in stockholder's equity on a net of tax basis. Cash and cash equivalents includes $3 million of short-term debt securities at December 31, 1997, which are available for sale. The Company had realized gains from sales of total investment securities of $119 million, $106 million and $133 million during the year ended December 31, 1997, 1996 and 1995, respectively, and F-16 HELLER FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) had realized losses and writedowns totaling $50 million, $103 million and $59 million for 1997, 1996 and 1995, respectively. Proceeds from the sale of equity investments may be subject to normal post-closing adjustments, the impact of which is estimated at the time of closing. Included in cash and cash equivalents at December 31, 1997 and 1996, respectively, are $664 million and $198 million of short-term debt securities that are held to maturity. In 1996, the Company held certain dollar denominated investments in debt and equity securities in Brazil which were classified as trading securities. Net gains of $3 million, $3 million and $4 million related to these investments were recorded in income for the years ended December 31, 1997, 1996 and 1995, respectively. These investments were liquidated during 1997. Equipment on lease is comprised of aircraft and related equipment. Noncancellable future minimum rental receipts under the leases are $24 million, $21 million, $21 million, $16 million and $9 million for 1998 through 2002. All equipment was under lease as of December 31, 1997. Other Assets-- The following table sets forth a summary of the major components of other assets:
DECEMBER 31, --------- 1997 1996 ---- ---- (IN MILLIONS) Other Assets: Repossessed assets........................................... $ 14 $ 14 Deferred income tax benefits, net of allowance of $8 and $16 in 1997 and 1996, respectively.............................. 163 127 Goodwill..................................................... 82 13 Non-Compete Agreement........................................ 15 -- Prepaid expenses and other assets............................ 76 56 Net advances to affiliates................................... -- 20 Furniture, fixtures and equipment............................ 37 19 ---- ---- Total other assets......................................... $387 $249 ==== ====
Noncash investing activities which occurred during the period ended December 31, 1997 include $17 million of receivables which were classified as repossessed assets. During 1996, $15 million of receivables were classified as repossessed assets. See Note 14 for additional information on deferred income tax benefits. 5. SENIOR DEBT Commercial paper and short-term borrowings--The Company uses commercial paper to finance its domestic operations and short-term borrowings are used by the consolidated international subsidiaries to finance international operations. Total commercial paper borrowings represent 27% of total debt at December 31, 1997. Combined commercial paper and short-term borrowings represent 36% of total debt at December 31, 1997. F-17 HELLER FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following table is a summary of the Company's commercial paper and short-term borrowings as of December 31, 1997 and 1996:
DECEMBER 31, ------------- 1997 1996 ------ ------ (IN MILLIONS) Domestic commercial paper................................... $2,279 $2,576 Factofrance commercial paper................................ 281 -- Factofrance short-term borrowings........................... 685 -- Other consolidated subsidiaries short-term borrowings....... 187 169 ------ ------ Commercial paper and short-term borrowings................ $3,432 $2,745 ====== ======
The table below sets forth information concerning the Company's domestic commercial paper borrowings. The average interest rates and average borrowings are computed based on the average daily balances during the year. The Company issues commercial paper with maturities ranging up to 270 days.
1997 1996 1995 ------ ------ ------ (IN MILLIONS) Commercial Paper--domestic: Average interest rate-- During the year................................. 5.67% 5.50% 5.96% During the year, including the effect of commitment fees................................ 5.78 5.65 6.10 At year-end, including the effect of commitment fees........................................... 5.99 5.63 5.96 Average borrowings................................ $2,917 $2,367 $2,483 Maximum month-end borrowings...................... 3,264 2,613 2,860 End of period borrowings.......................... 2,279 2,576 2,067
Factofrance commercial paper issued as of December 31, 1997 had an average interest rate of 3.46% and its short-term borrowings at December 31, 1997 had an average interest rate of 3.72%. Factofrance uses primarily short-term debt and commercial paper to fund its assets which are short-term in nature. Available credit and asset sale facilities--At December 31, 1997, the Company had total committed credit and asset sale facilities of $4.0 billion, and available credit and asset sale facilities of $3.5 billion. This includes $267 million of additional alternative liquidity which is available by discounting eligible French receivables with the French Central Bank since Factofrance is a registered financial institution in France. In addition, the Company has $36 million available credit under two foreign currency revolving credit agreements. The Company has a bank credit facility which provides $3.0 billion of liquidity support. This bank credit facility is comprised of two equal facilities, a 364-day facility which has been renewed and will expire on April 6, 1999 and a 5-year facility expiring April 8, 2002. The one-year credit facility includes a term loan option which expires one year after the option exercise date. The terms of the revised bank credit facilities require the Company to maintain stockholders' equity of $900 million until March 31, 1998 and $1 billion thereafter. Under the terms of the debt covenants of the agreement, the Company could have borrowed an additional $6.1 billion of debt at December 31, 1997. F-18 HELLER FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company has a factored accounts receivable sale facility which allows the Company to sell an undivided interest of up to $550 million in a designated pool of its factored accounts receivable to five bank-sponsored conduits. The Company had sold approximately $500 million of receivables under this facility as of December 31, 1997. The underlying liquidity support for the conduits is provided by unaffiliated entities. One of the conduits has an operating agreement with Fuji Bank. During December 1997, the Company established a $400 million secured committed warehouse line, available to finance fixed rate commercial mortgage loans which expires in June 1998. The Company drew down $200 million under this facility which is included as part of the Company's domestic commercial paper borrowings above. This amount was repaid during January, 1998. Notes and debentures--The scheduled maturities of debt outstanding at December 31, 1997, other than commercial paper and short-term borrowings and excluding the unamortized premium of $2 million, are as follows:
SCHEDULED MATURITIES AT DECEMBER 31, --------------------------------------------- AFTER 1998 1999 2000 2001 2002 2002 TOTAL ------ ------ ------ ----- ----- ----- ------ (IN MILLIONS) Various fixed rate notes and debentures................... $1,050 $1,052 $ 920 $ 213 $ 516 $ 200 $3,951 Fixed weighted average rate. 8.17% 7.28% 5.22% 6.54% 6.62% 6.98% 6.90% Various floating rate notes and debentures............... $ 952 $ 860 $ 152 $ 25 $ 45 $ 17 $2,051 Floating weighted average rate....................... 4.84% 5.98% 6.08% 6.11% 6.11% 3.86% 5.44% Total notes and debentures.... $2,002 $1,912 $1,072 $ 238 $ 561 $ 217 $6,002
Notes redeemable solely at the option of the Company prior to the final maturity date are reflected in the table above as maturing on their contractual maturity date. During the year, the Company issued $200 million of fixed rate notes due August 15, 2009, which are callable or putable on August 15, 1999. These notes are reflected in the table above as maturing after 2002. The Company's various fixed and floating rate notes and debentures are denominated in U.S. dollars, Japanese yen and French francs. In order to fix the exchange rate of Japanese yen to U.S. dollars on the yen denominated debt, the Company has entered into cross currency interest rate swap agreements. In order to convert certain of the Company's fixed rate debt to floating rate debt and vice-versa, the Company has entered into interest rate swap agreements. The following table provides the year-end weighted average interest rate of the U.S. dollar and Japanese yen denominated debt before and after the effect of the swap agreements. The Company has $31 million of French franc denominated fixed rate debt and $17 million of French franc denominated variable rate debt which support French franc denominated assets. F-19 HELLER FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
WEIGHTED AVERAGE INTEREST RATE --------------------------------------------------------------- BEFORE AFTER BEFORE AFTER EFFECT EFFECT VARIABLE EFFECT EFFECT FIXED DEBT OF OF DEBT OF OF TOTAL DEBT OUTSTANDING SWAP SWAP OUTSTANDING SWAP SWAP OUTSTANDING ----------- ------ ------ ----------- ------ ------ ----------- (IN MILLIONS) 1997: United States dollar.... $3,614 7.22% 6.72% $1,834 5.94% 5.95% $5,448 Japanese yen............ 306 3.26 6.10 200 1.07 6.59 506 ------ ------ ------ Total................. $3,920 6.91% 6.67% $2,034 5.46% 6.01% $5,954 ====== ====== ====== 1996: United States dollar.... $2,453 7.68% 6.76% $1,531 5.70% 5.71% $3,984 Japanese yen............ 452 3.43 5.87 328 0.87 6.12 780 ------ ------ ------ Total................. $2,905 7.02% 6.62% $1,859 4.85% 5.78% $4,764 ====== ====== ======
The contractual interest rates for the U.S. dollar denominated fixed rate debt range between 5.63% and 9.63% at December 31, 1997 and 1996. The contractual rates on the U.S. dollar denominated floating rate debt are based primarily on indices such as the Constant Maturity Treasury Index less a range of .12% to .40%, the Federal Funds rate plus .40%, the three-month Treasury Bill rate plus .46%, the one-month London Inter-Bank Offered Rate ("LIBOR") plus .07% to .14%, three-month LIBOR plus .02% to .75%, six-month LIBOR plus .25% or the Prime rate less 2.59% to 2.80%. 6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Company is a party to several types of agreements involving financial instruments with off-balance sheet risk. These instruments are used to meet the financing needs of borrowers and to manage the Company's own exposure to interest rate and currency exchange rate fluctuations. These instruments principally include interest rate swap agreements, forward currency exchange contracts, purchased options, loan commitments, letters of credit and guarantees. Derivative financial instruments used for risk management purposes--The Company utilizes derivatives as an integral part of its asset/liability management program to reduce its overall level of financial risk. These derivatives, particularly interest rate swap agreements, are used to lower funding costs, diversify sources of funding or alter interest rate exposure arising from mismatches between assets and liabilities. The Company's derivative instruments are entirely related to accomplishing these risk management objectives, which arise from normal business operations. The Company is not an interest rate swap dealer nor is it a trader in derivative securities, and it has not used speculative derivative products for the purpose of generating earnings from changes in market conditions. Before entering into a derivative agreement, management determines that an inverse correlation exists between the value of the hedged item and the value of the derivative. At the inception of each agreement, management designates the derivative to specific assets, pools of assets or liabilities. The risk that a derivative will become an ineffective hedge is generally limited to the possibility that an asset or liability being hedged will prepay before the related derivative expires. Accordingly, after inception of a hedge, asset/liability managers monitor its effectiveness through an ongoing review of the amounts and maturities of assets, liabilities and swap positions. This information is reported to the Company's Financial Risk Management Committee ("FRMC") whose members include the Company's Chairman, Chief Financial Officer and Treasurer. The FRMC determines the direction the Company will take with respect to its asset/liability position. The asset/liability position of the Company and the related activities of the FRMC are reported regularly to the Executive Committee of the Board of Directors and to the Board of Directors. F-20 HELLER FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following table summarizes the notional amounts of the Company's interest rate swap agreements, foreign exchange contracts, purchased options and interest rate cap agreements as of December 31, 1997 and 1996. The credit risk associated with these instruments is limited to amounts earned but not collected and to any additional amounts which may be incurred to replace the instrument under then current market conditions. These amounts will increase or decrease during the life of the instruments as interest rates and foreign exchange rates fluctuate, and are substantially less than the notional amounts of these agreements. The Company manages this risk by establishing minimum credit ratings for each counterparty and by limiting the exposure to individual counterparties as measured by the total notional amount and the current replacement cost of existing agreements. The Company has not experienced nonperformance by any counterparty related to its derivative financial instruments.
CONTRACT OR NOTIONAL AMOUNT ------------- 1997 1996 ------ ------ (IN MILLIONS) Interest rate swap agreements.............................. $4,553 $2,634 Cross currency interest rate swap agreements............... 612 780 Basis swap agreements...................................... 1,470 1,255 Spot and forward currency exchange contracts............... 623 262 Purchased options.......................................... 74 42 Interest rate cap agreements............................... -- 2
Interest rate swaps are primarily used to convert fixed rate financings to variable rate debt. Less frequently, when the issuance of debt denominated in a foreign currency is deemed more cost effective, cross currency interest rate swaps are employed to convert foreign currency denominated debt to U.S. dollar denominated debt and U.S. based indices. The Company also uses swap agreements to alter the characteristics of specific asset pools to more closely match the interest terms of the underlying financing. These agreements enhance the correlation of the interest rate and currency characteristics of the Company's assets and liabilities and thereby mitigate its exposure to interest rate volatility. Basis swap agreements involve the exchange of two different floating rate interest payment obligations and are used to manage the risk between different floating rate indices. The Company has entered into $160 million of interest rate swaps effective during 1998 which have the effect of converting fixed rate obligations to a variable rate. The amount of these interest rate swaps is not included in the table above. Forwards are contracts for the delivery of an item in which the buyer agrees to take delivery of an instrument or currency at a specified price and future date. To minimize the effect of exchange rate movements in the currencies of foreign countries, in which certain of its subsidiaries and investments are located, the Company will periodically enter into forward currency exchange contracts or purchase options. These financial instruments serve as hedges of its foreign investment in international subsidiaries and joint ventures or effectively hedge the translation of the related foreign currency income. The Company also periodically enters into forward contracts to hedge receivables denominated in foreign currencies or may purchase foreign currencies in the spot market to settle a foreign currency denominated liability. Commitments, letters of credit and guarantees--The Company generally enters into various commitments, letters of credit and guarantees in response to the financing needs of its customers. As many of the agreements are expected to expire unused, the total commitment amount does not necessarily represent future cash requirements. The credit risk involved in issuing these instruments is F-21 HELLER FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) essentially the same as that involved in extending loans to borrowers and the credit quality and collateral policies for controlling this risk are similar to those involved in the Company's normal lending transactions. The contractual amount of the Company's commitments, letters of credit and guarantees are shown below:
CONTRACT AMOUNT ------------- 1997 1996 ------ ------ (IN MILLIONS) Loan commitments........................................... $2,154 $1,959 Letters of credit and financial guarantees................. 754 561 Factoring credit guarantees................................ 285 286 Investment commitments..................................... 130 106
Commitments to fund new and existing borrowers generally have fixed expiration dates and termination clauses and typically require payment of a fee. Letters of credit and financial guarantees are conditional commitments issued by the Company to guarantee the performance of a borrower or an affiliate to a third party. At December 31, 1997, the contractual amount of guarantees includes $7 million related to affiliates. For factoring credit guarantees, the Company receives a fee for guaranteeing the collectibility of certain factoring clients' accounts receivable. Under this arrangement, clients generally retain the responsibility for collection and bookkeeping. Losses related to these services historically have not been significant. 7. LEGAL PROCEEDINGS The Company is party to a number of legal proceedings as plaintiff and defendant, all arising in the ordinary course of its business. Although the ultimate amount for which the Company may be held liable, if any, is not ascertainable, the Company believes that the amounts, if any, which may ultimately be funded or paid with respect to these matters will not have a material adverse effect on the financial condition or results of operations of the Company. 8. RENTAL COMMITMENTS The Company and its consolidated subsidiaries have minimum rental commitments under noncancellable operating leases at December 31, 1997, as follows (in millions): 1998................................. $17 1999................................. 15 2000................................. 14 2001................................. 13 2002................................. 12 Thereafter........................... 20 --- $91 ===
The total rent expense, net of rental income from subleases, was $30 million, $23 million and $18 million for the years ended December 31, 1997, 1996 and 1995, respectively. 9. PREFERRED STOCK Cumulative Perpetual Senior Preferred Stock ($.01 Par Value; stated value, $25; 8.125%; 5,000,000 shares authorized and outstanding)--The Company's Cumulative Perpetual Senior F-22 HELLER FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Preferred Stock, Series A ("Series A Preferred Stock") is not redeemable prior to September 22, 2000. On or after that date, the Perpetual Preferred Stock will be redeemable at the option of the Company, in whole or in part, at a redemption price of $25 per share, plus accrued and unpaid dividends. The Series A Preferred Stock has an annual dividend rate of 8.125%. Dividends are cumulative and payable quarterly. The Series A Preferred Stock ranks senior with respect to payment of dividends and liquidation to other preferred stock of the Company that is not designated as Cumulative Senior Perpetual Preferred Stock. Noncumulative Perpetual Senior Preferred Stock ($.01 Par Value; stated value, $100; 6.687%; 1,500,000 shares authorized and outstanding)--In June, 1997, the Company issued 1,500,000 shares of 6.687% Noncumulative Perpetual Senior Preferred Stock, Series B ("Series B 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, Pierce, Fenner & Smith Incorporated, 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. Effective January 1998, the Company exchanged 6.687% Fixed Rate Noncumulative Perpetual Senior Preferred Stock, Series C ("Series C Preferred Stock") for all formerly outstanding Series B Preferred Stock. Series C Preferred Stock remains outstanding and is registered with the Securities and Exchange Commission. The Series C Preferred Stock is not redeemable prior to August 15, 2007. On or after such date, the Series C 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. Conversion of Convertible Preferred Stock--In May 1997, HIC converted all of its shares of Cumulative Convertible Preferred Stock, Series D ("Series D Preferred Stock"), no par value, 1/2% under prime, into common stock of the Company. No shares of the Series D Preferred Stock remain outstanding. The conversion was accounted for as a stock dividend and therefore has been retroactively reflected in the consolidated financial statements. Also all dividends paid on the Series D Preferred Stock have been retroactively reclassified to common dividends. Redeemable Preferred Stock--The Company has authorized the issuance of 100,000 shares of a series of preferred stock designated NW Preferred Stock, Class B (No Par Value) ("NW Preferred Stock"), pursuant to the Keep Well Agreement between the Company and Fuji Bank, dated as of April 23, 1983 and as subsequently amended ("Keep Well Agreement"), wherein, among other things, Fuji Bank has agreed to purchase NW Preferred Stock in an amount required to maintain the Company's stockholders' equity at $500 million. The Company's stockholders' equity was $1,678 million at December 31, 1997. If and when issued, dividends will be paid quarterly on NW Preferred Stock at a rate per annum equal to 1% over the three-month LIBOR. Subject to certain conditions, NW Preferred Stock will be redeemable at the option of the holder within a specified period of time after the end of a calendar quarter in an aggregate amount not greater than the excess of the stockholders' equity of the Company as of the end of such calendar quarter over $500 million and at a redemption price equal to the price paid for such stock plus accumulated dividends. No purchases of NW Preferred Stock have been made by Fuji Bank under the Keep Well Agreement. 10. DIVIDEND RESTRICTIONS AND PAYMENTS Dividends may legally be paid only out of the Company's surplus, as determined under the provisions of the Delaware General Corporation Law, or net profits for either the current or preceding fiscal year, or both. In addition, the Company is prohibited from paying dividends on Common Stock F-23 HELLER FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) unless all current and full cumulative dividends on the Series A Preferred Stock and the current dividends on the Series C Preferred Stock have been paid. In addition, the Company is prohibited from paying dividends on any other preferred stock that ranks, with respect to the payment of dividends, equal or junior to the Series A Preferred Stock or the Series C Preferred Stock, unless all current and full cumulative dividends on the Series A Preferred Stock and Series C Preferred Stock have been paid. The Company declared and paid dividends on the Series A Preferred Stock of $10 million in 1997 and 1996 and declared and paid dividends of $4 million on the Series B Preferred Stock during 1997. Common Stock dividends paid in 1997 consisted of $43 million paid in cash and $26 million paid in the form of International Group Preferred Stock. The Company paid cash dividends of $58 million in 1996. 11. FEES AND OTHER INCOME The following table summarizes the Company's fees and other income for the years ended December 31, 1997, 1996 and 1995:
YEAR ENDED DECEMBER 31, -------------- 1997 1996 1995 ---- ---- ---- (IN MILLIONS) Fee income and other...................................... $ 84 $52 $ 49 Net investment gains...................................... 69 3 74 Participation income...................................... 27 24 24 Gains on securitization of receivables.................... 26 -- 1 ---- --- ---- Total................................................... $206 $79 $148 ==== === ====
Fee income and other includes servicing income, late fees, prepayment fees, other miscellaneous fees and equipment residual gains. 12. OPERATING EXPENSES The following table sets forth a summary of the major components of operating expenses:
YEAR ENDED DECEMBER 31, -------------- 1997 1996 1995 ---- ---- ---- (IN MILLIONS) Salaries and other compensation........................... $214 $154 $135 Space costs............................................... 30 23 18 Legal and consulting costs................................ 26 12 9 Equipment costs........................................... 17 12 13 Travel and entertainment.................................. 15 12 10 Business acquisition costs................................ 15 9 6 Goodwill and noncompete agreement amortization............ 6 1 1 Other..................................................... 34 24 24 ---- ---- ---- Total................................................... $357 $247 $216 ==== ==== ====
Of the increase in operating expenses in 1997, $59 million related to the consolidation of Factofrance in April, 1997. F-24 HELLER FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 13. BENEFIT PLANS AND OTHER POST RETIREMENT BENEFITS The Company has various incentive compensation plans and a savings and profit-sharing plan which provide for annual contributions to eligible employees based on the Company's achievement of certain financial objectives and employee achievement of certain objectives. The Company has a noncontributory defined benefit pension plan covering substantially all of its domestic employees and a supplemental retirement plan in which certain employees participate. The Company's policy is to fund, at a minimum, pension contributions as required by the Employee Retirement Income Security Act of 1974. Benefits under the defined benefit and supplemental retirement plans are based on an employee's years of service and average earnings for the five highest consecutive years of compensation occurring during the last ten years before retirement. The assets of the defined benefit plan are held in a collective investment fund of the Multiple Fund Investment Trust for Employee Benefit Plans. The assets are managed by American National Bank Investment Management and Trust Company. The following table summarizes the funding status of the defined benefit and supplemental retirement plans at the end of each year and identifies the assumptions used to determine the projected benefit obligation.
SUPPLEMENTAL RETIREMENT DEFINED BENEFIT PLAN PLAN ---------------------- ---------------- YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, ---------------------- ---------------- 1997 1996 1995 1997 1996 1995 ------ ------ ------ ---- ---- ---- (IN MILLIONS) Actuarial present value of benefit obligations Vested benefit obligation....... $ 26 $ 21 $ 17 $ 1 $ 2 $ 2 Nonvested benefit obligation.... 4 3 3 -- -- -- ------ ------ ------ ---- ---- ---- Accumulated benefit obligation.... 30 24 20 1 2 2 Effect of projecting future salary increases on past service........ 17 14 12 3 2 2 ------ ------ ------ ---- ---- ---- Projected benefit obligation...... 47 38 32 4 4 4 Plan assets at market value....... 42 37 34 -- -- -- ------ ------ ------ ---- ---- ---- Plan assets in excess of (less than) projected benefit obligation....................... $ (5) $ (1) $ 2 $ (4) $ (4) $ (4) ====== ====== ====== ==== ==== ==== Assumptions: Discount rate..................... 7.25% 7.75% 7.25% 7.25% 7.75% 7.25% Expected return on assets......... 9.00 9.00 9.00 N/A N/A N/A Rate of salary increases.......... 6.00 6.00 6.00 6.00 6.00 6.00
Components of net pension cost for the defined benefit plan for the following periods are:
DEFINED BENEFIT PLAN ------------------------ YEAR ENDED DECEMBER 31, ------------------------ 1997 1996 1995 ------ ------ ------ (IN MILLIONS) Service cost-benefits earned during the year... $ 3 $ 3 $ 2 Interest accrued on projected benefit obligation............... 3 2 2 Actual return on assets... (6) (3) (6) Net amortization and deferral................. 2 -- 3 ------ ------ ------ Net periodic pension cost................... $ 2 $ 2 $ 1 ====== ====== ======
F-25 HELLER FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Supplemental Retirement Plan had a net periodic pension cost of approximately $1 million in the years ended December 31, 1997, 1996 and 1995. The prepaid pension cost (liability) of the defined benefit and supplemental retirement plans were as follows:
SUPPLEMENTAL DEFINED RETIREMENT BENEFIT PLAN PLAN ---------------- ---------------- YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, ---------------- ---------------- 1997 1996 1995 1997 1996 1995 ---- ---- ---- ---- ---- ---- (IN MILLIONS) Plan assets in excess of (less than) projected benefit obligation.............. $(5) $(1) $ 2 $ (4) $ (4) $ (4) Unrecognized prior service (asset) cost.... (1) (1) (1) 2 2 1 Unrecognized net (gain) loss from past experience different from that assumed.... 4 2 2 (2) (1) 1 Unrecognized net asset from initial application............................... (1) (1) (1) -- -- -- --- --- --- ---- ---- ---- Pension (liability) prepaid cost......... $(3) $(1) $ 2 $ (4) $ (3) $ (2) === === === ==== ==== ====
The Company adjusts the discount and salary rates, as well as the rates of return on assets, to reflect market conditions at the measurement date. Changes in these assumptions will impact the amount of the pension expense in future years. The change in the discount rate at December 31, 1997 is expected to increase pension expense by $1 million in 1998. The change in the discount rate at December 31, 1996 decreased 1997 pension expense by $1 million. The Company maintained the salary rate assumption at 6% at December 31, 1997, based on the Company's experience. The Company also provides health care benefits for eligible retired employees and their eligible dependents. The following table presents the funded status of the post-retirement benefits other than pensions of active and retired employees as of December 31, 1997, 1996 and 1995.
POST-RETIREMENT HEALTH CARE PLAN ------------------- DECEMBER 31, ------------------- 1997 1996 1995 ----- ----- ----- (IN MILLIONS) Accumulated postretirement obligation: Retirees.......................................... $ 5 $ 4 $ 4 Fully eligible active plan participants........... 2 1 1 Other active plan participants.................... 3 2 2 ----- ----- ----- Total unfunded accumulated postretirement benefit obligation............................. 10 7 7 Unrecognized net gain (loss) from past experience different from that assumed........................ (1) 1 1 Unrecognized net asset from initial application..... (5) (6) (6) ----- ----- ----- Accrued postretirement benefit cost............. $ 4 $ 2 $ 2 ===== ===== ===== Assumptions: Discount rate..................................... 7.25% 7.75% 7.25%
F-26 HELLER FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company adjusts the discount, salary and health care cost trend rates to reflect market conditions at the measurement date. Changes in these assumptions will impact the amount of the benefit expense in future years. The accumulated postretirement benefit obligation, under the terms of the amended healthcare plan, was calculated using relevant actuarial assumptions and health care cost trend rates projected at annual rates ranging from 9.0% in 1997 to 5.5% in 2004 and thereafter. The effect of a 1.0% annual increase in these assumed cost trend rates would increase the accumulated postretirement benefit obligation by $1 million, while annual service and interest cost components in the aggregate would not be materially affected. The change in the discount rate at December 31, 1997 had no effect on the 1997 expense and is expected to increase 1998 expense by less than $1 million. The change in the discount rate at December 31, 1996 decreased the 1997 expense by less than $1 million. The unamortized balance of the transition asset was $5 million at December 31, 1997 and $6 million at December 31, 1996 and 1995. The net periodic postretirement benefit cost was $1 million for the years ended December 31, 1997, 1996 and 1995. The Company has an Executive Deferred Compensation Plan (the "Plan"), a nonqualified deferred compensation plan, in which certain employees of HIC and the Company may elect to defer a portion of their annual compensation on a pre-tax basis. The amount deferred remains an asset of the Company and may be invested in any of certain mutual funds at the participant's direction. Payment of amounts deferred are made in a lump sum or in annual installments over a five, ten or fifteen year period as determined by the participant. Plan assets were approximately $24 million and $13 million at December 31, 1997 and 1996, respectively. Earnings on plan assets totaled $5 million and $1 million in 1997 and 1996, respectively, and are included as part of fees and other income, while the offsetting compensation expense amount is included in operating expenses. The Company has long-term incentive plans in which participants receive performance units that are granted at the beginning of a three year performance period. The value of a performance unit is based on the three year average return on equity target for the Company. The total expense related to the long-term incentive plans was $3 million in 1997 and $3 million in 1996 and $2 million in 1995. 14. INCOME TAXES The provision for income taxes is summarized in the following table:
1997 1996 1995 ---- ---- ---- (IN MILLIONS) Current: Federal............................................... $107 $ 60 $116 Utilization of investment and foreign tax credits..... (46) (29) (22) ---- ---- ---- Net federal......................................... 61 31 94 State................................................. 5 (4) 2 Foreign............................................... 19 4 3 ---- ---- ---- Total current....................................... 85 31 99 ---- ---- ---- Deferred: Federal............................................... (17) 11 (43) State................................................. (2) 1 (7) ---- ---- ---- Total deferred...................................... (19) 12 (50) ---- ---- ---- $ 66 $ 43 $ 49 ==== ==== ====
Although the Company files a consolidated U.S. tax return with HIC, the Company reports income tax expense as if it were a separate taxpayer and records deferred tax benefits for deductible temporary differences if it is more likely than not that these benefits will be realized. Included in income tax expense are amounts relating to the International Group, which files a separate United States F-27 HELLER FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) federal income tax return. United States federal income taxes paid by International Group amounted to $3 million in 1997 and $5 million in 1996. Under the terms of the tax allocation agreement between HIC and the Company, as amended, each company covered by the agreement calculates its current and deferred income taxes based on its separate company taxable income or loss, utilizing separate company net operating losses, tax credits, capital losses and deferred tax assets or liabilities. In accordance with the provisions of the current tax allocation agreement, net payments of $73 million, $43 million and $70 million were made to HIC in 1997, 1996 and 1995, respectively. The reconciliation between the statutory federal income tax provision and the actual effective tax provision for each of the three years ended December 31 is as follows:
1997 1996 1995 ---- ---- ---- (IN MILLIONS) Tax provision at statutory rate........................ $ 82 $ 64 $ 63 State and foreign income taxes, net of federal income tax effects........................................... 23 8 4 Income of foreign subsidiaries and joint ventures and foreign tax credit utilization........................ (32) (13) (12) Net foreign tax rate differential...................... -- -- 4 Resolution of tax issues............................... (2) (7) (13) Other, net............................................. (5) (9) 3 ---- ---- ---- $ 66 $ 43 $ 49 ==== ==== ====
The significant components of the deferred tax assets and deferred tax liabilities at December 31, 1997 and 1996 are shown below:
DECEMBER 31, ---------- 1997 1996 ---- ---- (IN MILLIONS) Deferred Tax Assets: Allowance for loan losses................................... $ 97 $ 77 Repossessed properties...................................... -- 1 Foreign tax credits......................................... 8 16 Alternative minimum tax credit carryforward................. -- 1 Net operating losses........................................ 41 28 Equity interests and other investments...................... 22 10 Terminated swap income...................................... 5 17 Accrued expenses............................................ 25 18 ---- ---- Gross deferred tax assets..................................... 198 168 Valuation allowance........................................... (8) (16) ---- ---- Gross deferred tax assets, net of valuation allowance......... 190 152 Deferred Tax Liabilities: Repossessed properties...................................... $ (6) $-- Fixed assets and deferred income from lease financing....... (17) (17) Unrealized appreciation of securities available for sale.... (4) (8) ---- ---- Gross deferred tax liabilities................................ (27) (25) ---- ---- Net deferred tax asset........................................ $163 $127 ==== ====
F-28 HELLER FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Provision has not been made for United States or additional foreign taxes on $80 million of undistributed earnings of subsidiaries outside the United States, as those earnings are intended to be reinvested. Such earnings would become taxable upon the sale or liquidation of these international operations or upon the remittance of dividends. Given the availability of foreign tax credits and various tax planning strategies, management believes any tax liability which may ultimately be paid on these earnings would be substantially less than that computed at the statutory federal income tax rate. Upon remittance, certain foreign countries impose withholding taxes that are then available, subject to certain limitations, for use as credits against the Company's U.S. tax liability. The amount of withholding tax that would be payable upon remittance of the entire amount of undistributed earnings would be approximately $14 million. The Company had unused foreign tax credit carryforwards of $8 million and $16 million at December 31, 1997 and 1996, respectively. Due to substantial restrictions on the utilization of foreign tax credits imposed by the Tax Reform Act of 1986, the Company may not be able to utilize a significant portion of foreign tax credit carryforwards prior to expiration. Accordingly, the Company has recognized a valuation allowance for the amount of foreign tax credits recorded at December 31, 1997 and 1996. Consistent with this approach, the Company reduced income tax expense by $15 million in 1997 representing utilization of such foreign tax credit carryovers. The Company has recorded a net deferred tax asset of $163 million as of December 31, 1997. Although realization is not assured, management believes it is more likely than not that the deferred tax assets will be realized. The amount of the deferred tax assets considered realizable, however, could be reduced if estimates of future taxable income are reduced. 15. RELATED PARTIES Several financial, administrative or other service arrangements exist between the Company and Fuji Bank, HIC or related affiliates. In management's opinion, the terms of these arrangements were similar to those the Company would have been able to obtain in like agreements with unaffiliated entities in arms-length transactions. KEEP WELL AGREEMENT WITH FUJI BANK. The Keep Well Agreement provides that if the Company should lack sufficient cash or credit facilities to meet its commercial paper obligations, Fuji Bank will lend the Company up to $500 million. That loan would be payable on demand and the proceeds from the loan could only be used by the Company to meet its commercial paper obligations. The Keep Well Agreement further provides that Fuji Bank will maintain the Company's stockholders' equity in an amount equal to $500 million. Accordingly, if the Company should determine, at the close of any month, that its stockholders' equity is less than $500 million, then Fuji Bank will purchase, or cause one of its subsidiaries to purchase, shares of the Company's NW Preferred Stock in an amount necessary to increase the Company's stockholders' equity to $500 million. Commitment fees paid by the Company to Fuji Bank under the Keep Well Agreement amounted to less than $1 million in 1997, 1996 and 1995. Interest on any loans will be charged at the prime rate of Morgan Guaranty Trust Company of New York plus .25% per annum. No loans or purchases of NW Preferred Stock have been made by Fuji Bank under this agreement. In connection with the issuance of the Series B Preferred Stock (Note 9), the Company and Fuji Bank amended the termination provisions of the Keep Well Agreement. The Keep Well Agreement cannot be terminated by either party prior to December 31, 2002. After December 31, 2002, the Agreement cannot be terminated by either party unless the Company has received written certifications F-29 HELLER FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) from Moody's Investor Service, Inc. and Standard and Poor's Corporation that upon such termination, the Series A Preferred Stock will be rated no lower than "a3" and "A--," respectively and the Series C Preferred Stock will be rated no lower than "baa1" and "BBB" respectively. Similarly, after December 31, 2002, the agreement may only be terminated if the Company's senior debt ratings were unchanged as a result of the termination of the Agreement. After December 31, 2007, either Fuji Bank or the Company may terminate the agreement upon 30 business days prior written notice. SERVICES PROVIDED BY FUJI BANK AND HIC FOR THE COMPANY. Certain employees of Fuji Bank and HIC performed managerial, administrative and other related functions for the Company during 1997. The Company compensated Fuji Bank and HIC for the use of such individuals' services at a rate which reflects current costs to Fuji Bank and HIC. The amounts paid to Fuji Bank and HIC for these services were $2 million and $77 million, respectively for 1997, $2 million and $60 million for 1996 and $2 million and $53 million for 1995. In conjunction with the transfer of the Company to FAHI, the majority of employees of HIC who were providing services to the Company were transferred to the Company. Additionally, certain subsidiaries of Fuji Bank served as managers for various offerings of the Company's debt securities and acts as registrar and paying agent for certain debt issuances by the Company. These services are provided at market rates. The Company has entered into similar agreements with FAHI. In the Company's opinion, the amounts to be paid under such agreements will be significantly less than the amounts paid in 1997. SERVICES PROVIDED BY THE COMPANY FOR FUJI BANK AND HIC. The Company performs services for its affiliates, including FAHI, and charges them for the cost of the work performed. The Company may also guarantee the obligations of its clients or the clients of certain joint ventures, under letters of credit issued by financial institutions, some of which are affiliates of the Company. Additionally, the Company guaranteed payment under a deferred compensation arrangement between HIC and certain of its employees. The Company had agreements with HIC and certain other subsidiaries of HIC which provide for the Company to receive an annual negotiated fee for servicing assets which had been sold by the Company to HIC and these affiliates. The amount of fees for servicing these assets in 1997, 1996 and 1995, was approximately $200,000, $1 million and $1 million, respectively. Heller Capital Markets Group, Inc. ("CMG"), a wholly-owned subsidiary of the Company, acted as placement agent for the sale of commercial paper issued by HIC during 1997. CMG received compensation based upon the face amount of the commercial paper notes sold. HIC paid compensation to CMG pursuant to this arrangement of $61,000 during 1997 and less than $1 million during each of 1996 and 1995. The HIC commercial paper program was terminated during 1997. INTERCOMPANY RECEIVABLES, PAYABLES, TRANSACTIONS AND FINANCIAL INSTRUMENTS. At December 31, 1997, other liabilities included net amounts due to affiliates of $29 million, and at December 31, 1996, other assets included net amounts due from affiliates of $20 million. These amounts are principally comprised of interest bearing demand notes representing amounts due to or from the Company arising from an interest rate swap agreement with HIC, advances, administrative fees and costs charged to other subsidiaries of HIC and amounts payable to HIC for services provided. The notes bear interest at rates which approximate the average rates on the Company's commercial paper obligations or short-term bank borrowing rates outstanding during the period. During 1997, the Company paid interest of $3 million to HIC related to these notes. During 1997, the Company was a party to a $200 million notional amount interest rate swap agreement with HIC, which expires December 15, 2000 and was assumed by FAHI effective January 2, 1998. The purpose of this agreement is to manage the Company's exposure to interest rate fluctuations. Under this agreement, the Company pays interest to the counterparty at a variable rate based on the commercial paper rate published by the Board of Governors of the Federal Reserve F-30 HELLER FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) System. The counterparty pays interest to the Company at a fixed rate of 5.57%. This agreement, which FAHI assumed from HIC effective January 1998, increased the Company's interest expense by $295,000 and $3 million in 1997 and 1996, respectively. During 1997, HIC converted all of its shares of Series D Preferred Stock into common stock of the Company. Prior to the conversion, the Company paid a dividend to HIC on the Series D Preferred Stock of approximately $500,000. Also, during 1997, the Company paid to Fuji Bank a commitment fee of approximately $317,000, related to the Keep Well Agreement. The trust department of Fuji Bank may purchase commercial paper of the Company for its clients. Interest expense paid by the Company related to such commercial paper borrowings was $235,000 in 1997. In the ordinary course of its business, the Company participates in joint financings with Fuji Bank or certain affiliates. During 1997, the Company sold $10 million of an outstanding $25 million commitment to Fuji Bank at book value. No gain or loss was recorded on the sale. During 1996, the Company jointly participated with Fuji Bank in $53 million of financings, of which the Company retained an $8 million interest. Fuji Bank and one of its subsidiaries provided uncommitted lines of credit to consolidated international subsidiaries totaling $29 million and $15 million at December 31, 1997 and 1996, respectively. Borrowings under these facilities totaled $5 million and $4 million at December 31, 1997 and 1996, respectively. In addition, Fuji Bank provides committed and uncommitted lines of credit to certain international joint ventures. The Company has an accounts receivable sale facility which allows the Company to sell an undivided interest of up to $550 million in a designated pool of its factored accounts receivable to five bank-sponsored conduits. The Company sold approximately $500 million of receivables under this facility as of December 31, 1997. The underlying liquidity support for the conduits is provided by unaffiliated entities. One of the conduits has an operating agreement with Fuji Bank. The Company paid fees of $346,000 to Fuji Bank during 1997 for services provided under this agreement. In conjunction with the formation of FAHI, the Company purchased, at book value, less than $10 million of assets from HIC on December 31, 1997. The assets are primarily recorded as real estate receivables at the purchase price. 16. FAIR VALUE DISCLOSURES Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value information for certain financial instruments, for which it is practicable to estimate that value. Since there is no well-established market for many of the Company's assets and financial instruments, fair values are estimated using present value, property yield, historical rate of return and other valuation techniques. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. These assumptions are inherently judgmental and changes in such assumptions could significantly affect fair value calculations. The derived fair value estimates may not be substantiated by comparison to independent markets and may not be realized in immediate liquidation of the instrument. F-31 HELLER FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The carrying values and estimated fair values of the Company's financial instruments at December 31, 1997 and 1996, are as follows:
DECEMBER 31, -------------------------------------- 1997 1996 ------------------- ------------------ ESTIMATED ESTIMATED CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE -------- --------- -------- --------- (IN MILLIONS) Net receivables..................... $10,461 $10,883 $8,304 $8,509 Total investments................... 994 1,044 805 863 Debt................................ 9,436 9,371 7,506 7,514 Swap agreements Asset............................. 4 12 4 20 Liability......................... (7) (111) (6) (37) Forward contracts................... 623 623 262 262 Purchased options................... 74 74 42 42
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments. Carrying values approximate fair values for all financial instruments which are not specifically addressed. For variable rate receivables that reprice frequently and are performing at acceptable levels, fair values were assumed to equal carrying values. All other receivables were pooled by loan type and risk rating. The fair value for these receivables was estimated by employing discounted cash flow analyses, using interest rates equal to the London Inter-Bank Offered Rate or the Prime rate offered as of December 31, 1997 and 1996 plus an adjustment for normal spread, credit quality and the remaining terms of the loans. Carrying and fair values of the trading securities and securities available for sale are based on quoted market prices. The fair values of equity interests and other investments are calculated by using the Company's business valuation model to determine the estimated value of these investments as of the anticipated exercise date. The business valuation model analyzes the cash flows of the related company and considers values for similar equity investments. The determined value is then discounted back to December 31, 1997 and 1996, using a rate appropriate for returns on equity investments. Although the investments in international joint ventures accounted for by the equity method are not considered financial instruments and, as such, are not included in the above table, management believes that the fair values of these investments significantly exceed the carrying value of these investments. The fair value of the notes and debentures was estimated using discounted cash flow analyses, based on current incremental borrowing rates for arrangements with similar terms and remaining maturities, as quoted by independent financial institutions as of December 31, 1997 and 1996. Fair values were assumed to equal carrying values for commercial paper and other short term borrowings. The carrying value of the swap agreements represents the interest receivable and interest payable as of December 31, 1997 and 1996. The estimated fair value represents the mark to market loss and mark to market gain outstanding as of December 31, 1997 and 1996, respectively, as based upon quoted market prices obtained from independent financial institutions. Forwards and purchased options are carried at fair value. The fair values of loan commitments, letters of credit and guarantees are negligible. F-32 HELLER FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 17. FINANCIAL DATA BY REGION The following table shows certain financial information by geographic region for the years ended December 31, 1997, 1996 and 1995.
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------- UNITED ASIA- LATIN STATES EUROPE PACIFIC AMERICA CONSOLIDATED ------- ------ ------- ------- ------------ (IN MILLIONS) Assets 1997...................... $10,048 $2,378 $267 $168 $12,861 1996...................... 9,157 330 306 133 9,926 1995...................... 8,981 295 265 97 9,638 Total revenues 1997...................... $ 1,063 $ 159 $ 29 $ 19 $ 1,270 1996...................... 893 47 30 15 985 1995...................... 1,009 39 28 8 1,084 Income before taxes and minority interest 1997...................... $ 183 $ 59 $ 6 $(15) $ 233 1996...................... 145 36 6 (4) 183 1995...................... 148 23 7 3 181 Net income 1997...................... $ 126 $ 41 $ 5 $(14) $ 158 1996...................... 100 31 5 (3) 133 1995...................... 95 21 5 4 125
F-33 HELLER FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 18. SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following financial information for the calendar quarters of 1997, 1996 and 1995, is unaudited. In the opinion of management, all adjustments necessary to present fairly the results of operations for such periods have been included.
QUARTER ENDED --------------------------------- MARCH 31 JUNE 30 SEPT. 30 DEC. 31 -------- ------- -------- ------- (IN MILLIONS) Net interest income-- 1997.................................. $ 92 $107 $104 $105 1996.................................. 90 87 87 91 1995.................................. 94 95 98 100 Operating revenues-- 1997.................................. $141 $199 $193 $221 1996.................................. 131 129 124 149 1995.................................. 146 132 161 181 Provision for losses-- 1997.................................. $ 22 $ 34 $ 48 $ 60 1996.................................. 24 25 12 42 1995.................................. 50 28 56 89 Net income-- 1997.................................. $ 39 $ 44 $ 40 $ 35 1996.................................. 34 35 35 29 1995.................................. 30 34 35 26
19. ACCOUNTING DEVELOPMENTS The Company adopted Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125") as amended by Statement of Financial Accounting Standards No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125" (collectively referred to hereafter as "SFAS 125") on January 1, 1997. SFAS 125 uses a "financial components" approach that focuses on control to determine the proper accounting for financial asset transfers and addresses the accounting for servicing rights on financial assets in addition to mortgage loans. Securitizations of finance receivables are accounted for as sales when legal and effective control over the related receivables is surrendered. Servicing assets or liabilities are recognized when the servicing rights are retained by the seller. In June, 1997, the Financial Accounting Standards Board released Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which the Company has adopted effective January 1, 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 Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131") was also released in June, 1997 and has also been adopted effective January 1, 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. As SFAS 130 and 131 relate to disclosure requirements, management believes that neither statement will have a material impact on the financial results of the Company. F-34 HELLER FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 20. SUBSEQUENT EVENTS On January 29, 1998, Fuji Bank announced that it is considering an initial public offering of Common Stock by the Company. Fuji Bank will retain majority ownership of the Company after any such offering. The timing and the terms of the offering have not yet been determined. In anticipation of an initial public offering, the Company amended its Restated Certificate of Incorporation to increase the number of authorized shares of Common Stock. The total number of shares of stock which the Company shall have authority to issue is 852 million, of which 2 million shares, no par value, are to be of a class designated "Preferred Stock", 50 million shares, of the par value of $.01 each, are to be of a class designated "Senior Preferred Stock" and 800 million shares, of the par value of $0.25 each, are to be of a class designated "Common Stock." The Company's Certificate of Incorporation, as amended, authorizes two classes of Common Stock: Class A Common Stock and Class B Common Stock. The authorization of the two classes of Common Stock has been retroactively reflected in the Company's consolidated financial statements. Prior to the consummation of the offering, the Keep Well Agreement will be amended to allow the Company or Fuji Bank or any of its affiliates to sell or dispose of Common Stock to any person or entity, provided that after any such sale or disposition, Fuji Bank (directly or indirectly through one or more subsidiaries) continues to hold greater than 50% of the combined voting power of the outstanding Common Stock. In February 1998, the Company paid a dividend of 51 million shares of Class B Common Stock to FAHI, which has been retroactively reflected in the Company's consolidated financial statements. In February 1998, the Company was authorized to purchase the 21% ownership interest in International Group held by Fuji Bank for approximately $83 million. If completed the Company intends to account for this transaction using the purchase method of accounting. On February 24, 1998, the Company paid a dividend on the Common Stock owned by FAHI of $450 million. The dividend was paid out of the surplus of the Company in the form of a subordinated note maturing six years from the date of issuance with an interest rate of LIBOR plus 0.50%. The note can be prepaid at any time without a premium. 21. BASIC AND DILUTED NET INCOME PER SHARE Net income applicable to common stock per share is computed based on the number of common shares outstanding of 51,050,000, reflecting the common stock dividend in February 1998. 22. PRO FORMA EARNINGS PER SHARE (UNAUDITED) Pro forma net income applicable to common stock per share for 1997 is computed based on net income applicable to common stock of $144 million divided by 84,550,000 shares of common stock, reflecting the number of shares outstanding after the Company's initial public offering of common stock. F-35 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Company has agreed to sell to each of the U.S. Underwriters named below, and each of such U.S. Underwriters, for whom Goldman, Sachs & Co., J.P. Morgan Securities Inc., BT Alex. Brown Incorporated, Lehman Brothers Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated are acting as representatives, has severally agreed to purchase from the Company, the respective number of shares of Class A Common Stock set forth opposite its name below:
NUMBER OF SHARES OF CLASS A UNDERWRITER COMMON STOCK ----------- ----------------- Goldman, Sachs & Co..................................... J.P. Morgan Securities Inc.............................. BT Alex. Brown Incorporated............................. Lehman Brothers Inc..................................... Merrill Lynch, Pierce, Fenner & Smith Incorporated...... ---------- Total............................................... 30,150,000 ==========
Under the terms and conditions of the Underwriting Agreement, the U.S. Underwriters are committed to take and pay for all of the shares offered hereby, if any are taken. The U.S. Underwriters propose to offer the shares of Class A Common Stock in part directly to the public at the initial public offering price set forth on the cover page of this Prospectus and in part to certain securities dealers at such price less a concession of $ per share. The U.S. Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain brokers and dealers. After the shares of Class A Common Stock are released for sale to the public, the offering price and other selling terms may from time to time be varied by the representatives. The Company and Fuji Bank have entered into an underwriting agreement (the "International Underwriting Agreement") with the underwriters of the international offering (the "International Underwriters") providing for the concurrent offer and sale of 3,350,000 shares of Class A Common Stock in an international offering outside the United States. The offering price and aggregate underwriting discounts and commissions per share for the two Offerings are identical. The closing of the Offering made hereby is a condition to the closing of the International Offering, and vice versa. The representatives of the International Underwriters are Goldman Sachs International, J.P. Morgan Securities Ltd., BT Alex. Brown International, A Division of Bankers Trust International PLC, Lehman Brothers International (Europe) and Merrill Lynch International. Pursuant to an Agreement between the U.S. and International Underwriting Syndicates (the "Agreement Between") relating to the two Offerings, each of the U.S. Underwriters named herein has agreed that, as a part of the distribution of the shares offered hereby and subject to certain exceptions, it will offer, sell or deliver the shares of Class A Common Stock, directly or indirectly, only in the United States of America (including the States and the District of Columbia), its territories, its possessions and other areas subject to its jurisdiction (the "United States") and to U.S. persons, which term shall mean, for purposes of this paragraph: (a) any individual who is a resident of the United States or (b) any U-1 corporation, partnership or other entity organized in or under the laws of the United States or any political subdivision thereof and whose office most directly involved with the purchase is located in the United States. Each of the International Underwriters has agreed pursuant to the Agreement Between that, as a part of the distribution of the shares offered as a part of the International Offering, and subject to certain exceptions, it will (i) not, directly or indirectly, offer, sell or deliver shares of Class A Common Stock (a) in the United States or to any U.S. persons or (b) to any person who it believes intends to reoffer, resell or deliver the shares in the United States or to any U.S. persons, and (ii) cause any dealer to whom it may sell such shares at any concession to agree to observe a similar restriction. Pursuant to the Agreement Between, sales may be made between the U.S. Underwriters and the International Underwriters of such number of shares of Class A Common Stock as may be mutually agreed. The price of any shares so sold shall be the initial public offering price, less an amount not greater than the selling concession. The Company, has granted the U.S. Underwriters an option exercisable for 30 days after the date of this Prospectus to purchase up to an aggregate of 4,522,500 additional shares of Class A Common Stock solely to cover over- allotments, if any. If the U.S. Underwriters exercise their over-allotment option, the U.S. Underwriters have severally agreed, subject to certain conditions, to purchase approximately the same percentage thereof that the number of shares to be purchased by each of them, as shown in the foregoing table, bears to the 30,150,000 shares of Class A Common Stock offered hereby. The Company has granted the International Underwriters a similar option to purchase up to an aggregate of 502,500 additional shares of Class A Common Stock. The Company, FAHI and Fuji Bank have agreed that, during the period beginning from the date of this Prospectus and continuing to and including the date 180 days after the date of this Prospectus, they will not, directly or indirectly, offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or any other securities of the Company which are substantially similar to the shares of the Common Stock, including, but not limited to, any securities that are convertible into or exchangeable for, or that represent the right to receive, Common Stock or any such substantially similar securities (other than pursuant to employee benefit plans existing, or on the conversion or exchange of convertible or exchangeable securities outstanding, on the date of this Prospectus), or enter into any swap, option, future, forward or other agreement that transfers, in whole or in part, the economic consequences of ownership of Common Stock or any securities substantially similar to the Common Stock, without the prior written consent of Goldman, Sachs & Co., except for the shares of Class A Common Stock issued in connection with the concurrent U.S. and International Offerings. Prior to the Offerings, there has been no public market for the shares of Class A Common Stock. The initial public offering price will be negotiated among the Company and the representatives of the U.S. Underwriters and the International Underwriters. Among the factors to be considered in determining the initial public offering price of the Class A Common Stock, in addition to prevailing market conditions, are the Company's historical performance, estimates of the business potential and earnings prospects of the Company, an assessment of the Company's management and the consideration of the above factors in relation to market valuation of companies in related businesses. The Class A Common Stock has been approved for listing on the NYSE, upon notice of issuance, under the symbol "HF". In order to meet one of the requirements for listing the Class A Common Stock on the NYSE, the U.S. Underwriters have undertaken to sell lots of 100 or more shares to a minimum of 2,000 beneficial holders. The Company and Fuji Bank have agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act. In connection with the Offerings, the Underwriters may purchase and sell the Class A Common Stock in the open market. These transactions may include over- allotment and stabilizing transactions U-2 and purchases to cover syndicate short positions created in connection with the Offerings. Stabilizing transactions consist of certain bids or purchases for the purpose of preventing or retarding a decline in the market price of the Class A Common Stock, and syndicate short positions involve the sale by the Underwriters of a greater number of shares of Class A Common Stock than they are required to purchase from the Company in the Offerings. The Underwriters also may impose a penalty bid, whereby selling concessions allowed to syndicate members or other broker-dealers in respect of the securities sold in the Offerings for their account may be reclaimed by the syndicate if such shares of Class A Common Stock are repurchased by the syndicate in stabilizing or covering transactions. These activities may stabilize, maintain or otherwise affect the market price of the Class A Common Stock, which may be higher than the price that might otherwise prevail in the open market; and these activities, if commenced, may be discontinued at any time. These transactions may be effected on the NYSE, in the over-the-counter market or otherwise. Certain of the Underwriters perform investment banking and financial advisory and other financial services for the Company, Fuji Bank and their affiliates from time to time. Affiliates of certain of the Underwriters engage from time to time in general financing and banking transactions with the Company, Fuji Bank and their affiliates. At the request of the Company, the U.S. Underwriters have reserved up to 5% of the shares of Class A Common Stock offered hereby for sale, at the initial offering price, to directors, officers and employees of the Company, to the Company's Executive Deferred Compensation Plan and Savings and Profit Sharing Plan, at the direction of the officers and employees participating in such Plans, and to certain other persons designated by the Company. The number of shares of Class A Common Stock available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares which are not so purchased will be offered by the U.S. Underwriters to the general public on the same basis as the other shares offered hereby. U-3 [LOGO OF HELLER FINANCIAL APPEARS HERE] - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE- SENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPEC- TUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IM- PLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ---------------- TABLE OF CONTENTS
PAGE ---- Available Information..................................................... 2 Incorporation of Certain Documents by Reference........................... 2 Prospectus Summary........................................................ 3 Risk Factors.............................................................. 12 Special Note Regarding Forward-looking Statements......................... 19 Use of Proceeds........................................................... 20 Dividend Policy........................................................... 20 Capitalization............................................................ 21 Selected Financial Data................................................... 22 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 25 Business.................................................................. 39 Risk Management........................................................... 61 Management................................................................ 68 Certain Relationships and Related Transactions............................ 82 Ownership of Common Stock................................................. 87 Shares Available for Future Sale.......................................... 88 Description of Capital Stock.............................................. 90 Validity of Shares of Class A Common Stock................................ 97 Independent Public Accountants............................................ 97 Index to Consolidated Financial Statements................................ F-1 Underwriting.............................................................. U-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 33,500,000 SHARES [LOGO OF HELLER FINANCIAL APPEARS HERE] CLASS A COMMON STOCK (PAR VALUE $0.25 PER SHARE) ---------------- PROSPECTUS ---------------- GOLDMAN, SACHS & CO. J.P. MORGAN & CO. BT ALEX. BROWN LEHMAN BROTHERS MERRILL LYNCH & CO. REPRESENTATIVES OF THE UNDERWRITERS - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ + + +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED APRIL 28, 1998 33,500,000 SHARES [LOGO OF HELLER FINANCIAL APPEARS HERE] CLASS A COMMON STOCK (PAR VALUE $0.25 PER SHARE) ----------- Of the 33,500,000 shares of Class A Common Stock offered, 3,350,000 shares are being offered hereby in an international offering outside of the United States and 30,150,000 shares are being offered in a concurrent United States offering. The initial public offering price and the aggregate underwriting discount per share will be identical for both Offerings. See "Underwriting". All of the shares of Class A Common Stock offered hereby are being sold by the Company. The Company is currently an indirect, wholly-owned subsidiary of The Fuji Bank, Limited. Upon completion of the Offerings, Fuji Bank will beneficially own, indirectly, 100% of the outstanding shares of Class B Common Stock of the Company. The Class B Common Stock, which has three votes per share (except that the outstanding shares of Class B Common Stock, while held by Fuji Bank, may never represent more than 79% of the combined voting power of all outstanding shares of the Company's voting stock), is a class of common stock separate from the Class A Common Stock, which has one vote per share. Immediately following the Offerings, the 33,500,000 shares of Class A Common Stock offered in the Offerings will represent 39.6% of the economic interest (or rights of holders of common equity to participate in distributions in respect of the common equity) in the Company (43.0% if the Underwriters' over- allotment options are exercised in full) and, due to the limitation on the voting power of the Class B Common Stock while held by Fuji Bank, 21.0% of the combined voting power of all classes of voting stock of the Company (regardless of whether the Underwriters' over-allotment options are exercised). The remainder of the voting power and economic interest in the Company will be beneficially held by Fuji Bank, which will therefore continue to be able to exercise a controlling influence over the business and affairs of the Company upon consummation of the Offerings. See "Risk Factors--Control by and Relationship with Fuji Bank", "Certain Relationships and Related Transactions-- Relationship with Fuji Bank" and "Description of Capital Stock". Prior to this offering, there has been no public market for the Class A Common Stock. It is currently estimated that the initial public offering price per share will be between $23.00 and $25.00. For factors to be considered in determining the initial public offering price, see "Underwriting". SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR CERTAIN CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE CLASS A COMMON STOCK. The Class A Common Stock has been approved for listing on the New York Stock Exchange, upon notice of issuance, under the symbol "HF". THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURI- TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. -----------
INITIAL PUBLIC UNDERWRITING PROCEEDS TO OFFERING PRICE DISCOUNT(1) COMPANY(2) -------------- ------------ ----------- Per Share............................... $ $ $ Total (3)............................... $ $ $
- ----- (1) The Company and Fuji Bank have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. (2) Before deducting estimated expenses of $2,200,000 payable by the Company. (3) The Company has granted the International Underwriters an option for 30 days to purchase up to an additional 502,500 shares at the initial public offering price per share, less the underwriting discount, solely to cover over-allotments. Additionally, the Company has granted the U.S. Underwriters a similar option with respect to an additional 4,522,500 shares as part of the concurrent U.S. offering. If such options are exercised in full, the total initial public offering price, underwriting discount and proceeds to Company will be $ , $ and $ , respectively. See "Underwriting". ----------- The shares offered hereby are offered severally by the International Underwriters, as specified herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that the shares will be ready for delivery in New York, New York, on or about , 1998, against payment therefor in immediately available funds. GOLDMAN SACHS INTERNATIONAL J.P. MORGAN SECURITIES LTD. Joint Lead Managers BT ALEX. BROWN INTERNATIONAL LEHMAN BROTHERS MERRILL LYNCH INTERNATIONAL ----------- The date of this Prospectus is , 1998. [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] AVAILABLE INFORMATION Heller Financial, Inc. (the "Company") is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports and other information with the Securities and Exchange Commission (the "Commission"). Reports and other information filed by the Company may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's Regional Offices located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such materials may also be obtained from the web site the Commission maintains at http://www.sec.gov. In addition, such materials may be inspected and copied at the offices of The New York Stock Exchange (the "NYSE"), 20 Broad Street, New York, New York 10005. The Company has filed with the Commission a registration statement on Form S-2 (herein, together with all amendments and exhibits, the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"). This Prospectus does not contain all the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information, reference is hereby made to the Registration Statement. ---------------- INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed with the Commission (File No. 1-6157) pursuant to the Exchange Act are incorporated herein by reference: (1) The Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997; and (2) The Company's Current Reports on Form 8-K filed with the Commission on January 29, 1998, January 30, 1998, February 20, 1998, February 27, 1998 and April 21, 1998. The Company will provide without charge to each person, including any beneficial owner, to whom a copy of this Prospectus is delivered, on the written or oral request of any such person, a copy of any or all of the documents incorporated herein by reference, other than exhibits to such information (unless such exhibits are specifically incorporated by reference into such documents). Requests should be directed to Heller Financial, Inc., 500 West Monroe Street, Chicago, Illinois 60661, Attention: Treasurer, telephone (312) 441-7000. ---------------- Any statement contained in a document all or a portion of which is incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is, or is deemed to be, incorporated by reference herein modifies or supersedes such statement. Any statement so modified shall not be deemed to constitute a part of this Prospectus except as so modified, and any statement so superseded shall not be deemed to constitute a part of this Prospectus. ---------------- This Prospectus does not constitute an offer to sell or the solicitation of an offer to buy the shares in any jurisdiction in which such offer or solicitation is unlawful. There are restrictions on the offer and sale of the shares in the United Kingdom. All applicable provisions of the Financial Services Act 1986 and the Public Offers of Securities Regulations 1995 with respect to anything done by any person in relation to the Shares in, from or otherwise involving the United Kingdom must be complied with. See "Underwriting". In this Prospectus, references to "dollars" and to "$" are to United States dollars. ---------------- CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING". 2 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] of three years after the date of the transaction in which the person becomes an interested stockholder, unless either (i) prior to the date at which the stockholder becomes an interested stockholder the board of directors approved either the business combination or the transaction in which the person becomes an interested stockholder, (ii) the stockholder acquires more than 85% of the outstanding voting stock of the corporation (excluding shares held by directors who are officers or held in certain employee stock plans) upon consummation of the transaction in which the stockholder becomes an interested stockholder or (iii) the business combination is approved by the board of directors and by two-thirds of the outstanding voting stock of the corporation (excluding shares held by the interested stockholder) at a meeting of the stockholders (and not by written consent) held on or subsequent to the date of the business combination. An "interested stockholder" is a person who, together with affiliates and associates, owns (or at any time within the prior three years did own) 15% or more of the corporation's voting stock. Section 203 defines a "business combination" to include, without limitation, mergers, consolidations, stock sales and asset based transactions and other transactions resulting in a financial benefit to the interested stockholder. LIMITATIONS ON DIRECTORS' LIABILITY The Company's Restated Certificate will provide that no director of the Company shall be liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) in respect of certain unlawful dividend payments or stock redemptions or repurchases or (iv) for any transaction from which the director derived an improper personal benefit. The effect of these provisions will be to eliminate the rights of the Company and its stockholders (through stockholders' derivative suits on behalf of the Company) to recover monetary damages against a director for breach of fiduciary duty as a director (including breaches resulting from grossly negligent behavior), except in the situations described above. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Class A Common Stock will be The Bank of New York. 97 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] CERTAIN UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS The following is a general discussion of certain material U.S. federal income and estate tax consequences of the ownership and disposition of Class A Common Stock by a Non-U.S. Holder. For this purpose, a "Non-U.S. Holder" is any beneficial owner of Class A Common Stock that, for U.S. federal income tax purposes, is a foreign corporation, a non-resident alien individual, a foreign partnership or a foreign estate or trust. This discussion does not address all aspects of U.S. federal income and estate taxes and does not deal with foreign, state and local tax consequences that may be relevant to such Non- U.S. Holders in light of their individual circumstances (such as certain tax consequences applicable to pass-through entities). Furthermore, this discussion is based upon provisions of the Code existing and proposed Treasury Regulations promulgated thereunder and administrative and judicial interpretations thereof, as of the date hereof, all of which are subject to change (possibly with retroactive effect). This discussion addresses the tax considerations applicable to persons or entities who purchase Class A Common Stock in the Offerings and does not discuss the tax considerations applicable to subsequent purchasers of the Class A Common Stock. EACH PROSPECTIVE PURCHASER OF CLASS A COMMON STOCK IS ADVISED TO CONSULT A TAX ADVISOR WITH RESPECT TO CURRENT AND POSSIBLE FUTURE TAX CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING OF CLASS A COMMON STOCK AS WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY U.S. STATE, LOCAL OR FOREIGN TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY. DIVIDENDS Dividends paid to a Non-U.S. Holder of Class A Common Stock generally will be subject to withholding of U.S. federal income tax either at a rate of 30% of the gross amount of the dividends or at such lower rate as may be specified by an applicable income tax treaty. However, dividends that are effectively connected with the conduct of a trade or business by the Non-U.S. Holder within the United States and, where a tax treaty applies, are attributable to a U.S. permanent establishment of the Non-U.S. Holder, are not subject to the withholding tax, but instead are subject to U.S. federal income tax on a net income basis at applicable graduated individual or corporate rates. Any such effectively connected dividends received by a foreign corporation may, under certain circumstances, be subject to an additional "branch profits tax" at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. Under currently effective United States Treasury regulations, dividends paid prior to January 1, 2000 to an address outside the United States are presumed to be paid to a resident of such country (unless the payer has knowledge to the contrary) for purposes of the withholding discussed above and for purposes of determining the applicability of a tax treaty rate. Under recently finalized United States Treasury regulations (the "Final Withholding Regulations"), however, a Non-U.S. Holder of Class A Common Stock who wishes to claim the benefit of an applicable treaty rate (and/or generally to avoid backup withholding, as discussed below) with respect to dividends paid after December 31, 1999 will be required to satisfy applicable certification and other requirements. In addition, under the Final Withholding Regulations, in the case of Class A Common Stock held by a foreign partnership, (i) the certification requirement would generally be applied to the partners of the partnership and (ii) the partnership would be required to provide certain information, including a United States taxpayer identification number. The Final Withholding Regulations also provide look-through rules for tiered partnerships. Currently, certain certification and disclosure requirements must be complied with in order to be exempt from withholding under the effectively connected income exemption discussed above. A Non-U.S. Holder of Class A Common Stock eligible for a reduced rate of U.S. withholding tax pursuant to an applicable income tax treaty may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the Internal Revenue Service (the "IRS"). 98 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] GAIN ON DISPOSITION OF COMMON STOCK A Non-U.S. Holder generally will not be subject to U.S. federal income tax with respect to gain recognized on a sale or other disposition of Class A Common Stock unless (i) the gain is effectively connected with a trade or business within the United States by the Non-U.S. Holder, and, where a tax treaty so requires, is attributable to a U.S. permanent establishment of the Non-U.S. Holder, (ii) in the case of a Non-U.S. Holder who is an individual and holds the Class A Common Stock as a capital asset, such holder is present in the United States for a period or periods aggregating 183 days or more during the taxable year of the sale or other disposition and certain other conditions are met, (iii) the Non-U.S. Holder is subject to tax pursuant to certain provisions of the Code applicable to U.S. expatriates or (iv) the Company is or has been a "U.S. real property holding corporation" for U.S. federal income tax purposes and, in the event that the Class A Common Stock is considered "regularly traded", the Non-U.S. Holder held directly or indirectly at any time during the five-year period ending on the date of disposition more than five percent of the Class A Common Stock. The Company believes it is not and does not anticipate becoming a "U.S. real property holding corporation" for U.S. federal income tax purposes. An individual Non-U.S. Holder described in clause (i) above will, unless an applicable treaty provides otherwise, be taxed on the net gain derived from the sale under graduated U.S. federal income tax rates. An individual Non-U.S. Holder described in clause (ii) above will be subject to a flat 30% tax on the gain derived from the sale, which may be offset by certain U.S. source capital losses. If a Non-U.S. Holder that is a foreign corporation falls under clause (i) above, it will be taxed on its net gain under regular graduated U.S. federal income tax rates and may be subject to an additional branch profits tax at a 30% rate, unless it qualifies for a lower rate under an applicable income tax treaty. FEDERAL ESTATE TAX Class A Common Stock owned or treated as owned by an individual Non-U.S. Holder at the time of death will be included in such holder's gross estate for U.S. federal estate tax purposes, unless an applicable estate tax treaty provides otherwise, and therefore may be subject to U.S. federal estate tax. INFORMATION REPORTING AND BACKUP WITHHOLDING TAX The Company must report annually to the IRS and to each Non-U.S. Holder the amount of dividends paid to such holder and the tax withheld with respect to such dividends, regardless of whether withholding was required. Copies of the information returns reporting such dividends and withholding may also be made available to the tax authorities in the country in which the Non-U.S. Holder resides under the provisions of an applicable income tax treaty. Under current law, backup withholding at the rate of 31% generally will not apply to dividends paid prior to January 1, 2000 to a Non-U.S. Holder at an address outside the United States (unless the payor has knowledge that the payee is a U.S. person). Under the Final Withholding Regulations, however, a Non-U.S. Holder will generally be subject to backup withholding with respect to dividends paid after December 31, 1999 unless applicable certification requirements are met. Payment of the proceeds of a sale of Class A Common Stock by or through a U.S. office of a broker is subject to both backup withholding and information reporting unless the beneficial owner provides the payor with its name and address and certifies under penalties of perjury that it is a Non-U.S. Holder, or otherwise establishes an exemption. In general, backup withholding and information 99 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] reporting will not apply to a payment of the proceeds of a sale of Class A Common Stock outside of the United States by or through a foreign office of a foreign broker. If, however, such broker is, for U.S. federal income tax purposes a U.S. person, a controlled foreign corporation, a foreign person that derives 50% or more of its gross income for a certain period from the conduct of a trade or business in the United States or, effective after December 31, 1999, a foreign partnership, if 50% or more of its income or capital interests are held by U.S. persons or if it is engaged in the conduct of a trade or business in the United States, such payments will be subject to information reporting, but not backup withholding, unless (1) such broker has documentary evidence in its records that the beneficial owner is a Non-U.S. Holder and certain other conditions are met, or (2) the beneficial owner otherwise establishes an exemption. Any amounts withheld under the backup withholding rules generally will be allowed as a refund or a credit against such holder's U.S. federal income tax liability provided the required information is furnished in a timely manner to the IRS. VALIDITY OF SHARES OF CLASS A COMMON STOCK The validity of the shares of Class A Common Stock offered hereby will be passed upon for the Company by Katten Muchin & Zavis, Chicago, Illinois, and for the Underwriters by Sullivan & Cromwell, New York, New York. Upon consummation of the Offerings, certain partners of, and attorneys associated with, Katten Muchin & Zavis will own less than 1% of the outstanding shares of Class A Common Stock. INDEPENDENT PUBLIC ACCOUNTANTS The consolidated balance sheets of the Company as of December 31, 1997 and 1996 and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997 included in this Prospectus have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report. 100 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Company has agreed to sell to each of the International Underwriters named below, and each of such International Underwriters, for whom Goldman Sachs International, J.P. Morgan Securities Ltd., BT Alex. Brown International, A Division of Bankers Trust International PLC, Lehman Brothers International (Europe) and Merrill Lynch International are acting as representatives, has severally agreed to purchase from the Company, the respective number of shares of Class A Common Stock set forth opposite its name below:
NUMBER OF SHARES OF CLASS A UNDERWRITER COMMON STOCK ----------- ----------------- Goldman Sachs International............................. J.P. Morgan Securities Ltd.............................. BT Alex. Brown International A Division of Bankers Trust International PLC.......... Lehman Brothers International (Europe).................. Merrill Lynch International............................. --------- Total............................................... 3,350,000 =========
Under the terms and conditions of the Underwriting Agreement, the International Underwriters are committed to take and pay for all of the shares offered hereby, if any are taken. The International Underwriters propose to offer the shares of Class A Common Stock in part directly to the public at the initial public offering price set forth on the cover page of this Prospectus and in part to certain securities dealers at such price less a concession of $ per share. The International Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain brokers and dealers. After the shares of Class A Common Stock are released for sale to the public, the offering price and other selling terms may from time to time be varied by the representatives. The Company and Fuji Bank have entered into an underwriting agreement (the "U.S. Underwriting Agreement") with the underwriters of the U.S. Offering (the "U.S. Underwriters") providing for the concurrent offer and sale of 30,150,000 shares of Class A Common Stock in a U.S. offering in the United States. The offering price and aggregate underwriting discounts and commissions per share for the two Offerings are identical. The closing of the Offering made hereby is a condition to the closing of the U.S. Offering, and vice versa. The representatives of the U.S. Underwriters are Goldman, Sachs & Co., J.P. Morgan Securities Inc., BT Alex. Brown Incorporated, Lehman Brothers Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated. Pursuant to an Agreement between the U.S. and International Underwriting Syndicates (the "Agreement Between") relating to the two Offerings, each of the U.S. Underwriters has agreed that, as a part of the distribution of the shares offered in the U.S. Offering and subject to certain exceptions, it will offer, sell or deliver the shares of Class A Common Stock, directly or indirectly, only in the United States of America (including the States and the District of Columbia), its territories, its possessions and other areas subject to its jurisdiction (the "United States") and to U.S. persons, which term shall mean, for purposes of this paragraph: (a) any individual who is a resident of the United States or (b) any corporation, partnership or other entity organized in or under the laws of the United States or any political subdivision thereof and whose office most directly involved with the purchase is located in the United States. Each of the International Underwriters named herein has agreed pursuant to the U-1 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] Agreement Between that, as a part of the distribution of the shares offered hereby and subject to certain exceptions, it will (i) not, directly or indirectly, offer, sell or deliver shares of Class A Common Stock (a) in the United States or to any U.S. persons or (b) to any person who it believes intends to reoffer, resell or deliver the shares in the United States or to any U.S. persons, and (ii) cause any dealer to whom it may sell such shares at any concession to agree to observe a similar restriction. Pursuant to the Agreement Between, sales may be made between the U.S. Underwriters and the International Underwriters of such number of shares of Class A Common Stock as may be mutually agreed. The price of any shares so sold shall be the initial public offering price, less an amount not greater than the selling concession. The Company has granted the International Underwriters an option exercisable for 30 days after the date of this Prospectus to purchase up to an aggregate of 502,500 additional shares of Class A Common Stock solely to cover over- allotments, if any. If the International Underwriters exercise their over- allotment option, the International Underwriters have severally agreed, subject to certain conditions, to purchase approximately the same percentage thereof that the number of shares to be purchased by each of them, as shown in the foregoing table, bears to the 3,350,000 shares of Class A Common Stock offered hereby. The Company has granted the U.S. Underwriters a similar option to purchase up to an aggregate of 4,522,500 additional shares of Class A Common Stock. The Company, FAHI and Fuji Bank have agreed that, during the period beginning from the date of this Prospectus and continuing to and including the date 180 days after the date of this Prospectus, they will not, directly or indirectly, offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or any other securities of the Company which are substantially similar to the shares of the Common Stock, including, but not limited to, any securities that are convertible into or exchangeable for, or that represent the right to receive, Common Stock or any such substantially similar securities (other than pursuant to employee benefit plans existing, or on the conversion or exchange of convertible or exchangeable securities outstanding, on the date of this Prospectus), or enter into any swap, option, future, forward or other agreement that transfers, in whole or in part, the economic consequences of ownership of Common Stock or any securities substantially similar to the Common Stock, without the prior written consent of Goldman, Sachs & Co., except for the shares of Class A Common Stock issued in connection with the concurrent U.S. and International Offerings. Each International Underwriter has also agreed that (a) it has not offered or sold and prior to the date six months after the date of issue of the shares of Class A Common Stock will not offer or sell any shares of Class A Common Stock to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995, (b) it has complied, and will comply, with all applicable provisions of the Financial Services Act of 1986 of Great Britain with respect to anything done by it in relation to the shares of Class A Common Stock in, from or otherwise involving the United Kingdom, and (c) it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the issuance of the shares of Class A Common Stock to a person who is of a kind described in Article 11(3) of the Financial Services Act of 1986 (Investment Advertisements) (Exemptions) Order 1996 of Great Britain or is a person to whom the document may otherwise lawfully be issued or passed on. Buyers of shares of Class A Common Stock offered hereby may be required to pay stamp taxes and other charges in accordance with the laws and practices of the country of purchase in addition to the initial public offering price. U-2 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] Prior to the Offerings, there has been no public market for the shares of Class A Common Stock. The initial public offering price will be negotiated among the Company and the representatives of the U.S. Underwriters and the International Underwriters. Among the factors to be considered in determining the initial public offering price of the Class A Common Stock, in addition to prevailing market conditions, are the Company's historical performance, estimates of the business potential and earnings prospects of the Company, an assessment of the Company's management and the consideration of the above factors in relation to market valuation of companies in related businesses. The Class A Common Stock has been approved for listing on the NYSE, upon notice of issuance, under the symbol "HF". In order to meet one of the requirements for listing the Class A Common Stock on the NYSE, the U.S. Underwriters have undertaken to sell lots of 100 or more shares to a minimum of 2,000 beneficial holders. The Company and Fuji Bank have agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act. In connection with the Offerings, the Underwriters may purchase and sell the Class A Common Stock in the open market. These transactions may include over- allotment and stabilizing transactions and purchases to cover syndicate short positions created in connection with the Offerings. Stabilizing transactions consist of certain bids or purchases for the purpose of preventing or retarding a decline in the market price of the Class A Common Stock, and syndicate short positions involve the sale by the Underwriters of a greater number of shares of Class A Common Stock than they are required to purchase from the Company in the Offerings. The Underwriters also may impose a penalty bid, whereby selling concessions allowed to syndicate members or other broker- dealers in respect of the securities sold in the Offerings for their account may be reclaimed by the syndicate if such shares of Class A Common Stock are repurchased by the syndicate in stabilizing or covering transactions. These activities may stabilize, maintain or otherwise affect the market price of the Class A Common Stock, which may be higher than the price that might otherwise prevail in the open market; and these activities, if commenced, may be discontinued at any time. These transactions may be effected on the NYSE, in the over-the-counter market or otherwise. Certain of the Underwriters perform investment banking and financial advisory and other financial services for the Company, Fuji Bank and their affiliates from time to time. Affiliates of certain of the Underwriters engage from time to time in general financing and banking transactions with the Company, Fuji Bank and their affiliates. U-3 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN- TATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU- THORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITA- TION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OF- FER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUB- SEQUENT TO ITS DATE. ----------- TABLE OF CONTENTS
PAGE ---- Available Information..................................................... 2 Incorporation of Certain Documents by Reference........................... 2 Prospectus Summary........................................................ 3 Risk Factors.............................................................. 12 Special Note Regarding Forward-looking Statements......................... 19 Use of Proceeds........................................................... 20 Dividend Policy........................................................... 20 Capitalization............................................................ 21 Selected Financial Data................................................... 22 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 25 Business.................................................................. 39 Risk Management........................................................... 61 Management................................................................ 68 Certain Relationships and Related Transactions............................ 82 Ownership of Common Stock................................................. 87 Shares Available for Future Sale.......................................... 88 Description of Capital Stock.............................................. 90 Certain United States Tax Consequences to Non-United States Holders....... 98 Validity of Shares of Class A Common Stock................................ 100 Independent Public Accountants............................................ 100 Index to Consolidated Financial Statements................................ F-1 Underwriting.............................................................. U-1
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 33,500,000 SHARES [LOGO OF HELLER FINANCIAL APPEARS HERE] CLASS A COMMON STOCK (PAR VALUE $0.25 PER SHARE) --------------- PROSPECTUS --------------- GOLDMAN SACHS INTERNATIONAL J.P. MORGAN SECURITIES LTD. BT ALEX. BROWN INTERNATIONAL LEHMAN BROTHERS MERRILL LYNCH INTERNATIONAL REPRESENTATIVES OF THE UNDERWRITERS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS Set forth below is an estimate (other than the Securities and Exchange Commission registration fee, NASD filing fee and New York Stock Exchange listing fee) of the fees and expenses (other than underwriting discounts) payable by the Registrant in connection with the Offerings. The Registrant will pay all of these expenses.
APPROXIMATE AMOUNT ----------- Securities and Exchange Commission registration fee........... $ 284,122 NASD filing fee............................................... 30,500 New York Stock Exchange listing fee........................... 201,900 Accountants' fees and expenses................................ 350,000 Legal fees and expenses....................................... 450,000 Transfer Agent and Registrar fees and expenses................ 15,000 Printing and engraving expenses............................... 450,000 Miscellaneous expenses........................................ 418,478 ---------- Total..................................................... $2,200,000 ==========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Registrant, a Delaware corporation, is empowered by Section 145 of the Delaware General Corporation Law, subject to the procedures and limitations stated therein, to indemnify any person against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in the defense of any threatened, pending or completed action, suit or proceeding in which such person is made a party by reason of his being or having been a director or officer of the Registrant. The statute provides that indemnification pursuant to its provisions is not exclusive of other rights of indemnification to which a person may be entitled under any by-law, agreement, vote of stockholders or disinterested directors, or otherwise. The Amended and Restated By-Laws of the Registrant provide for indemnification by the Registrant of its directors and officers to the full extent permitted by the Delaware General Corporation Law. Also, as permitted by the Delaware General Corporation Law, the Registrant's Amended and Restated Certificate of Incorporation eliminates the personal liability of each director of the Registrant to the Registrant or its stockholders for monetary damages arising out of or resulting from any breach of such director's fiduciary duty as a director, except where such director breached such director's duty of loyalty to the Registrant or its stockholders, failed to act in good faith, engaged in intentional misconduct or a knowing violation of the law, paid an unlawful dividend, approved an unlawful stock purchase or redemption, or obtained an improper personal benefit. Prior to the consummation of the Offerings, the Registrant intends to purchase a directors' and officers' liability insurance policy. Under the terms of the Underwriting Agreement, the Underwriters have agreed to indemnify, under certain conditions, the Registrant, its directors, certain of its officers and persons who control the Company within the meaning of the Securities Act of 1933, as amended, against certain liabilities. II-1 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) EXHIBITS. 1.1 Form of Underwriting Agreement (U.S. version). 1.2 Form of Underwriting Agreement (International version). 3.1 Form of Amended and Restated Certificate of Incorporation of the Regis- trant. 3.2 Form of Amended and Restated By-laws of the Registrant. 4 Form of specimen stock certificate representing Class A Common Stock. 5 Opinion of Katten Muchin & Zavis as to the legality of the securities be- ing registered (including consent). 10.1 1998 Heller Financial, Inc. Stock Incentive Plan. 10.2 Form of Registration Rights Agreement to be entered into by and between the Registrant and The Fuji Bank, Limited ("Fuji Bank"). 10.3 Employment Letter Agreement dated as of December 31, 1997, between the Registrant and Richard J. Almeida (the "Almeida Employment Agreement"), incorporated by reference to Exhibit 10(w) to the Registrant's Annual Re- port on Form 10-K for the Fiscal Year ended December 31, 1997 (the "1997 10-K"). 10.4 Employment Letter Agreement dated as of December 31, 1997, between the Registrant and Frederick E. Wolfert (the "Wolfert Employment Agreement"), incorporated by reference to Exhibit 10(x) to the 1997 10-K. 10.5 Form of Amended and Restated Keep Well Agreement, as amended, between the Registrant and Fuji Bank. 10.6 Services Agreement dated January 1, 1985 between the Registrant and Fuji Bank, incorporated by reference to Exhibit (10)(e) to the 1992 10-K. 10.7 Management Agreement dated as of January 1, 1991 between Heller Interna- tional Corporation, Inc. ("HIC") and the Registrant, incorporated by ref- erence to Exhibit (10)(m) to the Registrant's Quarterly Report on Form 10- Q for the period ending March 31, 1991. 10.8 Management Services Agreement dated as of January 2, 1998 between Fuji American Holdings, Inc. ("FAHI") and the Registrant, incorporated by ref- erence to Exhibit 10(d) to the 1997 10-K. 10.9 Agreement for the Allocation of Federal, State and Foreign Income Tax Lia- bility and Benefits Among HIC and its Subsidiaries, effective as of July 1, 1996, incorporated by reference to Exhibit (10)(g) to the Company's An- nual Report on Form 10-K for the Fiscal Year ended December 31, 1996 (the "1996 10-K"). 10.10 Supplemental Executive Retirement Benefit Plan, amended and restated ef- fective January 1, 1996, incorporated by reference to Exhibit (10)(e) to the 1996 10-K. 10.11 Long Term Incentive Plan, effective January 1, 1994, incorporated by ref- erence to Exhibit 10(n) to the Company's Annual Report on Form 10-K for the Fiscal Year ended December 31, 1994 (the "1994 10-K"). 10.12 1996-1998 Long Term Incentive Plan, effective January 1, 1996, incorpo- rated by reference to Exhibit 10(h) to the 1997 10-K. 10.13 1997-1999 Long Term Incentive Plan, effective January 1, 1997, incorpo- rated by reference to Exhibit 10(i) to the 1997 10-K.
II-2 10.14 Executive Deferred Compensation Plan, dated January 1, 1994, as amended on October 1, 1994, incorporated by reference to Exhibit 10(o) to the 1994 10-K. 10.15 Second Amendment to the Executive Deferred Compensation Plan, dated December 29, 1995, incorporated by reference to Exhibit 10(n) to the Company's Annual Report on Form 10-K for the Fiscal Year ended December 31, 1995 (the "1995 10-K"). 10.16 Third Amendment to the Executive Deferred Compensation Plan, dated January 1, 1996, incorporated by reference to Exhibit (10)(m) to the 1996 10-K. 10.17 Fourth Amendment to the Executive Deferred Compensation Plan, dated November 26, 1996, incorporated by reference to Exhibit (10)(n) to the 1996 10-K. 10.18 Fifth Amendment to the Executive Deferred Compensation Plan, dated November 21, 1997, incorporated by reference to Exhibit 10(n) to the 1997 10-K. 10.19 Sixth Amendment to the Executive Deferred Compensation Plan effective as of January 1, 1997. 10.20 Seventh Amendment to the Executive Deferred Compensation Plan, dated March 2, 1998 and effective as of January 1, 1998. 10.21 Eighth Amendment to the Executive Deferred Compensation Plan, effective as of January 1, 1998 and April 1, 1998. 10.22 Cross Guaranty for the Executive Deferred Compensation Plan, incorporated by reference to Exhibit (10)(p) to the 1994 10-K. 10.23 Management Incentive Plan (effective January 1, 1987, revised January 1, 1989), incorporated by reference to Exhibit 10(m) to the 1995 10-K. 10.24 Savings and Profit Sharing Plan, amended and restated effective as of Jan- uary 1, 1989, incorporated by reference to Exhibit (10)(q) to the 1996 10- K. 10.25 First Amendment to Savings and Profit Sharing Plan, dated December 23, 1993, incorporated by reference to Exhibit (10)(r) to the 1996 10-K. 10.26 Second Amendment to Savings and Profit Sharing Plan, dated December 20, 1994, incorporated by reference to Exhibit (10)(s) to the 1996 10-K. 10.27 Third Amendment to Savings and Profit Sharing Plan, dated September 9, 1996, incorporated by reference to Exhibit (10)(t) to the 1996 10-K. 10.28 Fourth Amendment to Savings and Profit Sharing Plan, dated April 30, 1997, incorporated by reference to Exhibit 10(u) to the 1997 10-K. 10.29 Fifth Amendment to Savings and Profit Sharing Plan, effective as of April 30, 1998. 10.30 Form of Amendment to the Almeida Employment Agreement. 10.31 Form of Amendment to the Wolfert Employment Agreement. 10.32 Form of Change in Control Agreement. 10.33 Subordinated Promissory Note in the principal amount of $450 million is- sued by the Registrant to FAHI, incorporated by reference to Exhibit 10(y) to the 1997 10-K. 10.34 Heller Financial, Inc. 1998 Employee Stock Purchase Plan. 12 Computation of ratio of earnings to fixed charges, incorporated by reference to Exhibit 12 to the 1997 10-K.
II-3 23.1 Consent of Arthur Andersen LLP. 23.2 Consent of Katten Muchin & Zavis (contained in its opinion filed as Exhibit 5 hereto). 24 Power of Attorney (previously included on signature page of the Registration Statement).
ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes: (1) That, for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the Offerings of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-4 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL THE REQUIREMENTS FOR FILING ON FORM S-2 AND HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CHICAGO, STATE OF ILLINOIS ON THE 28TH DAY OF APRIL, 1998. Heller Financial, Inc. By: /s/ Lauralee E. Martin --------------------------------- Lauralee E. Martin Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities indicated on April 28, 1998. * * - ------------------------------------- ------------------------------------- Richard J. Almeida Michael J. Litwin Chairman, Chief Executive Officer Director (Principal Executive Officer) and Director * * - ------------------------------------- ------------------------------------- Atsushi Takano Dennis P. Lockhart Director Director * /s/ Lauralee E. Martin - ------------------------------------- ------------------------------------- Yukihiko Chayama Lauralee E. Martin Director Executive Vice President, Chief Financial Officer and Director (Principal Financial Officer) * * - ------------------------------------- ------------------------------------- Kenichi Tomita Takeshi Takahashi Director Director * * - ------------------------------------- ------------------------------------- Tsutomu Hayano Osamu Ogura Director Director * * - ------------------------------------- ------------------------------------- Mark Kessel Hideo Nakajima Director Director * * - ------------------------------------- ------------------------------------- Masahiro Sawada Kenichiro Tanaka Director Director *By: /s/ Lauralee E. Martin * -------------------------------- ------------------------------------- Lauralee E. Martin Lawrence G. Hund As Attorney-in-fact Executive Vice President and Controller (Principal Accounting Officer) II-5 EXHIBIT INDEX
EXHIBIT DESCRIPTION - ------- ----------- 1.2 Form of Underwriting Agreement (International version). 3.1 Form of Amended and Restated Certificate of Incorporation of the Regis- trant. 3.2 Form of Amended and Restated By-laws of the Registrant. 4 Form of specimen stock certificate representing Class A Common Stock. 5 Opinion of Katten Muchin & Zavis as to the legality of the securities be- ing registered (including consent). 10.1 1998 Heller Financial, Inc. Stock Incentive Plan. 10.2 Form of Registration Rights Agreement to be entered into by and between the Registrant and The Fuji Bank, Limited ("Fuji Bank"). 10.5 Form of Amended and Restated Keep Well Agreement, as amended, between the Registrant and Fuji Bank. 10.19 Sixth Amendment to the Executive Deferred Compensation Plan, effective as of January 1, 1997. 10.20 Seventh Amendment to the Executive Deferred Compensation Plan, dated March 2, 1998 and effective as of January 1, 1998. 10.21 Eighth Amendment to the Executive Deferred Compensation Plan, effective as of January 1, 1998 and April 1, 1998. 10.29 Fifth Amendment to Savings and Profit Sharing Plan, effective as of April 30, 1998. 10.30 Form of Amendment to the Almeida Employment Agreement. 10.31 Form of Amendment to the Wolfert Employment Agreement. 10.32 Form of Change in Control Agreement. 10.34 Heller Financial, Inc. 1998 Employee Stock Purchase Plan. 23.1 Consent of Arthur Andersen LLP 23.2 Consent of Katten Muchin & Zavis (contained in its opinion filed as Ex- hibit 5 hereto).
EX-1.2 2 FORM OF UNDERWRITING AGREEMENT (INTERNATIONAL) EXHIBIT 1.2 Heller Financial, Inc. Class A Common Stock (par value $0.25 per share) --------------------- Underwriting Agreement (International Version) --------------------- _____ __, 1998 Goldman Sachs International, J.P. Morgan Securities Ltd., BT Alex. Brown International, A Division of Bankers Trust International PLC, Lehman Brothers International (Europe), Merrill Lynch International As representatives of the several Underwriters named in Schedule I hereto, c/o Goldman Sachs International, Peterborough Court, 133 Fleet Street, London EC4A 2BB, England. Ladies and Gentlemen: Heller Financial, Inc., a Delaware corporation (the "Company") and a wholly-owned subsidiary of Fuji America Holdings, Inc., a Delaware corporation ("FAHI"), which in turn is a wholly-owned subsidiary of The Fuji Bank, Limited, a Japanese banking corporation ("Fuji Bank"), proposes, subject to the terms and conditions stated herein, to issue and sell to the Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of 3,350,000 shares (the "Firm Shares") and, at the election of the Underwriters, up to 502,500 additional shares (the "Optional Shares") of Class A Common Stock, par value $0.25 per share ("Stock"), of the Company (the Firm Shares and the Optional Shares that the Underwriters elect to purchase pursuant to Section 2 hereof being collectively called the "Shares"). It is understood and agreed to by all parties that the Company is concurrently entering into an agreement, a copy of which is attached hereto (the "U.S. Underwriting Agreement") providing for the sale by the Company of up to a total of 34,672,500 shares of Stock (the "U.S. Shares"), including the overallotment option thereunder, through arrangements with certain underwriters in the United States (the "U.S. Underwriters"), for whom Goldman, Sachs & Co., J.P. Morgan Securities Inc., BT Alex. Brown Incorporated, Lehman Brothers Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated are acting as representatives. Anything herein or therein to the contrary notwithstanding, the respective closings under this Agreement and the U.S. Underwriting Agreement are hereby expressly made conditional on one another. The Underwriters hereunder and the U.S. Underwriters are simultaneously entering into an Agreement between U.S. and International Underwriting Syndicates (the "Agreement between Syndicates") which provides, among other things, for the transfer of shares of Stock between the two syndicates and for consultation by the Lead Managers hereunder with Goldman, Sachs & Co. prior to exercising the rights of the Underwriters under Section 7 hereof. Two forms of prospectus are to be used in connection with the offering and sale of shares of Stock contemplated by the foregoing, one relating to the Shares hereunder and the other relating to the U.S. Shares. The latter form of prospectus will be identical to the former except for certain substitute pages. Except as used in Sections 2, 3, 4, 9 and 11 herein, and except as the context may otherwise require, references hereinafter to the Shares shall include all the shares of Stock which may be sold pursuant to either this Agreement or the U.S. Underwriting Agreement, and references herein to any prospectus whether in preliminary or final form, and whether as amended or supplemented, shall include both the U.S. and the international versions thereof. In addition, this Agreement incorporates by reference certain provisions from the U.S. Underwriting Agreement (including the related definitions of terms, which are also used elsewhere herein) and, for purposes of applying the same, references (whether in these precise words or their equivalent) in the incorporated provisions to the "Underwriters" shall be to the Underwriters hereunder, to the "Shares" shall be to the Shares hereunder as just defined, to "this Agreement" (meaning therein the U.S. Underwriting Agreement) shall be to this Agreement (except where this Agreement is already referred to or as the context may otherwise require), to "Preliminary Prospectus" shall include any preliminary prospectus relating to the International Shares, to "Prospectus" shall include the prospectus relating to the International Shares, and to the representatives of the Underwriters or to Goldman, Sachs & Co. shall be to the addressees of this Agreement and to Goldman Sachs International ("GSI"), and, in general, all such provisions and defined terms shall be applied mutatis mutandis as if the incorporated provisions were set forth in full herein having regard to their context in this Agreement as opposed to the U.S. Underwriting Agreement. 1. Each of the Company and Fuji Bank hereby makes to and with the Underwriters the same representations, warranties and agreements as are set forth in Section 1 of the U.S. Underwriting Agreement, which Section is incorporated herein by this reference. 2. Subject to the terms and conditions herein set forth, (a) the Company agrees to issue and sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company, at a purchase price per share of $..............., the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto and (b) in the event and to the extent that the Underwriters shall exercise the election to purchase Optional Shares as provided below, the Company agrees to issue and sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company, at the purchase price per share set forth in clause (a) of this Section 2, that portion of the number of Optional Shares as to which such election shall have been exercised (to be adjusted by you so as to eliminate fractional shares) determined by multiplying such number of Optional Shares by a fraction, the numerator of which is the maximum number of Optional Shares which such Underwriter is entitled to purchase as set forth opposite the name of such Underwriter in Schedule I hereto and the denominator of which is the maximum number of Optional Shares that all of the Underwriters are entitled to purchase hereunder. The Company hereby grants to the Underwriters the right to purchase at their election up to 502,500 Optional Shares, at the purchase price per share set forth in the paragraph above, for the sole purpose of covering overallotments in the sale of the Firm Shares. Any such election to purchase Optional Shares may be exercised only by written notice from you to the Company, given within a period of 30 calendar days after the date of this Agreement, setting forth the aggregate number of Optional Shares to be purchased and the date on which such Optional Shares are to be delivered, as determined by you but in no event earlier than the First Time of Delivery (as defined in Section 4 hereof) or, unless you and the Company otherwise agree in writing, earlier than two or later than ten business days after the date of such notice. 3. Upon the authorization by GSI of the release of the Firm Shares, the several Underwriters propose to offer the Firm Shares for sale upon the terms and conditions set forth in the Prospectus and in the forms of Agreement among Underwriters (International Version) and Selling Agreements, which have been previously submitted to the Company by you. Each Underwriter hereby makes to and with the Company and Fuji Bank the representations and agreements of such Underwriter as a member of the selling group contained in Sections 3(d) and 3(e) of the form of Selling Agreements. 4. (a) The Shares to be purchased by each Underwriter hereunder, in definitive form, and in such authorized denominations and registered in such names as GSI may request upon at least forty-eight -2- hours' prior notice to the Company, shall be delivered by or on behalf of the Company to GSI, through the facilities of The Depository Trust Company ("DTC"), for the account of such Underwriter, against payment by or on behalf of such Underwriter of the purchase price therefor by wire transfer of Federal same day funds to an account specified by the Company. The Company will cause the certificates representing the Shares to be made available for checking and packaging at least twenty-four hours prior to the Time of Delivery (as defined below) with respect thereto at the office of DTC or its designated custodian (the "Designated Office"). The time and date of such delivery and payment shall be, with respect to the Firm Shares, 9:30 a.m., New York City time, on May ...., 1998 or such other time and date as GSI and the Company may agree upon in writing, and, with respect to the Optional Shares, 9:30 a.m., New York City time, on the date specified by GSI in the written notice given by GSI of the Underwriters' election to purchase such Optional Shares, or such other time and date as GSI and the Company may agree upon in writing. Such time and date for delivery of the Firm Shares is herein called the "First Time of Delivery", such time and date for delivery of the Optional Shares, if not the First Time of Delivery, is herein called the "Second Time of Delivery", and each such time and date for delivery is herein called a "Time of Delivery". (b) The documents to be delivered at each Time of Delivery by or on behalf of the parties hereto pursuant to Section 7 of the U.S. Underwriting Agreement, including the cross receipt for the Shares and any additional documents requested by the Underwriters pursuant to Section 7(i) of the U.S. Underwriting Agreement, will be delivered at the offices of Katten Muchin & Zavis, 525 West Monroe Street, Chicago, Illinois 60661 (the "Closing Location"), and the Shares will be delivered at the Designated Office against payment therefor, all at such Time of Delivery. A meeting will be held at the Closing Location at 2:00 p.m., New York City time, on the day next preceding such Time of Delivery, at which meeting the final drafts of the documents to be delivered pursuant to the preceding sentence will be available for review by the parties hereto or their representatives. 5. The Company hereby makes with the Underwriters the same agreements as are set forth in Section 5 of the U.S. Underwriting Agreement, which Section is incorporated herein by this reference. 6. Each of the Company and Fuji Bank and the Underwriters hereby agree with respect to certain expenses on the same terms as are set forth in Section 6 of the U.S. Underwriting Agreement, which Section is incorporated herein by this reference. 7. Subject to the provisions of the Agreement between Syndicates, the obligations of the Underwriters hereunder, as to the Shares to be delivered at each Time of Delivery, shall be subject, in their discretion, to the condition that all representations and warranties and other statements of each of the Company and Fuji Bank herein are, at and as of such Time of Delivery, true and correct, the condition that each of the Company and Fuji Bank shall have performed all of its obligations hereunder theretofore to be performed, and additional conditions identical to those set forth in Section 7 of the U.S. Underwriting Agreement, which Section is incorporated herein by this reference. 8. (a) Each of the Company and Fuji Bank (each, a "Heller Party"), jointly and severally, will indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus distributed by the Underwriters, the Registration Statement or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such action or claim as such expenses are incurred; provided, however, that the Heller Parties shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any Preliminary Prospectus distributed by the Underwriters, the Registration Statement or -3- the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by any Underwriter through GSI expressly for use therein. (b) Each Underwriter will indemnify and hold harmless each Heller Party against any losses, claims, damages or liabilities to which such Heller Party may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus distributed by the Underwriters, the Registration Statement or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in any Preliminary Prospectus distributed by the Underwriters, the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by such Underwriter through GSI expressly for use therein; and will reimburse such Heller Party for any legal or other expenses reasonably incurred by such Heller Party in connection with investigating or defending any such action or claim as such expenses are incurred. (c) Promptly after receipt by an indemnified party under subsection (a) or (b) of this Section 8 of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party otherwise than under such subsection. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under such subsection for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by such indemnified party, in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the written consent of the indemnified party, effect the settlement or compromise of, or consent to the entry of any judgment with respect to, any pending or threatened action or claim in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified party is an actual or potential party to such action or claim) unless such settlement, compromise or judgment (i) includes an unconditional release of such indemnified party from all liability arising out of such action or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of such indemnified party. (d) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under subsection (a) or (b) of this Section 8 in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Heller Parties on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under subsection (c) of this Section 8, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Heller Parties on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Heller Parties on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering of the Shares purchased under this Agreement (before deducting expenses) received by the -4- Company bear to the total underwriting discounts and commissions received by the Underwriters with respect to the Shares purchased under this Agreement, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Heller Parties on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Heller Parties and the Underwriters agree that it would not be just and equitable if contributions pursuant to this subsection (d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this subsection (d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this subsection (d) to contribute are several in proportion to their respective underwriting obligations hereunder and not joint. (e) The obligations of the Heller Parties under this Section 8 shall be in addition to any liability which the Heller Parties may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Underwriter within the meaning of the Act; and the obligations of the Underwriters under this Section 8 shall be in addition to any liability which the respective Underwriters may otherwise have and shall extend, upon the same terms and conditions, to each officer and director of the Company and to each person, if any, who controls any Heller Party within the meaning of the Act. 9. (a) If any Underwriter shall default in its obligation to purchase the Shares which it has agreed to purchase hereunder at a Time of Delivery, you may in your discretion arrange for you or another party or other parties to purchase such Shares on the terms contained herein. If within thirty-six hours after such default by any Underwriter you do not arrange for the purchase of such Shares, then the Company shall be entitled to a further period of thirty-six hours within which to procure another party or other parties reasonably satisfactory to you to purchase such Shares on such terms. In the event that, within the respective prescribed periods, you notify the Company that you have so arranged for the purchase of such Shares, or the Company notifies you that it has so arranged for the purchase of such Shares, you or the Company shall have the right to postpone such Time of Delivery for a period of not more than seven days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees to file promptly any amendments to the Registration Statement or the Prospectus which in your opinion may thereby be made necessary. The term "Underwriter" as used in this Agreement shall include any person substituted under this Section 9 with like effect as if such person had originally been a party to this Agreement with respect to such Shares. (b) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you and the Company as provided in subsection (a) of this Section 9, the aggregate number of such Shares which remains unpurchased does not exceed one-eleventh of the aggregate number of all the Shares to be purchased at such Time of Delivery, then the Company shall have the right to require each non-defaulting Underwriter to purchase the number of Shares which such Underwriter agreed to purchase hereunder at such Time of Delivery and, in addition, to require each non- defaulting Underwriter to purchase its pro rata share (based on the number of Shares which such Underwriter agreed to purchase hereunder) of the Shares of such defaulting Underwriter or Underwriters for which such -5- arrangements have not been made; but nothing herein shall relieve a defaulting Underwriter from liability for its default. (c) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you and the Company as provided in subsection (a) of this Section 9, the aggregate number of such Shares which remains unpurchased exceeds one-eleventh of the aggregate number of all the Shares to be purchased at such Time of Delivery, or if the Company shall not exercise the right described in subsection (b) of this Section 9 to require non-defaulting Underwriters to purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement (or, with respect to the Second Time of Delivery, the obligations of the Underwriters to purchase and of the Company to sell the Optional Shares) shall thereupon terminate, without liability on the part of any non-defaulting Underwriter or the Company, except for the expenses to be borne by the Company, Fuji Bank and the Underwriters as provided in Section 6 hereof and the indemnity and contribution agreements in Section 8 hereof; but nothing herein shall relieve a defaulting Underwriter from liability for its default. 10. The respective indemnities, agreements, representations, warranties and other statements of the Company and Fuji Bank, and the several Underwriters, as set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any investigation (or any statement as to the results thereof) made by or on behalf of any Underwriter or any controlling person of any Underwriter, or the Company or Fuji Bank, or any officer or director or controlling person of the Company or Fuji Bank, and shall survive delivery of and payment for the Shares. 11. If this Agreement shall be terminated pursuant to Section 9 hereof, the Company and Fuji Bank shall not then be under any liability to any Underwriter except as provided in Sections 6 and 8 hereof; but if for any other reason any Shares are not delivered by or on behalf of the Company as provided herein, the Company and Fuji Bank will reimburse the Underwriters through GSI for all out-of-pocket expenses approved in writing by GSI, including fees and disbursements of counsel, reasonably incurred by the Underwriters in making preparations for the purchase, sale and delivery of the Shares not so delivered, but the Company and Fuji Bank shall then be under no further liability to any Underwriter in respect of the Shares not so delivered except as provided in Sections 6 and 8 hereof. 12. In all dealings hereunder, you shall act on behalf of each of the Underwriters, and the parties hereto shall be entitled to act and rely upon any statement, request, notice or agreement on behalf of any Underwriter made or given by you jointly or by GSI on behalf of you as the representatives of the Underwriters. All statements, requests, notices and agreements hereunder shall be in writing, and if to the Underwriters shall be delivered or sent by mail, telex or facsimile transmission to the Underwriters in care of GSI, Peterborough Court, 133 Fleet Street, London EC4A 2BB, England, Attention: Equity Capital Markets, Telex No. 94012165, facsimile transmission No. (071) 774-1550; and if to the Company or Fuji Bank shall be delivered or sent by mail, telex or facsimile transmission to the address of the Company or Fuji Bank (as the case may be) set forth in the Registration Statement, Attention: Secretary; provided, however, that any notice to an Underwriter pursuant to Section 8(c) hereof shall be delivered or sent by mail, telex or facsimile transmission to such Underwriter at its address set forth in its Underwriters' Questionnaire, or telex constituting such Questionnaire, which address will be supplied to the Company by GSI upon request. Any such statements, requests, notices or agreements shall take effect at the time of receipt thereof. 13. This Agreement shall be binding upon, and inure solely to the benefit of, the Underwriters, the Company and Fuji Bank and, to the extent provided in Sections 8 and 10 hereof, the officers and directors of the Company or Fuji Bank and each person who controls the Company or Fuji Bank or any Underwriter, and their respective heirs, executors, administrators, successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. No purchaser of any of the Shares from any Underwriter shall be deemed a successor or assign by reason merely of such purchase. -6- 14. Time shall be of the essence of this Agreement. 15. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, United States of America. 16. This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. -7- If the foregoing is in accordance with your understanding, please sign and return to us seven counterparts hereof, and upon the acceptance hereof by you, on behalf of each of the Underwriters, this letter and such acceptance hereof shall constitute a binding agreement among each of the Underwriters, the Company and Fuji Bank. It is understood that your acceptance of this letter on behalf of each of the Underwriters is pursuant to the authority set forth in a form of Agreement among Underwriters (International Version), the form of which shall be furnished to the Company for examination upon request, but without warranty on your part as to the authority of the signers thereof. Very truly yours, Heller Financial, Inc. By: -------------------- Name: Title: The Fuji Bank, Limited By: -------------------- Name: Title: Accepted as of the date hereof: Goldman Sachs International J.P. Morgan Securities Ltd. BT Alex. Brown International, A Division of Bankers Trust International PLC Lehman Brothers International (Europe) Merrill Lynch International By: Goldman Sachs International By: ------------------------ (Attorney-in-fact) On behalf of each of the Underwriters -8- SCHEDULE I
Number of Optional Shares to be Total Number of Purchased if Firm Shares Maximum Option Underwriter to be Purchased Exercised ----------- --------------- --------- Goldman Sachs International............................... J.P. Morgan Securities Inc................................ BT Alex. Brown International, A Division of Bankers Trust International PLC........... Lehman Brothers International (Europe).................... Merrill Lynch International............................... [Names of other Underwriters]............................. ---------------- ----------------- Total ================ =================
-9- EX-3.1 3 AMENDED & RESTATED CERTIFICATE OF INCORPORATION EXHIBIT 3.1 HELLER FINANCIAL, INC. (a Delaware corporation) AMENDED AND RESTATED CERTIFICATE OF INCORPORATION Under Sections 242 and 245 of the Delaware General Corporation Law Heller Financial, Inc. (the "Company"), a corporation organized and existing under the General Corporation Law of the State of Delaware, does hereby certify that: 1. The name of the Company is Heller Financial, Inc. 2. The original Certificate of Incorporation of the Company was filed with the Secretary of State of the State of Delaware on November 20, 1919, under the name Heller-Marks & Company. 3. This Amended and Restated Certificate of Incorporation has been duly proposed by resolutions adopted and declared advisable by the Board of Directors of the Company, duly adopted by written consent of the sole stockholder of the Company in lieu of a meeting and duly executed and acknowledged by the officers of the Company in accordance with the provisions of Sections 103, 228, 242 and 245 of the General Corporation Law of the State of Delaware and, upon filing with the Secretary of State in accordance with Section 103, shall supersede the original Certificate of Incorporation, as previously amended, and shall, as it may thereafter be amended in accordance with its terms and applicable law, be the Certificate of Incorporation of the Company. 4. The text of the Certificate of Incorporation of the Company is hereby amended, integrated and restated to read in its entirety as follows: FIRST: The name of this Company is HELLER FINANCIAL, INC. SECOND: The location of its registered office in the State of Delaware is to be 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its agent therein and in charge thereof, and upon whom legal process against this Company may be served, is THE CORPORATION TRUST COMPANY, 1209 Orange Street, in said City of Wilmington. THIRD: The nature of the business and the objects and purposes for which, and for any of which, this Company is formed are to do any or all of the things herein set forth as fully and to the same extent as natural persons might or could do and in any part of the world, namely: (a) To buy, sell and generally deal in commercial paper, securities, shares of stock, bonds, debentures, and evidences of indebtedness of all kinds, whether secured or unsecured, including bills and accounts receivable, and to loan money on the security thereof, or otherwise, and to make investments in commercial paper, securities, shares of stock, bonds, debentures, and evidences of indebtedness of all kinds, whether secured or unsecured, including bills and accounts receivable, and to loan money on the security thereof, or otherwise, and to make advances upon consignments of merchandise and commodities, and to hypothecate such merchandise and commodities as security, with power to transact all of the commercial and financial transactions pertaining to any of the businesses herein provided for. (b) To organize, incorporate, reorganize, finance, or assist financially or otherwise companies, corporations, syndicates, partnerships and associations of all kinds, and individuals, and to endorse, underwrite and subscribe for the bonds, stocks, securities, debentures, notes or undertakings of any company, corporation, syndicate, partnership, association or individual, and to make any guarantee in connection therewith, or otherwise, for the payment of money, and for the performance of any obligation or undertaking and to do any and all things necessary or convenient to carry any such purposes into effect. (c) To investigate, develop, consummate, undertake, and carry on any enterprise, business, transaction or operation, commonly carried on or undertaken by capitalists, financiers, trust companies, contracts, syndicates, merchants, importers, exporters, commission men or agents, and to acquire the good will, rights and property, and undertake the whole or any part of the assets and liabilities of any person, firm, association or corporation, and to pay for the same in cash, stock, bonds, or notes, or otherwise, and generally, as principal or agent, to institute, enter into, carry on, assist, promote, and participate in financial, commercial, mercantile, and other business, works, contracts, undertakings and operations. (d) To manufacture, buy, sell, warehouse, store and deal in goods, wares, merchandise, commodities and property of any and every kind, and also to advance money to any person, firm or corporation on the security of any such property, or on the security of commercial paper or notes given as evidence of any deferred payments for any property sold by this Company or by any person, firm, association or corporation. (e) To insure any of the property or interest aforesaid, and the persons, firms or corporations owning, using or operating the same, against loss of fire, theft, collision or damage, or any risk or liability whatever. (f) To engage in and carry on the business of general commission merchants, and purchasing and selling agents; to manufacture, buy, hold, own, produce, sell and otherwise dispose of, either as principal or agent, and upon commission or consignment or otherwise, goods, wares, merchandise, commodities, and personal property of all kinds. (g) To hold in trust, issue on commission, make advances upon, or sell, lease, license, transfer, organize, reorganize, incorporate, or dispose of any of the undertakings or resulting investments aforesaid, or the stock or securities thereof; to act as agent, trustee, or depositary for any of the above or like purposes, or any purpose herein mentioned, and to act as fiscal agent of any person, firm, association or corporation. 2 (h) To obtain the grant of, purchase, lease, or otherwise acquire any concessions, rights, options, patents, privileges, franchises, licenses, lands, properties, undertakings, or businesses, or any right, option, or contract in relation thereto, and to perform, carry out and fulfill the terms and conditions thereof, and to carry the same into effect, and develop, maintain, lease, sell, transfer, dispose of, and otherwise deal with the same. (i) To subscribe for, or cause to be subscribed for, buy, own, hold, purchase, receive or otherwise acquire, and to sell, negotiate, guarantee, assign, deal in, exchange, transfer, mortgage, pledge, or otherwise dispose of, shares of the capital stock, scrip, bonds, coupons, mortgages, debentures, debenture stock, securities, notes and evidences of indebtedness, issued or created by other corporations, joint stock companies or associations, whether public, private or municipal, or any corporate body, and while owner thereof to possess and to exercise in respect thereof, all the rights, powers and privileges of ownership, including the right to vote thereon; to guarantee the payment of dividends on any shares of the capital of any of the corporations, joint stock companies or associations in which this Company has or may have an interest and to become surety in respect of, endorse or otherwise guarantee the payment of the principal or interest of any scrip, bonds, coupons, mortgages, debentures, securities, notes, or evidences of indebtedness issued or created by any such corporations, joint stock companies or associations; to become surety for or guarantee the carrying out and performance of any and all contracts, leases and other obligations of every kind of any such corporation, joint stock company, or association, any of whose shares, bonds, securities or evidences of indebtedness are held by or for this Company, and to do any acts or things designed to protect, preserve, improve or enhance the value of any such shares, bonds, securities or evidences of indebtedness. (j) To purchase, apply for, obtain, or otherwise acquire, any and all letters patent, licenses, patent rights, patented processes and similar rights granted by the United States or any other government or country, or any interest therein, or any inventions which may seem capable of being used for or in connection with any of the objects or purposes of this Company, and to use, exercise, develop, sell, lease, grant licenses in respect to, or other interests in the same, and otherwise turn the same to account, and to carry on any business, manufacturing or otherwise, which may be deemed to directly or indirectly effectuate these objects or any of them. (k) To secure, acquire, apply for, register, hold, own or otherwise dispose of any and all copyrights, trademarks, trade names and other trade rights. (l) To organize, or cause to be organized, under the laws of the State of Delaware, or of any other state, territory or country, or the District of Columbia, a corporation or corporations for the purpose of accomplishing any of the objects for which this Company is organized, or for any other purpose or purposes, and to dissolve, wind up, liquidate, merge or consolidate any such corporation or corporations. (m) To borrow money for the purposes of this Company, and to issue bonds, debentures, notes, and other obligations, and to secure the sale by pledge or mortgage of the whole, or any part of the property of this Company, either real or personal, or to issue bonds, notes, debentures, or other obligations, without any such security. 3 (n) To issue shares of stock, preferred stock, debentures, debenture stock, bonds, notes, and other obligations for cash, or property, or in exchange for the stock, bonds, notes or securities of any person, firm or corporation. (o) To enter into, make, perform and carry out contracts of every kind for any lawful purpose, without limit as to amount, with any person, firm, association or corporation. (p) To draw, make, accept, endorse, discount, execute and issue promissory notes, bills of exchange, warrants and other negotiable or transferable instruments. (q) To purchase and acquire shares of the capital stock, bonds, and other obligations of this Company, from time to time, to such extent, and in such manner and upon such terms as its Board of Directors shall determine, and from time to time to accept, any such shares, bonds and obligations as security for, or in payment on account, or in satisfaction of, any claim or demand of this Company, and to reissue the same from time to time. (r) To have one or more offices to carry on any or all of its operations and business, and, without restriction or limit as to amount, to purchase, lease, or otherwise acquire, hold, and own, and to mortgage, sell, convey, lease, or otherwise dispose of real and personal property of every class and description, in any of the states or territories of the United States and in the District of Columbia and in any and all foreign countries, subject to the laws of such state, district, territory or country. (s) To do any and all things herein set forth, and in addition such other acts as are incident or conducive to the attainment of the purposes of this Company, or any of them, to the same extent as natural persons lawfully might or could do in any part of the world, insofar as such acts are not inconsistent with the provisions of the laws of the State of Delaware. The foregoing clauses shall be construed both as objects and powers, and it is hereby expressly provided that the foregoing enumeration of specific powers shall not be held to limit or restrict in any manner the powers of this Company, and are in furtherance of, and in addition to, and not in limitation of the general powers conferred by the laws of the State of Delaware. It is the intention that the purposes and powers specified in this Article Third hereof shall, except as otherwise expressly provided, in no wise be limited or restricted by reference to or interference from the terms of any other clause or paragraph of this Amended and Restated Certificate of Incorporation (this "Certificate of Incorporation"), and that each of the purposes and powers specified in this Article Third hereof, shall be regarded as independent purposes and powers. FOURTH: (a) The total number of shares of stock which the Company shall have authority to issue is 852,000,000, of which 2,000,000 shares, no par value, are to be of a class designated "Preferred Stock," 50,000,000 shares, of the par value of $0.01 each, are to be of a class designated "Senior Preferred Stock," 500,000,000 shares, of the par value of $0.25 each, are to be of a class designated Class A Common Stock ("Class A Common Stock") and 300,000,000 shares, of the par value of $0.25 each, are to be of a class 4 designated Class B Common Stock ("Class B Common Stock," and together with the Class A Common Stock, "Common Stock"). The relative powers, preferences and participating, optional or other special rights, and the qualifications, limitations and restrictions of the Class A Common Stock and Class B Common Stock of the Company shall be as follows: (1) Except as otherwise set forth below in this Article FOURTH, the relative powers, preferences and participating, optional or other special rights, and the qualifications, limitations or restrictions of the Class A Common Stock and Class B Common Stock shall be identical in all respects. (2) Subject to the rights of the holders of any outstanding Preferred Stock and Senior Preferred Stock and subject to any other provisions of this Certificate of Incorporation, holders of Class A Common Stock and Class B Common Stock shall be entitled to receive such dividends and other distributions in cash, stock of any corporation or, subject to the next sentence, shares of Common Stock of the Company, or any property of the Company as may be declared thereon by the Board of Directors from time to time out of assets or funds of the Company legally available therefor and shall share equally on a per share basis in all such dividends and other distributions. In the case of dividends or other distributions payable in Common Stock, including distributions pursuant to stock splits or divisions of Common Stock, only shares of Class A Common Stock shall be paid or distributed with respect to Class A Common Stock and only shares of Class B Common Stock shall be paid or distributed with respect to Class B Common Stock. The shares of Class A Common Stock and Class B Common Stock so distributed shall be equal in number on a per share basis. Neither the shares of Class A Common Stock nor the shares of Class B Common Stock may be reclassified, subdivided or combined unless such reclassification, subdivision or combination occurs simultaneously and in the same proportion for each class. Notwithstanding anything herein to the contrary, the holders of the Class A Common Stock shall not be entitled to receive any special dividend declared and paid in respect of the Class B Common Stock within seven (7) days after the initial issuance by the Company of the Class A Common Stock, provided that any such dividend or dividends, in the aggregate, shall not be in an amount greater than the excess over $450 million of the net proceeds received by the Company from the initial issuance of such Class A Common Stock. (3) At every meeting of the stockholders of the Company every holder of Class A Common Stock shall be entitled to one vote in person or by proxy for each share of Class A Common Stock standing in its name on the transfer books of the Company, and every holder of Class B Common Stock shall be entitled to three votes in person or by proxy for each share of Class B Common Stock standing in its name on the transfer books of the Company, in connection with the election of directors and all other matters submitted to a vote of stockholders, subject to the right of The Fuji Bank, Limited and its subsidiaries (together with their respective successors, "Fuji Bank") or the Class B Transferee (as defined in Section (a)(6)(ii) below), as the case may be, to elect to reduce from time to time the number of votes per share to which the holders of Class B Common Stock are entitled from three to any number of votes per share of Class B Common Stock less than three (but not fewer than one) by written notice to the Company, which notice shall (A) specify the 5 reduced number of votes per share, (B) be included with the records of the Company maintained by the Secretary and (C) for so long thereafter as there shall be shares of Class B Common Stock outstanding, be referred to or reflected in any proxy or information statement provided to holders of the Common Stock in connection with any matter to be voted upon by such holders. Any such notice, once given, shall be irrevocable. Except as may be otherwise required by law or this Article FOURTH, the holders of Class A Common Stock and Class B Common Stock shall vote together as a single class, subject to any voting rights that may be granted to holders of Preferred Stock and Senior Preferred Stock, on all matters submitted to a vote of the stockholders of the Company. Notwithstanding anything herein to the contrary, in the event that at any time while held by Fuji Bank the outstanding shares of Class B Common Stock would otherwise represent greater than seventy nine percent (79%) of the combined voting power of all outstanding classes of voting stock of the Company, then for voting purposes the number of votes per share of Class B Common Stock shall be automatically reduced so that the outstanding shares of Class B Common Stock in the aggregate represent seventy nine percent (79%) of such combined voting power. (4) In the event of any dissolution, liquidation or winding up of the affairs of the Company, whether voluntary or involuntary, after payment in full of the amounts required to be paid to the holders of any Preferred Stock and Senior Preferred Stock, the remaining assets and funds of the Company shall be distributed pro rata to the holders of Class A Common Stock and Class B Common Stock. For purposes of this Section (a)(4), the voluntary sale, conveyance, lease, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the assets of the Company or a consolidation or merger of the Company with one or more other corporations (whether or not the Company is the corporation surviving such consolidation or merger) shall not be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary. (5) In the case of any reorganization or consolidation or merger of the Company with one or more other entities, each holder of a share of Class A Common Stock shall be entitled to receive with respect to such share the same kind and amount of shares of stock and other securities and property (including cash), if any, receivable upon such reorganization, consolidation or merger by each holder of a share of Class B Common Stock, and each holder of a share of Class B Common Stock shall be entitled to receive with respect to such share the same kind and amount of shares of stock and other securities and property (including cash), if any, receivable upon such reorganization, consolidation or merger by a holder of a share of Class A Common Stock, except that shares of stock or other securities receivable upon such reorganization, consolidation or merger by a holder of a share of Class B Common Stock may differ from the shares of stock or other securities receivable upon such reorganization, consolidation or merger by a holder of a share of Class A Common Stock to the extent that the Class B Common Stock and Class A Common Stock differ as provided in this Certificate of Incorporation of the Company. (6) (i) Each record holder of shares of Class B Common Stock may convert such shares into an equal number of shares of Class A Common Stock by surrendering the certificates for such shares, accompanied by any required tax transfer stamps and by a written notice by such record holder to the Company stating that such record holder desires to convert such shares of Class B Common Stock into the same number of shares of 6 Class A Common Stock and requesting that the Company issue all of such shares of Class A Common Stock to persons named therein, and setting forth the number of shares of Class A Common Stock to be issued to each such person and the denominations in which the certificates therefor are to be issued. To the extent permitted by law, such voluntary conversion shall be deemed to have been effected at the close of business on the date of such surrender. (ii) Each share of Class B Common Stock shall automatically convert into one share of Class A Common Stock upon the transfer of such share if, after such transfer, such share is not beneficially owned by Fuji Bank or, as set forth below in this Section (a)(6)(ii), the Class B Transferee or any subsidiaries of the Class B Transferee. For purposes of this Certificate of Incorporation, "beneficial owner", and any derivative term thereof, shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations of the Securities Exchange Act of 1934, as amended. In addition, a person shall be the "beneficial owner" of any shares of Common Stock which such person or any of its affiliates or associates has (a) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (b) the right to vote pursuant to any agreement, arrangement or understanding (but neither such person nor any such affiliate or associate shall be deemed to be the beneficial owner of any shares of Common Stock solely by reason of a revocable proxy granted for a particular meeting of stockholders, pursuant to a public solicitation of proxies for such meeting, and with respect to which shares neither such person nor any such affiliate or associate is otherwise deemed the beneficial owner). For purposes of this Section (a), the term "subsidiary" means as to any person or entity, any corporation, partnership, joint venture, association or other entity in which such person or entity beneficially owns (directly or indirectly) 50% or more of the outstanding voting stock, voting power, partnership interests or similar voting interests. Notwithstanding anything herein to the contrary, shares of Class B Common Stock representing more than a 50% voting interest in the then outstanding shares of Common Stock taken as a whole, when transferred by Fuji Bank in a single transaction or series of related transactions to one person unaffiliated with Fuji Bank (together with its successors, the "Class B Transferee") and/or any subsidiaries of the Class B Transferee, shall not automatically convert to shares of Class A Common Stock upon the transfer of such shares. Upon any such transfer of shares of Class B Common Stock representing more than a 50% voting interest in the outstanding shares of Common Stock taken as a whole to the Class B Transferee, any shares of Class B Common Stock retained by Fuji Bank shall automatically convert into shares of Class A Common Stock. For avoidance of doubt, the Class B Common Stock shall automatically convert to shares of Class A Common Stock, as provided in the preceding paragraph, upon any transfer by the Class B Transferee or any of its subsidiaries to any person other than the Class B Transferee or any of its subsidiaries, whether in a single transaction or series of related or unrelated transactions and whether representing more or less than a 50% voting interest in the then outstanding shares of Common Stock taken as a whole. For purposes of this Section (a)(6), each reference to a "person" shall be deemed to include not only a natural person, but also a corporation, partnership, joint venture, association, or other legal entity of any kind; and each reference to a "natural person" (or to a "record holder" of shares, if a 7 natural person) shall be deemed to include in his representative capacity a guardian, committee, executor, administrator or other legal representative of such natural person or record holder. Each share of Class B Common Stock shall automatically convert into one share of Class A Common Stock if at any time the number of shares of Class B Common Stock then outstanding is less than thirty percent (30%) of the aggregate number of shares of Common Stock then outstanding. The Company will provide notice of any automatic conversion pursuant to this Section (a)(6)(iii) of all outstanding shares of Class B Common Stock to all holders of record of shares of Common Stock as soon as practicable following such conversion; provided, however, that the Company may also satisfy such notice requirement by providing such notice prior to such conversion. Such notice shall be provided by mailing notice of such conversion, first class, postage prepaid, to each holder of record of shares of Common Stock, at such holder's address as it appears on the transfer books of the Company; provided, however, that no failure to give such notice nor any defect therein shall affect the validity of the automatic conversion of any shares of Class B Common Stock. Each such notice shall state, as appropriate, the following: (A) the automatic conversion date; (B) that all outstanding shares of Class B Common Stock are to be or have been automatically converted on such automatic conversion date, and that from such automatic conversion date the certificates evidencing any shares of Class B Common Stock shall evidence the same number of shares of Class A Common Stock; and (C) the place or places where certificates for such shares are to be surrendered for exchange for certificates evidencing the shares of Class A Common Stock. Immediately upon such conversion on the automatic conversion date, the rights of the holders of shares of Class B Common Stock as such shall cease and such holders shall be treated for all purposes as having become the record owners of the shares of Class A Common Stock issuable upon such conversion; provided, however, that such persons shall be entitled to receive when paid any dividends declared on the Class B Common Stock as of a record date preceding the time of such conversion and unpaid as of the time of such conversion, subject to Section (a)(6)(vi) below. (iii) Holders of shares of Class B Common Stock may (A) sell or otherwise dispose of or transfer any or all of such shares held by them only in connection with a transfer which meets the qualifications of Section (a)(6)(iv) below, and under no other circumstances, or (B) convert any or all of such shares into shares of Class A Common Stock as provided in Section (a)(6)(i) above. No one other than those persons or entities in whose names shares of Class B Common Stock become registered on the original stock ledger of the Company by reason of their record ownership of shares of Common Stock of the Company which are reclassified into shares of Class B Common Stock, or transferees or successive transferees who receive shares of Class B Common Stock in 8 connection with a transfer which meets the qualifications set forth in Section (a)(6)(iv) below, shall by virtue of the acquisition of a certificate for shares of Class B Common Stock have the status of an owner or holder of shares of Class B Common Stock or be recognized as such by the Company or be otherwise entitled to enjoy for its own benefit the special rights and powers of a holder of shares of Class B Common Stock. Holders of shares of Class B Common Stock may at any and all times transfer to any person or entity the shares of Class A Common Stock issuable upon conversion of such shares of Class B Common Stock. (iv) Shares of Class B Common Stock shall be transferred on the books of the Company and a new certificate therefor issued, upon presentation at the office of the Secretary of the Company (or at such additional place or places as may from time to time be designated by the Secretary or any Assistant Secretary of the Company) of the certificate for such shares, in proper form for transfer and accompanied by all requisite stock transfer tax stamps, only if such certificate when so presented shall also be accompanied by any one of the following: (a) a written notice from Fuji Bank, stating that the certificate for such shares is being presented to effect a transfer by Fuji Bank of shares to a subsidiary or subsidiaries of Fuji Bank; (b) a written notice from Fuji Bank, stating that the certificate for such shares is being presented to effect a transfer by any subsidiary of Fuji Bank of shares to Fuji Bank or another subsidiary or subsidiaries of Fuji Bank; (c) a written notice from Fuji Bank, stating that the certificate for such shares is being presented to effect a transfer by Fuji Bank or any of its subsidiaries of shares to the Class B Transferee or a subsidiary or subsidiaries of the Class B Transferee as contemplated by Section (a)(6)(ii); (d) a written notice from the Class B Transferee stating that the certificate for such shares is being presented to effect a transfer by the Class B Transferee of shares to a subsidiary or subsidiaries of the Class B Transferee; or (e) a written notice from the Class B Transferee stating that the certificate for such shares is being presented to effect a transfer by any subsidiary of the Class B Transferee of shares to the Class B Transferee or another subsidiary or subsidiaries of the Class B Transferee. If a record holder of shares of Class B Common Stock shall deliver a certificate for such shares, endorsed by it for transfer or accompanied by an instrument of transfer signed by it, to a person or entity who receives such shares in connection with a transfer which does not meet the qualifications set forth in this Section (a)(6)(iv), then such person or entity or any successive transferee of a certificate for such shares may treat such endorsement or instrument as authorizing it on behalf of such record holder to convert such shares in the manner above provided for the purpose of the transfer to itself of the shares of Class A Common Stock issuable upon such conversion, and to give on behalf of 9 such record holder the written notice of conversion above required, and may convert such shares of Class B Common Stock accordingly. If any shares of Class B Common Stock shall improperly have been registered in the name of any person or entity (or in the name of any successive transferee of such certificate) and a new certificate therefor issued, such person or entity or such transferee shall surrender such new certificate for cancellation, accompanied by the written notice of conversion above required, in which case (1) such person or entity or such transferee shall be deemed to have elected to treat the endorsement on (or instrument of transfer accompanying) the certificate so delivered by such former record holder as authorizing such person or entity or such transferee on behalf of such former record holder so to convert such shares and so to give such notice, (2) the shares of Class B Common Stock registered in the name of such former record holder shall be deemed to have been surrendered for conversion for the purpose of the transfer to such person or entity or such transferee of the shares of Class A Common Stock issuable upon conversion and (3) the appropriate entries shall be made on the books of the Company to reflect such action. In the event that the Board of Directors of the Company (or any committee or subcommittee of the Board of Directors, or any officer of the Company, designated for this purpose by the Board of Directors) shall determine, upon the basis of facts not disclosed in any notice or other document accompanying the certificate for shares of Class B Common Stock when presented for transfer, that such shares of Class B Common Stock have been registered in violation of the provisions of Section (a)(6), or shall determine that a person or entity is enjoying for his or its own benefit the special rights and powers of shares of Class B Common Stock in violation of such provisions, then the Company shall take such action at law or in equity as is appropriate under the circumstances. An unforeclosed pledge made to secure a bona fide obligation shall not be deemed to violate such provisions. (v) Every certificate for shares of Class B Common Stock shall bear a legend on the face thereof reading as follows: "The shares of Class B Common Stock represented by this certificate may not be transferred to any person or entity in connection with a transfer that does not meet the qualifications set forth in Section (a)(6)(iv) of Article FOURTH of the Certificate of Incorporation of Heller Financial, Inc. and no person or entity who receives such shares in connection with a transfer which does not meet the qualifications prescribed by Section (a)(6)(iv) of said Article FOURTH is entitled to own or to be registered as the record holder of such shares of Class B Common Stock, but the record holder of this certificate may at any time convert such shares of Class B Common Stock into the same number of shares of Class A Common Stock. Each holder of this certificate, by accepting the same, accepts and agrees to all of the foregoing." (vi) Upon any conversion of shares of Class B Common Stock into shares of Class A Common Stock pursuant to the provisions of this Section (a)(6), any dividend for which the record date or payment date shall be subsequent to such conversion and which may have been declared on the shares of Class B Common Stock so converted shall be deemed to have been declared, and shall be payable, with respect to the shares of 10 Class A Common Stock into or for which such shares of Class B Common Stock shall have been so converted, and any such dividend which shall have been declared on such shares payable in shares of Class B Common Stock shall be deemed to have been declared, and shall be payable, in shares of Class A Common Stock. (vii) The Company shall not reissue or resell any shares of Class B Common Stock which shall have been converted into shares of Class A Common Stock pursuant to or as permitted by the provisions of this Section (a)(6), or any shares of Class B Common Stock which shall have been acquired by the Company in any other manner. The Company shall, from time to time, take such appropriate action as may be necessary to retire such shares and to reduce the authorized amount of Class B Common Stock accordingly. The Company shall at all times reserve and keep available, out of its authorized but unissued Common Stock, such number of shares of Class A Common Stock as would be issuable upon the conversion of all shares of Class B Common Stock then outstanding. (viii) In connection with any transfer or conversion of any stock of the Company pursuant to or as permitted by the provisions of this Section (a)(6), or in connection with the making of any determination referred to in this Section (a)(6): (A) The Company shall be under no obligation to make any investigation of facts unless an officer, employee or agent of the Company responsible for making such transfer or determination or issuing Class A Common Stock pursuant to such conversion has substantial reason to believe, or unless the Board of Directors (or a committee or subcommittee of the Board of Directors designated for the purpose) determines that there is substantial reason to believe, that any notice or other document is incomplete or incorrect in a material respect or that an investigation would disclose facts upon which any determination referred to in Section (a)(6)(iv) above should be made, in either of which events the Company shall make or cause to be made such investigation as it may deem necessary or desirable in the circumstances and have a reasonable time to complete such investigation. (B) Except as otherwise required by law, neither the Company nor any director, officer, employee or agent of the Company shall be liable in any manner for any action taken or omitted in good faith in connection with the registration of transfer of the shares of Common Stock. (C) The Company will not be required to pay any documentary, stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Class A Common Stock on the conversion of shares of Class B Common Stock pursuant to this Section (a)(6), and no such issue or delivery shall be made unless and until the person or entity requesting such issue has paid to the Company the amount of any such tax or has established, to the satisfaction of the Company, that such tax has been paid. 11 (D) Subject to the rights of any holders of Preferred Stock and Senior Preferred Stock, all rights to vote and all voting power (including, without limitation thereto, the right to elect directors) shall be vested exclusively, in accordance with Section (a)(3) and subsections (D) through (F) of this Section (a)(6)(viii), inclusive, in the holders of Common Stock, voting together as a single class, except as otherwise required by the law of the State of Delaware, this Article FOURTH or the By-Laws of the Company. (E) At any meeting of stockholders, the presence in person or by proxy of the holders of shares entitled to cast a majority of all the votes which could be cast at such meeting by the holders of all of the outstanding shares of stock of the Company entitled to vote on every matter that is to be voted on without regard to class at such meeting shall constitute a quorum for purposes of such vote. (F) At every meeting of stockholders, except as otherwise required by the law of the State of Delaware or this Article FOURTH, the holders of shares of Class A Common Stock and the holders of shares of Class B Common Stock shall vote together as one class, and their votes shall be counted and totaled together; and at any meeting of stockholders duly called and held at which any such vote as one class is to be taken and at which a quorum (determined in accordance with the provisions of subsection (E)) is present, (i) in all matters other than the election of directors, a majority of the votes which could be cast at such meeting upon a given question and (ii) in the case of the election of directors, a plurality of the votes which could be cast at such meeting upon such election, in each case by such holders who are present in person or by proxy, shall be necessary in addition to any vote or other action that may be expressly required by the provisions of this Certificate of Incorporation or by the law of the State of Delaware, to decide such question or election, and shall decide such question or election if no such additional vote or other action is so required. (7) In the event that at any time or from time to time after the original issuance of the Class A Common Stock, the Company issues any additional shares of Class A Common Stock of the Company or any other securities of the Company convertible into shares of Class A Common Stock of the Company (other than pursuant to any employee stock or stock option benefit plan or in connection with any stock split or stock dividend), the holders of shares of Class B Common Stock shall have the right to subscribe for and purchase additional shares of Class B Common Stock or shares of such other securities such that such holders of Class B Common Stock may, by purchasing such additional securities, maintain the same percentage beneficial ownership interest (including voting and/or economic interest) that such holders held immediately prior to the issue of such additional securities. As of February 24, 1998, each outstanding whole share of Common Stock, par value $0.25 per share, was automatically, without the necessity of any further action on the part of the holder thereof, reclassified into one share of Class B Common Stock. The Preferred Stock and the Senior Preferred Stock may be issued from time to time in one or more series of any number of shares, provided that (i) the aggregate number of shares of Preferred Stock issued and not canceled of any and all such series 12 shall not exceed the total number of shares of Preferred Stock authorized, and (ii) the aggregate number of shares of Senior Preferred Stock issued and not canceled of any and all such series shall not exceed the total number of shares of Senior Preferred Stock authorized. Authority is hereby expressly granted to the Board of Directors, by the vote of a majority of the then total number of its membership, from time to time to issue the Preferred Stock or Senior Preferred Stock as Preferred Stock or Senior Preferred Stock, respectively, of any series and, in connection with the creation of each such series, to fix by the resolution or resolutions providing for the issue of shares thereof, the number of shares of such series, and the voting powers, full or limited, or no voting powers, and such distinctive designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions of such series, to the full extent now or hereafter permitted by the laws of the State of Delaware. Subject to the provisions of this Certificate of Incorporation and except as otherwise provided by law, the shares of stock of the Company, regardless of class, may be issued for such consideration and for such corporate purposes as the Board of Directors may from time to time determine. Except as otherwise specifically set forth herein, no holder of stock of the Company shall have any preemptive rights with respect to stock of the Company. (b) The Board of Directors pursuant to the authority expressly vested in this Article FOURTH, and pursuant to the provisions of the General Corporation Law of the State of Delaware has by resolution fixed the voting powers, designation, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof of the following series of Preferred Stock: NW Preferred Stock, Class B (1) Designation. The designation of the series of Preferred Stock created by this resolution shall be "NW Preferred Stock, Class B (No Par Value)", the first series of said stock when issued to be designated as "Series A," and each subsequent series when issued thereafter to be lettered consecutively (all such series hereinafter called the "NW Preferred Stock"). The NW Preferred Stock, Class B shall consist of 100,000 shares. Except as hereinafter set forth, all such series when issued are to be governed by the same voting powers, designation, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof as each of the other series of Preferred Stock. (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 13 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 cash, 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. (3) Rights of Redemption. The shares of the NW Preferred Stock shall be subject to redemption as follows: 14 A. Mandatory Redemption. Each share of each series of NW Preferred Stock shall be redeemable no less than 30 and no more than 45 days following the end of a calendar quarter upon five business days' prior written notice to the Company from the holder (the date on which any such redemption shall occur being referred to herein as the "Redemption Date"), in whole or in part, in an aggregate amount in such calendar quarter not exceeding the excess of the Net Worth of the Company, as defined herein, at the end of such quarter over $500,000,000, at a redemption price equal to the price paid to the Company upon the issuance thereof, plus Accrued Dividends in respect thereof, provided that the Company shall be obligated to effect any such redemption only to the extent that its doing so will not (i) result in a breach of or default under any agreement for or instrument evidencing indebtedness of, or guaranteed by, the Company and (ii) conflict with the provisions set forth under paragraph 2 of this Section (b) restricting the payment of dividends 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. Unless provision has been made for payment in full of Accrued Dividends on all preferred stock, no sum shall be set aside for the redemption of any Preferred Stock nor shall any Preferred Stock be purchased or otherwise acquired by the Company. B. Sinking Fund, Etc. Shares of the NW Preferred Stock are not subject or entitled to the benefit of a sinking fund. C. Effect of Redemption. After a Redemption Date in respect of any shares of NW Preferred Stock, shares redeemed on such Redemption Date shall not be deemed to be outstanding and shall not be transferable on the books of the Company except to the Company. D. Receipt of Redemption Price. At any time on or after a Redemption Date in respect of any shares of NW Preferred Stock, the respective holders of record of shares of NW Preferred Stock to be redeemed shall be entitled to receive the redemption price upon actual delivery to the Company of certificates for the shares to be redeemed. E. Return of Deposits, Etc. Any moneys deposited with the transfer agent, or other redemption agent, for the redemption of any shares of NW Preferred Stock which shall not be claimed after five years from the Redemption Date shall be repaid to the Company by such agent on demand, and the holder of any such shares of NW Preferred Stock shall thereafter look only to the Company for any payment to which such holder may be entitled. Any interest accrued on money so deposited shall belong to the Company and shall be paid to it from time to time on demand. F. Redemption by Deposit. If on or before the Redemption Date in respect of any shares of NW Preferred Stock, funds necessary for such redemption shall have been deposited by the Company, in trust for the pro rata benefit of the holders of the shares called for redemption on such Redemption Date, with a bank or trust company in good standing organized under the laws of the United States of America, doing business in the City of Chicago or in the Borough of Manhattan, in the City of New York, having a 15 capital, surplus and undivided profits aggregating at least $10,000,000 according to its last published statement of condition, then, notwithstanding that any certificate for shares to be redeemed shall not have been surrendered for cancellation, from and after such Redemption Date, all shares to be redeemed shall no longer be deemed to be outstanding and all rights with respect to such shares shall forthwith cease and terminate, except only the right of the holders thereof to receive the redemption price for such shares, without interest, and the right to exercise on or before the close of business on the Redemption Date, privileges of exchange or conversion, if any, not theretofore expiring. Any interest accrued on such funds shall be paid to the Company from time to time. (4) Rights on Liquidation, Dissolution or Winding Up. A. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of shares of the NW Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Company available for distribution to its stockholders, before any payment shall be made to the holders of any class of capital stock of the Company ranking junior upon liquidation to the NW Preferred Stock, an amount equal to the price paid for each such share upon the issuance thereof plus an amount equal to all Accrued Dividends thereon to and including the date of payment. B. In the event the assets of the Company available for distribution to the holders of shares of NW Preferred Stock upon any involuntary or voluntary liquidation, dissolution or winding up of the Company shall be insufficient to pay in full all amounts to which such holders are entitled pursuant to subparagraph A of this paragraph 4, no such distribution shall be made on account of any shares of any other class or series of preferred stock ranking on a parity with the shares of NW Preferred Stock upon liquidation unless proportionate distributive amounts shall be paid on account of the shares of NW Preferred Stock, ratably, in proportion to the full distributive amounts to which the holders of all such parity shares are respectively entitled upon such liquidation, dissolution or winding up. (5) Voting. The shares of the NW Preferred Stock shall not have any voting powers, either general or special, except as required by applicable law. (6) Definitions. A. The term "business day" shall mean a day on which dealings are carried on in the London interbank market and banks are open in London, and banks are not required or authorized to close in New York City or in Chicago, it being understood, however, that for purposes of paragraph 2 of this Resolution, the term "business day" shall not include reference to Chicago. 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. C. Intentionally Omitted. 16 D. Intentionally Omitted. E. The term "Net Worth" in respect of any period shall mean the stockholders' equity of the Company, including preferred stock, common stock and earned surplus and all other items listed under the heading "Stockholders' Equity" on the balance sheet of the Company, as determined in accordance with generally accepted accounting principles, consistently applied, and shown on the balance sheet of the Company as at the close of such period; provided, that Net Worth shall be increased by the aggregate amount of the accrued and unpaid dividends on all shares of NW Preferred Stock outstanding on the last day of the period in respect of which Net Worth is being determined, and by the aggregate amount of the liquidation preference of all such shares of NW Preferred Stock to the extent not otherwise included in Net Worth pursuant to the foregoing provisions of this definition. F. The term "Preferred Stock" shall mean any preferred stock created and issued under the Certificate of Incorporation of the Company as in effect on the date of this resolution, including the NW Preferred Stock, whether or not issued. The term "preferred stock" shall mean shares of any class of stock (including Preferred Stock) if the holders of such class shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, in preference or priority to the holders of shares of Common Stock. G. For the purposes of this resolution any stock of any class or classes of the Company shall be deemed to rank: (1) prior to shares of the NW Preferred Stock, either as to dividends or upon liquidation, if the holders of such class or classes 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 the NW Preferred Stock; (2) on a parity with shares of the NW Preferred Stock, either as to dividends or upon liquidation, whether or not the dividend rates, dividend payment dates, or redemption or liquidation prices per share thereof be different from those of the NW Preferred Stock, if the holders of such 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 rates or liquidation prices, without preference or priority of one over the other as between the holders of such stock and the holders of shares of NW Preferred Stock; and (3) junior to shares of the NW Preferred Stock, either as to dividends or upon liquidation, if such class shall be common stock of the Company or if the holders of the NW 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 classes. 17 (c) The Board of Directors pursuant to the authority expressly vested in this Article FOURTH, and pursuant to the provisions of the General Corporation Law of the State of Delaware has by resolution fixed the voting powers, designation, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof of the following series of Senior Preferred Stock: Cumulative Perpetual Senior Preferred Stock, Series A (1) Designation. The designation of the series of Senior Preferred Stock created by these resolutions shall be Cumulative Perpetual Senior Preferred Stock, Series A (the "Series A Senior Preferred Stock"). The number of authorized shares constituting the Series A Senior Preferred Stock is 5,000,000. The shares of the Series A Senior Preferred Stock shall have a stated value of $25.00 per share. (2) Voting Rights. The Series A Senior Preferred Stock shall not have any voting powers, either general or special, except as required by applicable law and as stated herein. The affirmative vote of the holders of at least two-thirds of the outstanding shares of the Series A Senior Preferred Stock voting as a class is required to approve any proposed amendment to this Certificate of Incorporation or the By-laws of the Company if such amendment would increase or decrease the aggregate number of authorized shares of the Series A Senior Preferred Stock, increase or decrease the par value of the Series A Senior Preferred Stock or alter or change the powers, preferences or special rights of the Series A Senior Preferred Stock so as to affect the Series A Senior Preferred Stock adversely. In case the Company shall be in arrears in the payment of six consecutive quarterly dividends on the outstanding Series A Senior Preferred Stock, the holders of the Series A Senior Preferred Stock voting separately as a class and in addition to any voting rights that holders of the Series A Senior Preferred Stock shall have as required by law, shall have the exclusive right to elect two additional directors beyond the number to be elected by the shareholders at the next annual meeting of the shareholders called for the election of directors, and at every subsequent such meeting at which the terms of office of the directors so elected by the Series A Senior Preferred Stock expire, provided such arrearage exists on the date of such meeting or subsequent meetings, as the case may be. The right of the holders of Series A Senior Preferred Stock voting separately as a class to elect two members of the Board of Directors of the Company as aforesaid shall continue until such time as all dividends accumulated on Series A Senior Preferred Stock shall have been paid in full and provision has been made for the payment in full of the dividends for the current quarter, at which time the special right of the holders of Series A Senior Preferred Stock so to vote separately as a class for the election of directors shall terminate, subject to revesting at such time as the Company shall be in arrears in the payment of six consecutive quarterly dividends on the outstanding Series A Senior Preferred Stock. If the annual meeting of stockholders of the Company is not, for any reason, held on the date fixed in the By-laws at a time when the holders of Series A Senior Preferred Stock, voting separately and as a class, shall be entitled to elect directors, or if vacancies shall exist in both of the two offices of directors elected by the holders of Series A Senior Preferred Stock, a proper officer of the Company shall, upon the written request of the 18 holders of record of at least ten percent (10%) of the Series A Senior Preferred Stock then outstanding addressed to the Secretary of the Company, call a special meeting in lieu of the annual meeting of stockholders, or, in the event of such vacancies, a special meeting of the holders of Series A Senior Preferred Stock, for the purpose of electing directors. Any such meeting shall be held at the earliest practicable date at the place for the holding of the annual meetings of stockholders. If such meeting shall not be called by the proper officer of the Company within twenty (20) days after personal service of said written request upon the Secretary of the Company, or within twenty (20) days after mailing the same within the United States by certified mail, addressed to the Secretary of the Company at its principal executive offices, then the holders of record of at least ten percent (10%) of the outstanding Series A Senior Preferred Stock may designate in writing one of their number to call such meeting at the expense of the Company, and such meeting may be called by the person so designated upon the notice required for the annual meetings of stockholders of the Company and shall be held at the place for holding the annual meetings of stockholders. Any holder of Series A Senior Preferred Stock so designated shall have access to the lists of stockholders to be called pursuant to the provisions hereof. At any meeting held for the purpose of electing directors at which the holders of Series A Senior Preferred Stock shall have the right, voting separately as a class, to elect directors as aforesaid, the presence in person or by proxy of the holders of at least thirty-three and one-third percent (33-1/3%) of the outstanding Series A Senior Preferred Stock shall be required to constitute a quorum of such Series A Senior Preferred Stock. Any vacancy occurring in the office of director elected by the Holders of Series A Senior Preferred Stock may be filled by the remaining director elected by the holders of the shares of such class, unless and until such vacancy shall be filled by the holders of the shares of such series voting as a class. Any director to be elected by the holders of Series A Senior Preferred Stock shall agree, prior to his election to office, to resign upon any termination of the right of the holders of Series A Senior Preferred Stock to vote as a class for directors as herein provided, and upon any such termination the directors then in office elected by the holders of Series A Senior Preferred Stock shall forthwith resign. Unless the Company receives the affirmative vote of the holders of at least a majority of the then outstanding shares of the Series A Preferred Stock voting as a class, the Company shall not issue to the holder of the common stock of the Company as of this date or to any affiliate of such common stockholder, from any class or series of stock existing at the time of this resolution or to be created in the future, any shares of stock ranking on a parity with the Series A Senior Preferred Stock as to payment of dividends and upon liquidation. For the purpose of this paragraph, the term "affiliate" of the common stockholder shall mean a person who directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the common stockholder. Unless the Company receives the affirmative vote of the holders of at least two-thirds of the then outstanding shares of the Series A Senior Preferred Stock voting as a class, the Company shall not issue, from any class or series of stock existing at the time 19 of the resolutions designating the Series A Preferred Stock or to be created in the future, any shares of stock ranking senior to the Series A Senior Preferred Stock as to payment of dividends and upon liquidation. (3) Preferences. The Series A Senior Preferred Stock will be cumulative perpetual Senior Preferred Stock (i.e., will be redeemable, if at all, solely at the option of the Company) and will rank senior to the class designated as any Preferred Stock as to payments of dividends and upon liquidation. The 5,000,000 shares of Series A Senior Preferred Stock authorized for issuance pursuant to resolutions of the Board of Directors of the Company all constitute Senior Preferred Stock within the 20,000,000 shares originally authorized pursuant to resolutions of the Board of Directors. (4) Dividends. The holders of the shares of Series A Senior Preferred Stock shall be entitled to receive, when as and if declared by the Board of Directors of the Company (the "Board of Directors" or "Board") or a committee thereof out of funds legally available therefor, cash dividends at the rate 8-1/8% per annum to be payable quarterly on the fifteenth day of, February, May, August and November of each year, commencing November 15, 1992 (each a "Series A Dividend Payment Date"). Each such dividend will be paid to holders of record on each record date, which shall not be less than 5 nor more than 50 days preceding the Series A Dividend Payment Date, as fixed by the Board or a duly authorized committee thereof. Dividends on the Series A Senior Preferred Stock, whether or not declared, will be cumulative from the date of original issue of the Series A Senior Preferred Stock. The amount of dividends payable for any period shorter than a full quarterly dividend period will be determined on the basis of twelve 30-day months and a 360-day year. Accrued but unpaid dividends will not hear interest. No full dividends shall be declared or paid or set apart for payment on the Company's preferred stock of any series ranking, as to dividends on a parity with or junior to the Series A Senior Preferred Stock for any period unless full dividends on the Series A Senior Preferred Stock (including any accumulated dividends) have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for such payment. When dividends are not paid in full upon the Series A Senior Preferred Stock and any other preferred stock of the Company ranking on a parity as to dividends with the Series A Senior Preferred Stock, dividends upon shares of Series A Senior Preferred Stock and dividends on such other preferred stock shall be declared pro rata so that the amount of dividends declared per share on the Series A Senior Preferred Stock and such other preferred stock shall in all cases bear to each other the same ratio that accrued dividends per share on shares of Series A Senior Preferred Stock and such other preferred stock bear to each other. Except as provided in the preceding sentence, unless full dividends on the Series A Senior Preferred Stock have been paid for a dividend period, no dividends (other than on Common Stock or another stock ranking junior to the Series A Senior Preferred Stock as to dividends and upon liquidation) shall be declared or paid or set aside for payment or other distribution made upon the Common Stock of the Company or on any other stock of the Company ranking junior to or on a parity with the Series A Senior Preferred Stock as to dividends or upon liquidation be redeemed, purchased or otherwise acquired for any consideration (or any moneys be paid to 20 or made available for a sinking fund for the redemption of any shares of any such stock) by the Company (except by conversion into or exchange for stock of the Company ranking junior to the Series A Senior Preferred Stock as to dividends and upon liquidation). (5) Rights of Redemption. At the option of the Company, shares of the Series A Senior Preferred Stock may be redeemed, as a whole or in part, on any Series A Dividend Payment Date occurring on or after the eighth anniversary of the date of issue at a redemption price equal to the stated value per share plus, in each case, dividends accrued and unpaid thereon (whether or not earned or declared) to the date fixed for redemption. Notwithstanding the foregoing, unless full dividends, including any accumulation on all outstanding shares of Series A Senior Preferred Stock of and full dividends, including any accumulation on preferred stock of the Company of any series ranking, as to dividends, on a parity with or senior to the Series A Senior Preferred Stock, shall have been paid or contemporaneously are declared and paid, no shares of Series A Senior Preferred Stock shall be redeemed unless all outstanding shares of Series A Senior Preferred Stock and shares of such other preferred stock are simultaneously redeemed, provided that the foregoing shall not prevent the purchase or acquisition of shares of Series A Senior Preferred Stock or shares of such other preferred stock by conversion into or exchange for shares of the Company ranking junior to the Series A Senior Preferred Stock and such other preferred stock as to dividends and upon liquidation. If shares of Series A Senior Preferred Stock are to be redeemed, the notice of redemption shall be mailed to each record holder of shares of Series A Preferred Stock to be redeemed, not less than 30 nor more than 45 days prior to the date fixed for redemption thereof. Each notice of redemption will include a statement setting forth: (i) the redemption date, (ii) the number of shares of Series A Senior Preferred Stock to be redeemed, (iii) the redemption price (specifying the amount of accrued and unpaid dividends to be included therein), (iv) that dividends on the shares to be redeemed will cease to accrue on such redemption date, (v) the provision of the Certificate under which redemption is made and (vi) the place or places where holders may surrender such shares of Series A Senior Preferred Stock, if applicable, and obtain payment of the redemption price. No defect in the notice of redemption or in the mailing thereof or publication of its contents shall affect the validity of the redemption proceedings. In the event that less than all of the outstanding shares of Series A Senior Preferred Stock are to be redeemed, the shares to be redeemed shall be selected by the Company by lot or such other method as the Company shall deem fair and equitable. If the Company gives notice of redemption, then, by 12:00 Noon, New York City time, on the redemption date, the Company shall irrevocably deposit with a paying agent (the "Series A Paying Agent") funds sufficient to pay the applicable redemption price, including any accrued and unpaid dividends to the redemption date, and shall give the Series A Paying Agent irrevocable instructions and authority to pay the redemption price to the holder or holders of record thereof upon surrender of certificates. 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 21 outstanding. The Company shall be entitled to receive, from time to time, from the Series A Paying Agent, the interest, if any, earned on such monies deposited with the Series A Paying Agent, and the holders of any shares to be redeemed with such monies 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 Company, after which the holders of the shares of Series A Senior Preferred Stock so called for redemption shall be entitled to look only to the Company for payment thereof. (6) Liquidation Preference. (a) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of shares of the Series A Senior Preferred Stock shall be entitled to receive out of the assets of the Company available for distribution to stockholders, before any distribution of assets shall be made to the holders of shares of Common Stock, the Preferred Stock or of any other class or series of stock ranking junior to the Series A Preferred Stock as to such a distribution, an amount equal to $25.00 per share, plus an amount equal to any accrued and unpaid dividends (whether or not declared) for the then-current, and each prior dividend period (without accumulation of accrued and unpaid dividends for prior dividend periods) to the date fixed for payment of such distribution. (b) If upon any voluntary or involuntary liquidation, dissolution or winding up of the Company, the amounts payable with respect to shares of the Series A Senior Preferred Stock and shares of any other class or series of stock of the Company ranking on a parity with the Series A Senior Preferred Stock as to any such distribution are not paid in full, the holders of shares of the Series A Senior Preferred Stock and the holders of shares of such other class or series of stock shall share ratably in any such distribution of assets of the Company in proportion to the full respective preferential amounts to which they are entitled. (c) After payment to the holders of shares of the Series A Senior Preferred Stock of the full preferential amounts provided for in this Section 3, the holders of such shares shall not be entitled to any further participation in any distribution of assets by the Company. (d) The consolidation or merger of the Company with or into any other corporation or corporations, or the sale, lease or conveyance of all or substantially all the assets of the Company, whether for cash, shares of stock, Series A Senior Preferred Stock or properties, shall not be regarded as a liquidation, dissolution or winding up of the Company within the meaning of this Section 3. (e) Conversion and Exchange. The holders of shares of the Series A 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 Company. (7) Priority as to Certain Distributions. As a series of Senior Preferred Stock, the shares of the Series A Senior Preferred Stock shall be entitled to such rights and 22 priorities, and subject to such limitations, as to dividends as are set forth in the resolutions and in this Certificate of Incorporation. (8) Sinking Fund. No sinking fund shall be provided for the purchase or redemption of shares of the Series A Senior Preferred Stock. (9) Ranking. Without limitation to any provision set forth in the resolutions or in this Certificate of Incorporation, it is hereby confirmed and expressly declared that the Series A Senior Preferred Stock constitutes a series of Senior A Preferred Stock and, accordingly, ranks senior to all shares of 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 Company shall be deemed to rank: (a) prior to the Series A 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 the Series A Senior Preferred Stock; (b) on a parity with the Series A 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 A Senior Preferred Stock, if the holders of such class or series of stock and of the Series A Senior Preferred Stock shall be entitled to the receipt of dividends or of amount 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 the Series A Senior Preferred Stock; and (c) junior to the Series A Senior Preferred Stock as to dividends or distribution of assets upon liquidation, dissolution or winding up, if such stock shall be Common Stock, Preferred Stock or if the holders of the Series A 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. (10) Exclusion of Other Rights. Unless otherwise required by law, shares of the Series A 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. (11) 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. 23 (12) Change in Number of Shares. As provided in this Certificate of Incorporation but subject to applicable law, the Board of Directors may increase or decrease the number of shares of this series of Preferred Stock subsequent to the issue of shares of this series, but not below the number of shares of the Series A Senior Preferred Stock then outstanding. (d) The Board of Directors pursuant to the authority expressly vested in this Article Fourth, and pursuant to the provisions of the General Corporation Law of the State of Delaware has by resolution fixed the voting powers, designation, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof of the following series of Senior Preferred Stock: Fixed Rate Noncumulative Perpetual Senior Preferred Stock, Series C 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 C ("Series C Senior Preferred Stock"). The number of authorized shares constituting the Series C Senior Preferred Stock is 1,500,000. The shares of the Series C Senior Preferred Stock shall have a stated value of $100.00 per share. 2. Voting Rights. The Series C 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 C 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 C 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 this Certificate of Incorporation or of any other certificate amendatory of or supplemental to this Certificate of Incorporation (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 Company ("Junior Preferred Stock")) or of the By-laws of the Company which would adversely affect the preferences, rights, powers or privileges of the Series C 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 C 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 C 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 C 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 24 the creation, authorization or issue of any shares of any class of stock of the Corporation ranking prior to the shares of the Series C Senior Preferred Stock as to dividends or upon liquidation, or the reclassification of any authorized stock of the Company 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 Company, a default in preference dividends on the Series C Senior Preferred Stock or any other class or series of Noncumulative Senior Preferred Stock ranking on a parity with the Series C 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 C 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 C 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 Company to fill such newly created directorships. Each director elected by the holders of shares of Series C 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 Company 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 C Senior Preferred Stock and Voting Noncumulative Senior Preferred Stock entitled to have originally voted for such director's election, voting together as a single class without regard to class or series, at a meeting of the Company's stockholders, or of the holders of shares of Series C 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 C 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 (except as provided in the following clause (B)) by an instrument in writing signed by the remaining Preferred Director and filed with the Company 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 C 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 25 Series C 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 C 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 C 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). 3. Preferences. The Series C Senior Preferred Stock will be fixed rate noncumulative perpetual (i.e., will be redeemable, if at all, solely at the option of the Company) 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 C Senior Preferred Stock shall be entitled to receive cash dividends thereon at a rate per annum of 6.687%, 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 Company 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 "Series C Dividend Payment Date"), commencing August 15, 1997. Each such dividend shall be paid to the holders of record of shares of Series C Senior Preferred Stock as they appear on the stock register of the Company 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 C Senior Preferred Stock shall be noncumulative. Accordingly, if the Board fails to declare a dividend on the Series C Senior Preferred Stock payable on a Dividend Payment Date, then holders of Series C Senior Preferred Stock will have no right to receive a dividend in respect of the dividend period ending on such Series C Dividend Payment Date, and the Company will have no obligation to pay dividends accrued for such period, whether or not dividends on the Series C Senior Preferred Stock are declared payable on any future Series C 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 declared) per share of the Series C 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): 26 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 Company 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 C Senior Preferred Stock, then any such amendment shall not result in the adjustment provided for pursuant to the DRD Formula. The Company'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 Company, 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 Series C Dividend Payment Date has been declared but before such dividend has been paid, the amount of dividends payable on such Series C 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 Company on such Series C 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 Company on such Series C Dividend Payment Date, will be payable (if declared) on the next succeeding Series C Dividend Payment Date to holders of Series C Senior Preferred Stock on the record date applicable to such succeeding Series C Dividend Payment Date, in addition to any other amounts payable on such Series C 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 Series C Dividend Payment Date as to which the Corporation previously paid dividends on shares of Series C Senior Preferred Stock (each an "Affected Series C Dividend Payment Date"), the Company will pay (if declared) additional dividends (the "Retroactive Dividends") on the next succeeding Series C Dividend Payment Date (or if such amendment is enacted after the dividend payable on such Series C Dividend Payment Date has been declared, on the second succeeding Series C Dividend Payment Date following the date of enactment), to holders of Series C Senior Preferred Stock on the record date applicable to such succeeding Series C Dividend Payment Date, in an amount equal to the excess, if any, of (x) the product of the dividends paid by the Company 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 Series C Dividend Payment Date) over (y) the dividends paid by the Company on each Affected Series C Dividend Payment Date. 27 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 Company having received either an opinion of counsel or tax ruling referred to in the third preceding paragraph. The Company will only make one payment of Retroactive Dividends. In the event that the amount of dividends payable per share of Series C Senior Preferred Stock shall be adjusted pursuant to the DRD Formula and/or Retroactive Dividends are to be paid, the Company 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 C Senior Preferred Stock at such holder's address as the same appears on the stock register of the Company. (c) So long as any shares of Series C 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 C Senior Preferred Stock as to dividends and upon liquidation and other than as provided in subsection (c) 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 C Senior Preferred Stock as to dividends or upon liquidation, nor shall any Common Stock, Junior Preferred Stock or other stock of the Company ranking junior to or on a parity with the Series C 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 Company (except by conversion into or exchange for stock of the Company ranking junior to the Series C Senior Preferred Stock as to dividends and upon liquidation) unless, in each case, the full dividends on all outstanding shares of the Series C 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). (d) When dividends are not paid or declared and set aside for payment in full, as aforesaid, upon the shares of Series C Senior Preferred Stock and any other Senior Preferred Stock ranking on a parity as to dividends with the Series C Senior Preferred Stock, all dividends declared upon shares of Series C Senior Preferred Stock and any other class or series of Senior Preferred Stock ranking on a parity as to dividends with the Series C Senior Preferred Stock shall be declared pro rata so that the amount of dividends declared per share on the Series C 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 C 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 other. Holders of shares of Series C 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 C Senior Preferred Stock. 28 5. Redemption. (a) The shares of Series C Senior Preferred Stock shall not be redeemable prior to August 15, 2007. On and after August 15, 2007, the Company, at its option, may redeem shares of the Series C 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 and Retroactive Dividends to the date fixed for redemption. In the event that fewer than all the outstanding shares of Series C 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 C Senior Preferred Stock, no shares of Series C Senior Preferred Stock shall be redeemed unless all outstanding shares of Series C Senior Preferred Stock are simultaneously redeemed, and the Company shall not purchase or otherwise acquire any shares of Series C Senior Preferred Stock; provided, however, that the foregoing shall not prevent the purchase or acquisition of shares of Series C Senior Preferred Stock pursuant to a tender or exchange offer made on the same terms to all holders of Series C 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 Company; provided, further, that if some, but less than all, of the shares of the Series C 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 Company, the shares of the Series C Senior Preferred Stock tendered will be purchased or otherwise acquired by the Company 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 C Senior Preferred Stock. (c) In the event the Company shall redeem shares of Series C Senior Preferred Stock pursuant to subsection (a) of this Section 5, notice of such redemption shall be 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 Company. Each such notice shall state: (i) the redemption date; (ii) the number of shares of Series C 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 Company in providing funds for the payment of 29 the redemption price) dividends on the shares of Series C 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 Company (except the right to receive from the Company 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 Company 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 Company gives notice of redemption, then, by 12:00 Noon, Chicago time, on the redemption date, the Company shall irrevocably deposit with a paying agent (which may be an affiliate of the Company) (the "the Series C 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 Series C Paying Agent irrevocable instructions and authority to pay the redemption price to the holder or holders of record of the shares of Series C 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 Company shall be entitled to receive, from time to time, from the Series C Paying Agent, the interest, if any, earned on such funds deposited with the Series C 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 Company, after which the holders of the shares of Series C Senior Preferred Stock so called for redemption shall be entitled to look only to the Company for payment thereof. 6. Liquidation Preference. (a) Upon the dissolution, liquidation or winding up of the Company, voluntary or involuntary, the holders of the shares of Series C Senior Preferred Stock shall be entitled to receive and be paid out of the assets of the Company 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 C 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 Company nor the merger or consolidation of the Company into or with any other corporation or the merger or consolidation of any other corporation into or with the 30 Company, 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 C Senior Preferred Stock of the full preferential amounts provided for in this Section 6, the holders of the shares of Series C Senior Preferred Stock, as such, shall have no right or claim to any of the remaining assets of the Company. (d) In the event the assets of the Company available for distribution to the holders of the shares of Series C Senior Preferred Stock upon any dissolution, liquidation or winding up of the Company, 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 C Senior Preferred Stock upon such dissolution, liquidation or winding up, unless proportionate distributive amounts shall be paid on account of the shares of Series C 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 C 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 Company. 8. Priority as to Certain Distributions. As a series of Senior Preferred Stock, the shares of the Series C Senior Preferred Stock shall be entitled to such rights and priorities, and subject to such limitations, as to dividends as are set forth in the resolutions designating the Series C Senior Preferred Stock and in this Certificate of Incorporation. 9. Sinking Fund. No sinking fund shall be provided for the purchase or redemption of shares of the Series C Senior Preferred Stock. 10. Ranking. Without limitation to any provision set forth in these resolutions or in this Certificate of Incorporation, it is hereby confirmed and expressly declared that the Series C 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 Company shall be deemed to rank: (a) prior to the Series C 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 C Senior Preferred Stock; 31 (b) on a parity with the Series C 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 C Senior Preferred Stock, if the holders of such class or series of stock and of the Series C 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 C Senior Preferred Stock; and (c) junior to the Series C 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 C 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 C 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 this Certificate of Incorporation, but subject to applicable law, the Board of Directors may 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 C Senior Preferred Stock then outstanding. The 1,500,000 shares of Series C Senior Preferred Stock authorized for issuance pursuant to resolutions of the Board of Directors all constitute Senior Preferred Stock within the 20,000,000 shares originally authorized pursuant to resolutions of the Board of Directors. FIFTH: The existence of the Company is to be perpetual. SIXTH: The private property of the stockholders shall not be subject to the payment of corporate debts to any extent whatever. SEVENTH: Except as otherwise provided for or fixed pursuant to the provisions of Article Fourth of this Certificate of Incorporation relating to the rights of the holders of a series of the Senior Preferred Stock to elect additional directors, the number of directors of the Company shall be fixed and may be altered from time to time as may be provided in 32 the By-laws. In case of any increase in the number of directors, the additional directors may be elected by the directors, or by the stockholders, at an annual or special meeting. EIGHTH: In furtherance, and not in limitation of the powers conferred by statute, the Board of Directors are expressly authorized: (a) To fix, determine and vary from time to time the amount to be maintained as surplus and the amount or amounts to be set apart as working capital. (b) Subject to Article FIFTEENTH hereof, to make, alter, amend or repeal By-laws for the Company without any action on the part of the stockholders. (c) To designate two or more directors to constitute an executive committee, which committee shall have and exercise (except when the Board of Directors shall be in session and except as otherwise provided under the law of the State of Delaware, this Certificate of Incorporation or the By-laws of the Company) such powers and rights of the full Board of Directors in the management of the business and affairs of the Company as may be lawfully delegated, and shall have power to authorize the seal of the Company to be affixed to all papers which may require it. (d) If the By-laws of the Company shall so provide, the stockholders and directors shall have power to hold their meetings either within or without the State of Delaware, and to have one or more offices outside of the State of Delaware, and to keep the books and records of the Company outside the State of Delaware, and at such place or places as may from time to time be designated by the Board of Directors. (e) To authorize and cause to be executed mortgages and liens without limit as to amount, upon the real and personal property of the Company. (f) From time to time to determine whether and to what extent, and at what time and place and under what conditions and regulations the accounts and books of the Company, or any of them, shall be open to the inspection of the stockholders; and no stockholder shall have any right to inspect any account or book or document of the Company except as conferred by statute or the By-laws or as authorized by a resolution of the directors or stockholders. (g) To sell, assign, transfer, convey and otherwise dispose of a part of the property, assets and effects of the Company, less than the whole or substantially the whole thereof, on such terms and conditions as they shall deem advisable, without the assent of the stockholders in writing or otherwise; and also to sell, assign, transfer, convey and otherwise dispose of the whole, or substantially the whole, of the property, assets, effects, franchises, and goodwill of the Company on such terms and conditions as they shall deem advisable but only with the assent in writing, or pursuant to the vote, of the holders at least 66-2/3% of the total voting power of all outstanding Common Stock, but in any event not less than the amount required by law. 33 (h) All of the powers of the Company, insofar as the same lawfully may be vested by this Certificate in the directors, are hereby conferred upon the said directors of the Company. NINTH: The Company may in its By-laws fix the number (not less than the number required by law or in this Certificate of Incorporation) of shares (or votes thereof), the holders of which must consent to, or which must be voted in favor of, any specific act or acts by the Company, or its Board of Directors, and during the period for which such number remains so fixed, such specified act or acts shall not and may not be performed or carried out by the Company, or its Board of Directors without the consent or affirmative vote of the holders of at least the number of shares (or votes thereof) so fixed. TENTH: Subject to Article SIXTEENTH hereof and to the law of the State of Delaware, in the absence of fraud, no contract or transaction between the Company and any other corporation shall be affected by the fact that the directors of the Company are interested in or are directors or officers of such other corporation, and any director individually may be a party to, or may be interested in any such contract or transaction of the Company; and no such contract or transaction of the Company with any person or persons, firm or association, shall be affected by the fact that any director of this Company is a party to, or interested in such contract or transaction, or in any way connected with such person or persons, firm or association, provided that the interest in any such contract or transaction of any such director shall be fully disclosed, and that such contract or other transaction shall be authorized or ratified by the vote of a sufficient number of the directors of the Company not so interested; and each and every person who may become a director in the Company is hereby relieved from any liability that might otherwise exist from thus contracting with the Company for the benefit of himself or any firm, association, or corporation in which he may be in anyway interested. ELEVENTH: The Company may in its Bylaws make any other provisions or requirements for the management or conduct of the business of the Company, provided the same be not inconsistent with the provisions of this Certificate of Incorporation, or contrary to the laws of the State of Delaware, or the United States. TWELFTH: Subject to any rights of holders of Preferred Stock and Senior Preferred Stock of the Company and to the law of the State of Delaware, if one or more vacancies occur in the Board of Directors by reason of death, resignation, expansion of the Board of Directors or otherwise, except insofar as otherwise provided in the case of a vacancy or vacancies occurring by reason of removal by the stockholders, the remaining directors, although less than a quorum, or the sole remaining director, may elect, by a majority vote (if there be more than one remaining director), a successor or successors for the unexpired term or terms, and, except as otherwise provided by law, any such vacancy may not be filled by the stockholders of the Company. THIRTEENTH: A special meeting of stockholders may be called at any time by (i) the Chairman of the Board, the Vice Chairman or the President or (ii) the Secretary at the request of a majority of the total number of members of the Board of Directors. Any action required or permitted to be taken at any annual or special meeting of stockholders may be taken without a meeting, without prior notice and without a vote, if a consent in writing, 34 setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing and who, if the action had been taken at a meeting would have been entitled to notice of the meeting if the record date for such meeting had been the date that written consents signed by a sufficient number of holders to take the action were delivered to the Company. Such written consent shall be filed with the records of the Company. Notwithstanding the foregoing, however, on and after the date on which neither Fuji Bank and/or its subsidiaries nor any Class B Transferee (and/or its subsidiaries) continues to beneficially own a majority of the total voting power of all outstanding classes of Common Stock of the Company, voting together as a single class, any corporate action required or permitted to be taken at any annual meeting of stockholders or special meeting of stockholders may taken only at a duly called annual meeting of stockholders or special meeting of stockholders and may not be taken by written consent of the stockholders in lieu of a meeting. FOURTEENTH: No director of the Company shall be personally liable to the Company or to its stockholders for monetary damages arising out of or resulting from any breach of his fiduciary duty as a director; provided, however, that this Article FOURTEENTH shall not apply in any case where such liability arises out of or results from: (a) the breach by such director of his duty of loyalty to the Company or to its stockholders; (b) any act or omission of such director not in good faith or which involves intentional misconduct or a knowing violation of the law; (c) any transaction from which such director derives an improper personal benefit; or (d) any payment of a dividend or any purchase or redemption of the capital stock of the Company in violation of the provisions of Section 174 of the General Corporation Law of the State of Delaware (the "DGCL"). If the DGCL is amended to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the Company existing at the time of such elimination or limitation, in addition to the limitation on personal liability herein, shall be eliminated or limited to the fullest extent of the DGCL. Any repeal or modification of this Article FOURTEENTH by the stockholders of the Company shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director of the Company at the time of such repeal or modification. This Article FOURTEENTH shall be effective as of, and shall apply to any act, omission or transaction of any director of the Company occurring on or after, July 1, 1986. FIFTEENTH: The Company reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation in the manner now or hereafter prescribed by statute and all rights conferred on officers, directors and stockholders herein are granted subject to this reservation. Notwithstanding any provisions herein to the contrary and subject to the rights of any holders of Preferred Stock and Senior Preferred Stock, (1) the affirmative vote of the holders of at least 66-2/3% of the total voting power of all classes of outstanding Common Stock entitled to vote generally in the election of directors, voting together as a single class, shall be required to amend, repeal or adopt any provision of this Certificate of Incorporation inconsistent with Article TWELFTH or THIRTEENTH hereof or this Article FIFTEENTH, and (2) the By-laws of the Company may be adopted, amended or repealed by the affirmative vote of the members of the Board 35 of Directors of the Company constituting not less than a majority of the entire Board of Directors or by the vote of the holders of at least 66-2/3% of the total voting power of all outstanding Common Stock, voting together as a single class. SIXTEENTH: (a) In anticipation that Fuji Bank will remain a substantial stockholder of the Company and in anticipation that the Company and Fuji Bank may engage in the same or similar activities or lines of business and have an interest in the same areas of corporate opportunities, and in recognition of the benefits to be derived by the Company through its continued contractual, corporate and business relations with Fuji Bank (including possible service of directors and officers and other employees of Fuji Bank as directors or officers or other employees of the Company), the provisions of this Article Sixteenth are set forth to regulate and define the conduct of certain affairs of the Company as they may involve Fuji Bank and its directors and officers and other employees, and the powers, rights, duties and liabilities of this Company and its directors, officers and other employees and stockholders in connection therewith. (b) Fuji Bank shall have no duty to refrain from engaging in the same or similar activities or lines of business as the Company, and neither Fuji Bank nor any director or officer or other employee thereof (except as provided in subsection (c) below) shall be liable to the Company or its stockholders for breach of any fiduciary duty by reason of any such activities of Fuji Bank. In the event that Fuji Bank acquires knowledge of a potential transaction or matter which may be a corporate opportunity for both Fuji Bank and the Company, Fuji Bank shall have no duty to communicate or offer such corporate opportunity to the Company and shall not be liable to the Company or its stockholders for breach of any fiduciary duty as a stockholder of the Company by reason of the fact that Fuji Bank pursues or acquires such corporate opportunity for itself, directs such corporate opportunity to another person or does not communicate information regarding such corporate opportunity to the Company. (c) In the event that a director or officer or other employee of the Company who is also a director or officer or other employee of Fuji Bank acquires knowledge of a potential transaction or matter which may be a corporate opportunity for both the Company and Fuji Bank, such director or officer or other employee of the Company shall have fully satisfied and fulfilled his fiduciary duty to the Company and its stockholders with respect to such corporate opportunity, if such person acts in a manner consistent with the following policy: (1) a corporate opportunity offered to any person who is an officer or employee of the Company, and who is also a director but not an officer or employee of Fuji Bank, shall belong to the Company; (2) a corporate opportunity offered to any person who is a director but not an officer or employee of the Company, and who is also a director or officer or other employee of Fuji Bank shall belong to the Company if such opportunity is expressly offered to such person in writing solely in his capacity as a director of the Company, and otherwise shall belong to Fuji Bank; and (3) a corporate opportunity offered to any person who is an officer or other employee of both the Company and Fuji Bank, or an officer of one and a non-officer employee of the other, shall belong to the Company if such opportunity is expressly offered to such person in writing solely in his capacity as an officer or employee of the Company, and otherwise shall belong to Fuji Bank. 36 (d) For purposes of this Article SIXTEENTH only: (1) A director of the Company who is Chairman of the Board of Directors of the Company or of a committee thereof shall not be deemed to be an officer or employee of the Company by reason of holding such position (without regard to whether such position is deemed an officer of the Company under the By-Laws of the Company), unless such person is a full-time employee of the Company; and (2)(i) The term "Company" shall mean the Company and all corporations, partnerships, joint ventures, associations and other entities which are controlled by the Company (directly or indirectly) through the ownership of the outstanding voting power of such corporation, partnership, joint venture, association or other entity or otherwise and (ii) the term "Fuji Bank" shall mean Fuji Bank and all corporations, partnerships, joint ventures, associations and other entities (other than the Company, defined in accordance with the foregoing subsection (i)) which are controlled by Fuji Bank (directly or indirectly) through the ownership of the outstanding voting power of such corporation, partnership, joint venture, association or other entity or otherwise. (e) Notwithstanding anything in this Certificate of Incorporation to the contrary, the foregoing provisions of this Article SIXTEENTH shall expire on the date that Fuji Bank ceases to own beneficially Common Stock representing at least 30% of the total voting power of all classes of outstanding Common Stock of the Company and no person who is a director or officer or other employee of the Company is also a director or officer or other employee of Fuji Bank. Neither the alteration, amendment or repeal of this Article SIXTEENTH nor the adoption of any provision of this Certificate of Incorporation inconsistent with this Article shall eliminate or reduce the effect of this Article in respect of any matter occurring, or any cause of action, suit or claim that, but for this Article SIXTEENTH, would accrue or arise, prior to such alteration, amendment, repeal or adoption. [signature page follows] 37 IN WITNESS WHEREOF, Heller Financial, Inc. has caused this Amended and Restated Certificate of Incorporation to be signed by its Executive Vice President and attested by its Assistant Secretary and has caused its corporate seal to be hereunto affixed, this __ day of April, 1998. HELLER FINANCIAL, INC. Seal By: ----------------------------- Name: --------------------------- Title: -------------------------- Attest: - ----------------------------- Assistant Secretary 38 EX-3.2 4 AMENDED & RESTATED BY-LAWS EXHIBIT 3.2 ================================================================================ AMENDED AND RESTATED BY-LAWS OF HELLER FINANCIAL, INC. (a Delaware corporation) ADOPTED: ________, 1998 ================================================================================ BY-LAWS OF HELLER FINANCIAL, INC. ---------------------- ARTICLE I: IDENTIFICATION; OFFICES Section 1.01. Name. The name of the corporation is Heller Financial, Inc. (the "Corporation"). Section 1.02. Registered Office; Other Offices; Books and Records. The registered office of the Corporation in the State of Delaware shall be established and maintained at the office of The Corporation Trust Company in the City of Wilmington, County of New Castle, and The Corporation Trust Company shall be the Registered Agent of the Corporation in charge thereof. The Corporation may have such other offices at such other place or places, within or without the State of Delaware, as the business of the Corporation may from time to time require. The books and records of the Corporation may be kept (subject to the provisions of the laws of the State of Delaware) at any place, either inside or outside of the State of Delaware, as from time to time may be determined by the Board of Directors or as may be required for the conducting of business by the Corporation. ARTICLE II: MEETINGS OF STOCKHOLDERS Section 2.01. Date, Place and Time of Annual Meetings. An annual meeting of the stockholders of the Corporation (an "Annual Meeting of Stockholders") for the purpose of electing directors and for the transaction of such other business as may properly be brought before such meeting shall be held on the date during the month of May of each year, or on a date during such other month, and at the time and place, within or outside the State of Delaware, designated by the Chairman of the Board of Directors by notice to the Stockholders entitled to vote. In the event the Chairman of the Board fails to so designate, the Annual Meeting of Stockholders shall be held on the first Wednesday of May of each year, at the principal business office of the Corporation at the hour of 9:00 a.m., unless that date is a legal holiday, in which event the Annual Meeting of Stockholders shall be held on the next succeeding day not a legal holiday. The Chairman of the Board may, upon notice to the stockholders pursuant to Section 2.04, change the date to a different date, along with the place and time of the Annual Meeting of Stockholders. Section 2.02. Special Meetings of Stockholders. A special meeting of stockholders (a "Special Meeting of Stockholders") may be called at any time by (i) the Chairman of the Board, the Vice Chairman or the President or (ii) by the Secretary at the request of a majority of the total number of members of the Board of Directors. Section 2.03. Place of Special Meetings of Stockholders. A Special Meeting of Stockholders shall be held at such place, within or outside the State of Delaware, as may be fixed from time to time by the person or persons calling such meetings, or, if not so fixed, at the principal business office of the Corporation in the State of Illinois. Section 2.04. Notice of Meetings. a. Except as otherwise permitted by statute, written notice stating the place, date and hour of each Annual or Special Meeting of Stockholders shall be given personally or by first-class mail (airmail in the case of international communications) or by courier, telecopy or other electronic transmission to each stockholder entitled to vote thereat, not less than 10 and not more than 60 days prior to the meeting. The notice of any Special Meeting of Stockholders shall also state the purpose or purposes for which the meeting is called and indicate that it is being issued by or upon the request of the person or persons calling the meeting. Such notice is given, if mailed, when deposited in the United States mail, postage prepaid, and if by courier, telecopy or other electronic transmission, when delivered, to the stockholder at his address as it appears on the records of the Corporation or of its stock transfer agent. b. Notice of a Special Meeting of Stockholders may be given by the person or persons calling the meeting, or upon the written request of such person or persons, such notice shall be given by the Secretary on behalf of such person or persons. If the person or persons calling a Special Meeting of Stockholders give notice thereof, they shall forward a copy thereof to the Secretary. Every request to the Secretary for the giving of notice of a Special Meeting of Stockholders shall state the purpose or purposes of such meeting. c. (1) Nominations of persons for election to the Board of Directors and the proposal of business to be considered by the stockholders may be made at an Annual Meeting of Stockholders (x) pursuant to the Corporation's notice of meeting delivered pursuant to this Section 2.04, (y) by or at the direction of the Board of Directors or (z) by any stockholder of the Corporation who is entitled to vote at the meeting who has complied with the notice procedures set forth in this Article II and who was a stockholder of record at the time such notice was delivered to the Secretary of the Corporation. (2) For nominations or other business to be properly brought before an Annual Meeting of Stockholders by a stockholder pursuant to Section 2.04(c)(1)(z), the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and such business must be a proper subject for stockholder action under the Delaware General Corporation Law. To be timely, a stockholder's notice must be delivered to the Secretary at the principal executive office of the Corporation not less than 90 days prior to the first anniversary of the date of the preceding year's Annual Meeting of Stockholders; provided, however, that in the event that the date of the Annual Meeting of Stockholders is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the stockholder, to be timely, must be so delivered not later than the close of business on the later of the 60th day prior to such Annual Meeting of Stockholders or the 10th day following the day on which public announcement of the date of such meeting is first made. Notwithstanding the foregoing, in the event that the number of directors to be elected to the Board of Directors is increased and the names of all of the nominees for director position are not disclosed by a public announcement by the Corporation at least 70 days prior to the date of the first anniversary of the date of the preceding year's Annual Meeting of Stockholders, a stockholder's notice pursuant to this Section shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to, or 2 mailed and received by, the Secretary not later than the close of business on the 10th day following the day on which such names have been first disclosed by a public announcement by the Corporation. Such stockholder's notice shall set forth (A) as to each person to whom the stockholder proposes to nominate for election or re-election as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected) pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise; (B) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (C) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made, (i) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner, and (ii) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. If the stockholder or beneficial owner intends to solicit proxies in support of any such nomination or proposal, such stockholder's notice shall also include a representation to that effect. (3) Nominations of persons for election to the Board of Directors may be made at a Special Meeting of Stockholders at which directors are to be elected pursuant to the Corporation's notice of meeting (x) by or at the direction of the Board of Directors or (y) by any stockholder of the Corporation who is entitled to vote at the meeting, who complies with the notice procedures set forth in this subsection (3) and who is a stockholder of record at the time such notice is delivered to the Secretary of the Corporation. Nominations by stockholders of persons for election to the Board of Directors may be made at such a Special Meeting of Stockholders if the stockholder's notice required by Section 2.04(c)(2) shall be delivered to the Secretary at the principal executive office of the Corporation later than the close of business on the later of the 60th day prior to such Special Meeting of Stockholders or the 10th day following the day on which public announcement is first made of the date of the Special Meeting of Stockholders and of the nominees proposed by the Board of Directors to be elected at such meeting. (4) Except as otherwise set forth in Section 3.06, only persons who are nominated in accordance with the procedures set forth in this Section 2.04 shall be eligible to serves as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 2.04. Except as otherwise provided by law, the Certificate of Incorporation, as amended from time to time, of the Corporation (the "Certificate of Incorporation"), or these By-Laws, the Chairman of the Board shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with this Section 2.04 and, if any proposed nomination or business is not in compliance with this Section 2.04, or if a stockholder or beneficial owner solicits proxies in support of a nomination or proposal without having made the representation require in Section 2.04(c)(2), to declare that such proposal or nomination shall be disregarded. 3 (5) For purposes of this Section 2.04, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (6) Notwithstanding the foregoing provisions of this Section 3, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 2.04. Nothing in this Section 2.04 shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. Section 2.05. Adjournments. When a meeting is adjourned to another date, hour or place, notice need not be given of the adjourned meeting if the date, hour and place thereof are announced at the meeting at which the adjournment is taken. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the adjourned meeting. At the adjourned meeting any business may be transacted which might have been transacted at the original meeting. Section 2.06. Waiver of Notice. Notice of meeting need not be given to any stockholder who submits a written waiver of notice, signed in person or by proxy, whether before or after the meeting. Neither the business to be transacted at, nor the purpose of, any meeting of stockholders need be specified in any written waiver of notice. Attendance of a stockholder at a meeting, in person or by proxy, shall constitute a waiver of notice of such meeting, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of such meeting, to the transaction of any business because the meeting is not lawfully called or convened. Section 2.07. Quorum. At all meetings of stockholders, except as otherwise required by statute, the presence of holders of a majority of the shares entitled to vote thereat, present in person or by proxy, shall be requisite and constitute a quorum for the transaction of business. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat may adjourn such meeting from time to time in accordance with Section 2.05 of these By-laws until the number of votes requisite to constitute a quorum shall be present. Section 2.08. Vote of Stockholders. When a quorum is present or represented at any meeting, the vote of the holders of a majority of the outstanding voting power of the shares issued and outstanding and entitled to vote thereat in person or by proxy shall decide any question brought before such meeting, unless the question is one upon which a vote of a different percentage is required by statute, these By-laws or the Certificate of Incorporation, as amended from time to time, of the Corporation, in which case the vote of such different percentage shall be required. Each stockholder of record on the applicable record date shall be entitled at every meeting of stockholders to one vote for every share (unless the Certificate of Incorporation shall provide for a greater number of votes for such 4 share) standing in his name on the record of stockholders. Voting at meetings of stockholders need not be by written ballot, unless the holders of a majority of the shares entitled to vote thereat shall so determine. Section 2.09. Proxies. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by proxy. Every proxy must be in writing and signed by the stockholder or his attorney-in-fact. No proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A duly executed proxy shall be irrevocable for the period stated therein if the proxy states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may remain irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the Corporation generally. Section 2.10. Action Without a Meeting. Any action required or permitted to be taken at any Annual or Special Meeting of Stockholders may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing and who, if the action had been taken at a meeting would have been entitled to notice of the meeting if the record date for such meeting had been the date that written consents signed by a sufficient number of holders to take the action were delivered to the Corporation. Such written consent shall be filed with the records of the Corporation. Notwithstanding the foregoing, however, on and after the date on which neither The Fuji Bank, Limited and/or its subsidiaries ("Fuji Bank") nor any one person or entity (and/or its subsidiaries) unaffiliated to Fuji Bank to whom shares of Class B Common Stock of the Corporation representing more than a 50% voting interest in the then outstanding shares of Common Stock of the Corporation taken as a whole continues to beneficially own a majority of the total voting power of all outstanding classes of Common Stock of the Corporation, voting together as a single class, any corporate action required or permitted to be taken at any Annual Meeting of Stockholders or Special Meeting of Stockholders may taken only at a duly called Annual Meeting of Stockholders or Special Meeting of Stockholders and may not be taken by written consent of the stockholders in lieu of a meeting. Section 2.11. Chairman and Secretary of the Meeting. Meetings of the stockholders shall be presided over by the Chairman of the Board or, if the Chairman of the Board is not present, any officer of the Corporation designated by the Chairman to act as chairman or, if the Chairman of the Board is not present and has not designated a chairman, by a chairman to be chosen at the meeting. The Secretary of the Corporation or, in his or her absence, any person appointed by the chairman of the meeting, shall act as secretary of the meeting and shall keep the minutes thereof. The order of business at all meetings of the stockholders and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion, shall be as determined by the chairman of the meeting. 5 Section 2.12. Record Date. For the purpose of determining the stockholders entitled to notice of or to vote any Annual Meeting of Stockholders or Special Meeting of Stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or for the purpose of determining stockholders entitled to receive payment of any dividend or other distribution or the allotment of any rights, or for the purpose of any other action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than 60 nor less than 10 days before the date of any such meeting and shall not be more than 60 days prior to any other action. A determination of stockholders of record entitled to notice of, or to vote at, a meeting of stockholders shall apply to any adjournment of the meeting, provided, however, that the Board of Directors may fix a new record date for any adjourned meeting. Section 2.13. List of Stockholders. For a period of at least 10 days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting arranged in alphabetical order for each class of stock, and showing their addresses and their record holdings as of the record date shall be open for examination by any stockholder, for any purpose germane to the meeting, during ordinary business hours, at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list also shall be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. The list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares hold by each of them. Section 2.14. Ratification. Any transaction questioned in any stockholders derivative suit, or any other suit to enforce alleged rights of the Corporation or any of its stockholders, on the ground of lack of authority, defective or irregular execution, adverse interest of any director, officer or stockholder, nondisclosure, miscomputation or the application of improper principles or practices of accounting may be approved, ratified and confirmed before or after judgment by the Board of Directors or by the holders of Common Stock, voting as provided in the Certificate of Incorporation, and, if so approved, ratified or confirmed, shall have the same force and effect as if the questioned transaction had been originally duly authorized, and said approval, ratification or confirmation shall be binding upon the Corporation and all of its stockholders and shall constitute a bar to any claim or execution of any judgment in respect of such questioned transaction. Section 2.15. Inspectors. The Board of Directors may, and to the extent required by law shall, in advance of any Annual Meeting of Stockholders or Special Meeting of Stockholders, appoint one or more inspectors to act at the meeting, decide upon the qualification of voters, count the votes, decide the results and make a written report thereof. The Board of Directors may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at an Annual Meeting of Stockholders or a Special Meeting of Stockholders, the chairman of the meeting may, and to the extent required by law shall, appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the 6 discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. Section 2.16. Conducting Meetings. Meetings of the stockholders shall be conducted in a fair manner but need not be governed by any prescribed rules of order. The presiding officer of the meeting shall establish an agenda for the meeting. The presiding officer's ruling on procedural matters shall be final. The presiding officer is authorized to impose reasonable time limits on the remarks of individual stockholders and may take such steps as such officer may deem necessary or appropriate to assure that the business of the meeting is conducted in a fair and orderly manner. ARTICLE III: BOARD OF DIRECTORS Section 3.01. Powers. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors, which may exercise all the powers of the Corporation and do all lawful acts and things which are not expressly reserved to the stockholders by law, by the Certificate of Incorporation or by these By-laws. Section 3.02. Number and Term of Office. Except as hereinafter provided, directors shall be elected at the Annual Meeting of the Stockholders; each director so elected shall serve for one year and until his successor is elected and qualified. Subject to the rights of holders of Preferred Stock or Senior Preferred Stock (each as defined in the Certificate of Incorporation) of the Corporation, the number of directors shall be not less than eight (8) nor more than sixteen (16), the exact number from time to time to be established by the Board of Directors by resolution. Section 3.03. Election. At each meeting of the stockholders for the election of directors, at which a quorum is present, the persons receiving a plurality of the votes cast by the holders of shares entitled to vote in the election shall be elected as directors. Section 3.04. Resignation. Any director may at any time resign from the Board of Directors by delivering a written notice to the Board of Directors, the Chairman of the Board, the President or the Secretary. Such resignation shall take effect at the time specified therein, or, if not so specified, upon receipt of such notice by the Board of Directors, the Chairman of the Board, the President or the Secretary. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 3.05. Removal. Any director or directors may be removed, with or without cause, by vote of the holders of a majority of the voting power of the shares then entitled to vote at an election of directors at any Special Meeting of the Stockholders or without a meeting pursuant to Section 2.10. Section 3.06. Vacancies. Subject to any rights of holders of Preferred Stock or Senior Preferred Stock of the Corporation, if one or more vacancies occur in the Board of Directors by reason of death, resignation, expansion of the Board of Directors or otherwise, except insofar as otherwise provided by statute in the case of a vacancy or vacancies occurring by reason of removal by the stockholders, the remaining directors, although 7 less than a quorum, or the sole remaining director, may elect, by a majority vote (if there be more than one remaining director), a successor or successors for the unexpired term or terms. Section 3.07. Annual Meetings. A newly elected Board of Directors shall meet in order to organize, to designate the Chairman of the Board, to elect officers and to transact such other business as may properly come before it. Such annual meeting of the Board of Directors may be held without notice if it shall be held on or within two business days following the day fixed for the Annual Meeting of Stockholders. If such annual meeting of the Board of Directors shall not be held at such date, hour and place, it shall be held whenever called by the Chairman of the Board or by any two directors at such place, within or without the State of Delaware, and at such time as shall be determined by the person or persons calling such meeting. Section 3.08. Regular Meetings. a. Board of Directors. Regular meetings of the Board of Directors shall, unless otherwise specified by written notice to each director, be held at the office of the Corporation in Chicago, Illinois on such dates as the Chairman of the Board shall establish by promulgation of the corporate calendar and amendments thereto. b. Executive Committee. Regular meetings of the Executive Committee of the Board of Directors shall be held at the office of the Corporation in Chicago, Illinois, on such dates as the Chairman of the Board of the Executive Committee may establish by notice to the members of the Executive Committee or as the Chairman of the Board may establish by promulgation of the corporate calendar. Section 3.09. Special Meetings. a. Board of Directors. Special meetings of the Board of Directors shall be held whenever called by the Chairman of the Board, by the President or by any two directors at such place, within or without the State of Delaware, and at such time as shall be determined by the person or persons calling such meeting. b. Executive Committee. Special meetings of the Executive Committee of the Board of Directors shall be held whenever called by the Chairman of the Executive Committee or by any two directors who are members of the Executive Committee at such place, within or without the State of Delaware, and at such time as shall be determined by the person or persons calling such meeting. Section 3.10. Notice of Certain Annual and Special Meetings. Notice of any special meeting and of any annual meeting of the Board of Directors which does not take place within two business days after the day fixed for the Annual Meeting of Stockholders shall be given by first-class mail (airmail in the case of international communications) to each director, addressed to him at his residence or usual place of business, not later than the fifth day before the day on which such meeting is to be held, or shall be sent to him at such place by overnight courier or telecopy, or be delivered personally or by telephone, not later than the third day before the day on which such meeting is to be held. Such 8 notice shall state the place, date and hour of the meeting, and promulgation and delivery of the corporate calendar shall constitute notice to the directors hereunder. Section 3.11. Waiver of Notice. Notice of a meeting need not be given to any director who submits a written waiver of such notice, signed by him, whether before or after such meeting. Neither the business to be transacted at, nor the purpose of, any meeting of the directors need be specified in any notice or any written waiver of notice with respect to such meeting. Attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except when the director attends such meeting for the express purpose of objecting, at the beginning of such meeting, to the transaction of any business because the meeting is not lawfully called or convened. Section 3.12. Quorum and Manner of Acting. At any meeting of the Board of Directors, the presence of a majority of the total number of directors shall be requisite and constitute a quorum for the transaction of business. The vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors, except as required by law or the Certificate of Incorporation. A majority of the directors present, whether or not a quorum is present, may adjourn any meeting to another time and place. Notice in accordance with Section 3.10 of these By-laws of any adjournment of any meeting of the Board of Directors to another time or place shall be given to the directors who were not present at the time of such adjournment and, unless such time and place are announced at the meeting, to the other directors. Section 3.13. Action Without a Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board of Directors or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the Board of Directors or the committee, as the case may be. Section 3.14. Telephonic Meetings. Members of the Board of Directors or any committee thereof may participate in a meeting of the Board of Directors or committee, as the case may be, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation shall constitute presence in person at such meeting. Section 3.15. Committees. a. Executive Committee. The Board of Directors may, by resolution passed by a majority of the whole Board, designate from among its members an Executive Committee to consist of one or more directors and may designate one or more directors as alternate members of such committee, who may replace any absent or disqualified member at any meeting thereof. In the absence or disqualification of a member of the Executive Committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. The Executive Committee, to the extent permitted by law, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, including without limitation the power to authorize the borrowing of money by the 9 Corporation (pursuant to loan agreements, the issuance of bonds or notes or otherwise) and the giving of collateral therefor, and may authorize the seal of the Corporation to be affixed to all papers which may require it. Specifically, but not by way of limitation, the Executive Committee shall have the power and authority to declare dividends, to authorize the issuance of stock and to adopt certificates of ownership and merger pursuant to Section 253 of the Delaware Corporation Law. The Executive Committee shall designate from its members a Chairman of the Executive Committee. The Chairman of the Executive Committee may be removed, with or without cause, by vote of the majority of the Executive Committee. The Executive Committee shall record minutes of each meeting of the Executive Committee and shall submit the same to the Board of Directors at the next meeting of the Board of Directors following such meeting of the Executive Committee. At all meetings of the Executive Committee, a majority of the total number of the members thereof shall constitute a quorum for the transaction of business. The vote of the majority of the members of the Executive Committee present at a meeting at which a quorum is present shall be the act of the Executive Committee. Meetings of the Executive Committee shall, unless otherwise by written notice to the members of the Executive Committee, either personally, or by mail or telecopy, be held on such dates and times and at such places as set forth in the corporate calendar, and amendments thereto, as promulgated by the Chairman of the Board. b. Compensation Committee. The Board of Directors may, by resolution passed by a majority of the whole Board, designate from among its members a Compensation Committee to consist of one or more directors and may designate one or more directors as alternate members of such committee, who may replace any absent or disqualified member at any meeting thereof. In the absence or disqualification of a member of the Compensation Committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. The Compensation Committee shall have the power and authority to set and determine (and to delegate the authority to set and determine) all matters relating to employees' compensation and benefits including, without limitation, matters of corporate policy over salary, bonuses, benefits, perquisites, and the like, and to establish and amend (and to delegate the authority to establish and amend) the compensation of all officers of the Corporation. The Compensation Committee shall designate from its members a Chairman of the Compensation Committee. The Chairman of the Compensation Committee may be removed, with or without cause, by vote of the majority of the Compensation Committee. The Compensation Committee shall record minutes of each meeting of the Compensation Committee. At all meetings of the Compensation Committee, a majority of the total number of the members thereof shall constitute a quorum for the transaction of business. The vote of the majority of the members of the Compensation Committee present at a meeting at which a quorum is present shall be the act of the Compensation Committee. Meetings of the Compensation Committee shall, unless otherwise by written notice to the members of the Compensation Committee, either personally, or by mail or telecopy, be held on such dates and times and at such places as set forth in the corporate calendar, and amendments thereto, as promulgated by the Chairman of the Board. c. Audit Committee. The Board of Directors may, by resolution passed by a majority of the whole Board, designate from among its members an Audit Committee to 10 consist of one or more directors and may designate one or more directors as alternate members of such committee, who may replace any absent or disqualified member at any meeting thereof. In the absence or disqualification of a member of the Audit Committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. The Audit Committee shall have such duties, power and authority with respect to the choice of the Corporation's auditors and reviews of the Corporation's financial statements as may, by resolution, be delegated by the Board of Directors from time to time. The Audit Committee shall designate from its members a Chairman of the Audit Committee. The Chairman of the Audit Committee may be removed, with or without cause, by vote of the majority of the Audit Committee. The Audit Committee shall record minutes of each meeting of the Audit Committee and shall submit the same to the Board of Directors at the next meeting of the Board of Directors following such meeting of the Audit Committee. At all meetings of the Audit Committee, a majority of the total number of the members thereof shall constitute a quorum for the transaction of business. The vote of the majority of the members of the Audit Committee present at a meeting at which a quorum is present shall be the act of the Audit Committee. Meetings of the Audit Committee shall, unless otherwise by written notice to the members of the Audit Committee, either personally, or by mail or telecopy, be held on such dates and times and at such places as set forth in the corporate calendar, and amendments thereto, as promulgated by the Chairman of the Board. d. Miscellaneous Committees. The Board of Directors shall have the power to appoint or provide for from time to time any such other committees consisting of such directors, officers or other persons and having such powers and functions in the management of the Corporation as may be provided by the Board of Directors and as may be permitted by law, and from time to time to suspend or discontinue the powers and duties of such committees. If the members of any such committee consist of directors, the resolution of the Board of Directors designating such members shall be adopted by a majority of the entire Board of Directors. e. Removal. Any member of the Executive Committee or any other committee appointed or provided for by the Board of Directors, or the entire membership of the Executive Committee or of such other committee may be removed, with or without cause, by the vote of the majority of the Board of Directors. Section 3.16. Directors' Fees. The fees and compensation of the directors of the Corporation shall be determined by the resolution of the Board of Directors and in the discretion of the Board of Directors the directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors or an authorized committee thereof. ARTICLE IV: OFFICERS Section 4.01. Elected Officers. The elected officers of the Corporation shall consist of the Chairman of the Board, who shall be termed "Chairman of the Board of Directors" (and is sometimes referred to as "Chairman of the Board"); if elected by the Board of Directors, one or more Vice Chairmen of the Board of Directors (sometimes individually 11 referred to as a "Vice Chairman of the Board"); one or more Presidents; one or more Executive Vice Presidents; one or more Senior Vice Presidents; a Treasurer; a Secretary; a Controller; a Director of Taxes; a General Counsel; and one or more Deputy General Counsels. Section 4.02. Election. The Board of Directors at the first meeting after each Annual Meeting of the Stockholders (a) shall elect by ballot a Chairman of the Board from among the members of the Board, and a Secretary, Controller, General Counsel and Treasurer, and (b) may elect (i) one or more Vice Chairmen from among the members of the Board and (ii) one or more Presidents including Senior Group Presidents or Group Presidents; one or more Executive Vice Presidents; one or more Senior Vice Presidents; and one or more Deputy General Counsels who need not be members of the Board. Section 4.03. Term and Removal. The term of office of each officer elected pursuant to Section 4.02 or appointed pursuant to Section 4.06 of this Article shall expire on the day of the next annual election. Any officer may be removed from office, either with or without cause or hearing, at any time by the affirmative vote of a majority of the members of the Board of Directors then in office. A vacancy in any office arising from any cause may be filled for the unexpired portion of the term by the Board of Directors. Section 4.04. Compensation. The compensation of the officers of the Corporation shall be fixed by the Board of Directors; provided, however, that the Compensation Committee of the Board of Directors shall have the authority to fix the compensation of any or all officers as and to the extent set forth in Section 3.15. Section 4.05. Powers and Duties. The powers and duties of the respective officers of the Corporation are as follows: a. Chairman of the Board. The Chairman of the Board, unless the Board of Directors shall otherwise provide by resolution, shall be the chief executive officer of the Corporation. The Chairman of the Board shall preside at all meetings whether of the stockholders or the Board of Directors. In the absence of the Chairman of the Board, or in the event of his or her inability or refusal to act, the Board of Directors may by vote designate a Vice Chairman to preside at any such meeting, whether of the stockholders or of the Board of Directors. In the absence of any Vice Chairman, or in the event of his or her inability or refusal to act, the Board of Directors may by vote designate from among its members a director to preside at any such meeting, whether of the stockholders or of the Board of Directors. The Chairman of the Board, subject to the power of the Board of Directors to manage the business and affairs of the Corporation or to delegate such power to other officers or employees, shall have general and active supervision over and direction of the business, property and affairs of the Corporation and shall see that resolutions of the Board of Directors are carried into effect. The Chairman of the Board shall have the authority to execute certificates, contracts, bonds, mortgages, notes, guaranties and other agreements, instruments and documents for and on behalf of the Corporation and under the seal of the Corporation where so required. He or she shall have the authority to cause the employment of such employees of the Corporation, other than officers elected by the Board of Directors, as the conduct of the business of the Corporation may require, and to fix their compensation and the compensation of all appointed Officers of the Corporation; to remove or suspend any 12 employee who shall not have been elected by the Board of Directors; and to suspend for cause, pending final action by the Board of Directors, any officer who shall have been elected by the Board of Directors. The Chairman of the Board shall make reports to the Board of Directors as well as the stockholders and shall perform all other duties and exercise all other powers usually pertaining to the offices of Chairman of the Board and chief executive officer of a corporation, and shall perform such further duties and exercise such further powers as may be assigned to him from time to time by the Board of Directors. If there shall be a vacancy in the position of Chairman of the Board, such vacancy may be filled by the Board of Directors. The Chairman of the Board may be removed, with or without cause, by vote of the majority of the Board of Directors. b. Vice Chairmen. There may be one or more Vice Chairmen of the Corporation, if elected by the Board of Directors. The Vice Chairmen shall have the authority to execute certificates, contracts, bonds, mortgages, notes, guaranties and other agreements, instruments and documents for and on behalf of the Corporation and under the seal of the Corporation where so required. In the absence of the Chairman of the Board or in the event of his or her inability to act or refusal to act, his or her duties shall be performed and his or her powers may be exercised by such Vice Chairman of the Board as shall be designated by the Board of Directors or, failing such designation, by the Vice Chairmen in order of their election to that office. c. President. Unless the Board of Directors otherwise provides by resolution, the President shall be the chief operating officer of the Corporation. The President shall, in the absence of the Chairman of the Board and any Vice Chairmen of the Board, or in the event of their inability or refusal to act, perform the duties and exercise the powers of the Chairman of the Board described in Section 4.06 hereof. The President has the same power as the Chairman of the Board to execute certificates, contracts, bonds, mortgages, notes, guaranties and other agreements, instruments and documents for and on behalf of the Corporation and under the seal of the Corporation where so required. The President shall make reports to the Board of Directors as well as the stockholders and shall perform such other duties as are incidental to the office of President or are properly required of the President by the Chairman of the Board, any Vice Chairman or the Board of Directors. d. Group Presidents. The Group Presidents of the several operating groups of the Corporation shall have and exercise general supervision over and direction of the operations of their respective groups, in all cases under the direction of the President, and shall have the power to execute certificates, contracts, bonds, mortgages, notes, guaranties and other agreements, instruments and documents for and on behalf of the Corporation and under the seal of the Corporation and shall perform such other duties as required of them by the Chairman, any Vice Chairman, the President or the Board of Directors. Presidents of divisions of a group of the Corporation shall have the same duties and authorities as the Executive Vice Presidents of the Corporation. e. Executive Vice Presidents. The Executive Vice Presidents shall be authorized to execute certificates, contracts, bonds, mortgages, notes, guaranties and other agreements, instruments and documents for and on behalf of the Corporation and under the seal of the Corporation where so required. They shall also be authorized to perform all duties that from time to time may be prescribed by the Directors, the 13 Chairman of the Board, any Vice Chairman, the President or the Group President for their respective operating group. f. Senior Vice Presidents. The Senior Vice Presidents shall be authorized to execute certificates, contracts, bonds, mortgages, notes, guaranties and other agreements, instruments and documents for and on behalf of the Corporation and under the seal of the Corporation where so required. They shall also be authorized to perform all duties that from time to time may be prescribed by the Board of Directors, the Chairman of the Board, any Vice Chairman, the President or the Group President for their respective operating group. g. Controller. The Controller shall have the responsibility for supervision and management of all accounting and bookkeeping functions of the Corporation and of all of its subsidiaries; shall keep or cause to be kept, such books of record of all the income, expenses, losses, gains, assets and liabilities of the Corporation; shall have custody of the accounting records of the Corporation; shall render to the Chairman of the Board, the President and the Board of Directors at meetings of the Board of Directors or whenever else it may be required, an account of all transactions and the financial condition of the Corporation, and shall perform all other duties and exercise all other powers usually pertaining to the office of controller of a corporation and shall perform such other duties and exercise such other powers as may be assigned by the Board of Directors, the Chairman of the Board, any Vice Chairman or the President. The Controller shall be authorized to appoint, pursuant to Section 4.06, one or more Assistant Controllers who shall perform such duties and exercise such powers as may be assigned to them from time to time by the Board of Directors, the Chairman of the Board, any Vice Chairman, the President or the Controller. In the absence of the Controller or in the event of his inability or refusal to act, his duties shall be performed and his powers may be exercised by such Assistant Controller as shall be designated by the Chairman of the Board or, failing such designation, by any Controller. If there shall be a vacancy in the office of Assistant Controller, such person as shall be designated by the Chairman of the Board shall perform the duties and exercise the powers of Assistant Controller. h. Treasurer. The Treasurer has custody of the corporate funds and securities and shall deposit all monies and other valuable effects in the name and to the credit of the Corporation in any depositories that are authorized by the Board of Directors; shall disburse the funds of the Corporation as may be directed by the Board of Directors; shall keep a full and accurate account of all monies received and paid on account of the Corporation; and shall render to the Chairman of the Board, any Vice Chairman, the President and the Board of Directors an account of all such transactions at meetings of the Board of Directors or whenever it shall be required. The Treasurer shall perform all other duties and exercise all other powers usually pertaining to the office of the treasurer of a corporation and shall perform such other duties and exercise such other powers as may be assigned to him or her from time to time by the Board of Directors, the Chairman of the Board, any Vice Chairman or the President. The Treasurer shall appoint, pursuant to Section 4.06, one or more Assistant Treasurers who shall perform such duties and exercise such powers as may be assigned to them from time to time by the Board of Directors, the Chairman of the Board, any Vice Chairman, the President or the Treasurer. In the absence of the Treasurer or in the event of his or her inability or refusal to act, his or her duties shall be performed and his or her powers may be exercised by such Assistant Treasurer as shall be designated by the Chairman of the 14 Board or, failing such designation, by any Assistant Treasurer. If there shall be a vacancy in the office of Assistant Treasurer, such person as shall be designated by the Chairman of the Board shall perform the duties and exercise the powers of Assistant Treasurer. i. Secretary. The Secretary shall attend meetings of the stockholders and Board of Directors, and act as clerk thereof, and record all votes and minutes of all proceedings in a book to be kept for that purpose and shall, when requested, perform like duties for all committees of the Board of Directors. The Secretary shall give, or cause to be given, notice of meetings of the stockholders and meetings of the Board of Directors and committees thereof if such notice is required by law or pursuant to these By-laws or the rules of procedure of any such committee. The Secretary shall keep in safe custody the seal of the Corporation, and shall have authority to affix the same to any instrument and to attest the same. He or she shall keep and account for all books, documents, papers and records of the Corporation, except those for which some other officer is properly accountable. He or she shall generally perform such duties and exercise such powers usually pertaining to the office of secretary of a corporation. He or she shall perform such further duties and exercise such further powers as may be assigned to him from time to time by the Board of Directors, the Chairman of the Board, any Vice Chairman, or the President. The Secretary shall appoint, pursuant to Section 4.06, one or more Assistant Secretaries who shall perform such duties and exercise such powers as may be assigned to them from time to time by the Board of Directors, the Chairman of the Board, any Vice Chairman, the President or the Secretary. The Secretary and Assistant Secretaries, in addition to their other powers and duties, shall have the authority to execute powers of attorney on behalf of the Corporation. In the absence of the Secretary or in the event of his or her inability or refusal to act, his or her duties shall be performed and his or her powers may be exercised by such Assistant Secretary as shall be designated by the Chairman of the Board or, failing such designation, by any Assistant Secretary. If there shall be a vacancy in the office of Assistant Secretary, such person as shall be designated by the Chairman of the Board shall perform the duties and exercise the powers of Assistant Secretary. j. Director of Taxes. The Director of Taxes shall have the responsibility of supervision of the tax department of the Corporation and shall advise and consult with the Chairman of the Board, any Vice Chairman, the President, the Chief Financial Officer and the General Counsel on all tax matters affecting the Corporation and its subsidiaries and on matters of corporate tax policy; cause compliance with laws and regulations in respect of taxes due; shall select counsel to represent the Corporation in, and shall manage administrative appeals and tax litigation involving, the Corporation; shall render to the Chairman of the Board, any Vice Chairman, the President, the Chief Financial Officer, the General Counsel and the Board of Directors an account of all tax matters affecting the Corporation; and shall perform all other duties and exercise all other powers usually pertaining to the office of director of taxes of a corporation including the signing of all returns, waivers, consents and any other tax forms on behalf of the Corporation and all its subsidiaries, and shall perform such other duties and exercise such other powers as may be assigned by the Board of Directors, the Chairman of the Board, the Vice Chairman, the President, the Chief Financial Officer or the General Counsel. 15 k. General Counsel and Deputy General Counsels. The General Counsel shall have the responsibility for supervision and management of all legal functions of the Corporation and all its subsidiaries; shall select attorneys to represent the Corporation in such matters as he or she shall determine and shall manage their services; shall cause to be negotiated and documented all transactions entered into or involving the Corporation; shall render to the Chairman of the Board, any Vice Chairman, the President and the Board of Directors at meetings of the Board of Directors or whenever else it may be required, an account of all legal matters of or affecting the Corporation and shall perform all other duties and exercise all other powers usually pertaining to the office of general counsel of a corporation and shall perform such other duties and exercise such other powers as may be assigned by the Board of Directors, the Chairman of the Board, any Vice Chairman or the President. Deputy General Counsels shall supervise and manage the legal functions of the operating division, office or branch of the Corporation designated by and under the direction of the General Counsel, and the Deputy General Counsels shall perform such duties and exercise such powers as may be assigned to them from time to time by the Board of Directors, the Chairman of the Board, any Vice Chairman, the President, or the General Counsel. In the absence of the General Counsel or in the event of his or her inability or refusal to act, his or her duties shall be performed and his or her powers may be exercised by such Deputy General Counsel as shall be designated by the Chairman of the Board or, failing such designation, by any Deputy General Counsel. If there shall be a vacancy in the office of General Counsel, such person as shall be designated by the Chairman of the Board shall perform the duties and exercise the powers of General Counsel. Section 4.06. Appointed Officers. The Chairman of the Board, any Vice Chairman, the President, each of the Group Presidents, the General Counsel and each manager of a business unit or corporate staff department may appoint, without further approval by the Board of Directors, vice presidents, assistant vice presidents, associate general counsels, senior counsels, counsels, attorneys, assistant controllers, assistant treasurers, assistant secretaries and other appropriate titled officers to assist them in their respective duties. The powers and duties of the appointed officers shall be as follows: a. Vice Presidents and Assistant Vice Presidents. Vice Presidents and Assistant Vice Presidents shall have the power and authority to execute certificates, contracts, bonds, mortgages, notes, guaranties and other instruments and documents for and on behalf of the Corporation and under the seal of the Corporation where so required. They shall also be authorized to perform all duties that from time to time may be prescribed by the Board of Directors, the Chairman of the Board, any Vice Chairman, the President or their Group President. b. Associate General Counsels, Senior Counsels, Counsels and Attorneys. Associate General Counsels shall have the power and authority to supervise and manage the legal function of any group, branch or office of the Corporation designated by and under the direction of a Deputy General Counsel for and on behalf of the Corporation and under the seal of the Corporation where so required, and shall, in addition, perform duties that from time to time may be prescribed by the Board of Directors, the Chairman of the Board, any Vice Chairman, the President, the General Counsel or a Deputy General Counsel. Senior Counsels, Counsels and Attorneys shall perform duties that 16 from time to time may be prescribed by the the General Counsel or a Deputy General Counsel. c. Assistant Controllers. Assistant Controllers shall perform such duties and exercise such powers as may be assigned to them from time to time by the Board of Directors, the Chairman of the Board, the President or the Controller. In the absence of the Controller or in the event of his or her inability or refusal to act, his or her duties shall be performed and his or her powers may be exercised by such Assistant Controller as shall be designated by the Chairman of the Board or, failing such designation, by the Assistant Controllers in order of their election to that office. If there shall be a vacancy in the office of Assistant Controller, such person as shall be designated by the Chairman of the Board shall perform the duties and exercise the powers of Assistant Controller. d. Assistant Treasurers. Assistant Treasurers shall perform such duties and exercise such powers as may be assigned to them from time to time by the Board of Directors, the Chairman of the Board, the President or the Treasurer. In the absence of the Treasurer or in the event of his or her inability or refusal to act, his or her duties shall be performed and his or her powers may be exercised by such Assistant Treasurer as shall be designated by the Chairman of the Board or, failing such designation, by the Assistant Treasurers in the order of their election to that office. If there shall be a vacancy in the office of Assistant Treasurer, such person as shall be designated by the Chairman of the Board shall perform the duties and exercise the powers of Assistant Treasurer. e. Assistant Secretaries. Assistant Secretaries shall have the power and authority to execute any and all documents required to be signed by the Secretary, including without limitation powers of attorney, which relate to the consummation of transactions of their respective business units, for and on behalf of the Corporation and under the seal of the Corporation where so required, and shall, in addition, perform duties that from time to time may be prescribed by the Board of Directors, the Chairman of the Board, the President or the Secretary. In the absence of the Secretary or in the event of his or her inability or refusal to act, his or her duties shall be performed and his or her powers may be exercised by such Assistant Secretary as shall be designated by the Chairman of the Board or, failing such designation, by the Assistant Secretaries in the order of their election to that office. If there shall be a vacancy in the office of Assistant Secretary, such person as shall be designated by the Chairman of the Board shall perform the duties and exercise the powers of Assistant Secretary. Section 4.07. Group/Divisional Officers. Officers of the Corporation, appointed, pursuant to Section 4.06 above, may be designated as officers of a particular group or division of the Corporation. When officers are so designated, their powers and duties shall be those of an officer with the same title as described in Section 4.06 above, as the case may be, but such powers and duties shall be limited to the activities of their respective group or division. Section 4.08. Voting Corporation's Securities. Unless otherwise ordered by the Board of Directors, the Chairman of the Board or the Chairman of the Board's designee for this specific purpose has full power and authority on behalf of the Corporation to attend and to act and to vote at all meetings of security holders of the corporations in which the 17 Corporation may hold securities, and at those meetings, the Chairman of the Board or the Chairman of the Board's designee shall possess and may exercise any and all rights and powers incident to the ownership of the securities, and which as the owner thereof, the Corporation may have possessed and exercised, if present. The Board of Directors or the Executive Committee by resolution from time to time may confer powers upon any other person or persons. ARTICLE V: SHARE CERTIFICATES Section 5.01. Form; Signature. The shares of the Corporation shall be represented by certificates; provided that the Board of Directors of the Corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation. Notwithstanding the adoption of such a resolution by the Board of Directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the Corporation by the Chairman of the Board or Vice Chairman of the Board, Chief Executive Officer, or the President or Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary of an Assistant Secretary of the Corporation representing the number of shares registered in certificate form. Any or all the signatures on the certificate may be a facsimile. Section 5.02. Signatures of Former Officer, Transfer Agent or Registrar. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person or entity were such officer, transfer agent or registrar at the date of issue. Section 5.03. Transfers of Shares. All transfers of shares of the stock of the Corporation are subject to the terms conditions and restrictions, if any, of the Certificate of Incorporation. Transfers of shares of the capital stock of the Corporation shall be made on the books of the Corporation by the registered holder thereof, or by his attorney thereunder authorized by power of attorney duly executed and filed with the Secretary of the Corporation, or with a Transfer Clerk or a Transfer Agent appointed as in Section 5.06 of this Article, and, if certificated shares, on surrender of the certificate or certificates for the shares properly endorsed and the payment of all taxes thereon. The person in whose name shares of stock are registered on the books of the Corporation shall be considered the owner thereof for all purposes as regards the Corporation; but whenever any transfer of shares is made for collateral security, and not absolutely, that fact, if known, to the Secretary, shall be stated in the entry of transfer. The Board may, from time to time, make any additional rules and regulations as it may deem expedient, not inconsistent with these By laws, concerning the issue, transfer and registration of certificates for shares of the stock of the Corporation. Section 5.04. Lost, Stolen or Destroyed Stock Certificates; Issuance of New Certificates. The Corporation may issue a new certificate of stock in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the 18 Corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. Section 5.05. Transfer Agent and Registrar. The Board of Directors may appoint one or more Transfer Clerks or one or more Transfer Agents and one or more Registrars. Section 5.06. Registered Stock. The Corporation shall be protected in treating the persons in whose names shares stand on the record of stockholders as the owners thereof for all purposes; and the Corporation shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. ARTICLE VI: INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS; INSURANCE Section 6.01. Third Party Proceedings. The Corporation shall, in accordance with Section 6.03 or 6.04 of these bylaws, indemnify, to the fullest extent permitted by the General Corporation Law of Delaware (the "DGCL") any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he or she is or was a director, officer, employee, attorney or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, attorney or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal action or proceeding, have reasonable cause to believe that his or her conduct was unlawful. Section 6.02 Derivative Stockholder Liability. The Corporation shall, in accordance with Section 6.03 or 6.04 of these bylaws, indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he or she is or was a director, officer, employee, attorney or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, attorney or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he or she acted in good faith and in a manner he or she reasonably believed to be in or not 19 opposed to the best interests of the Corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Section 6.03 Indemnification Upon Success on the Merits. To the extent that a present or previous director, officer, employee, attorney or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 6.01 and 6.02, or in the defense of any claim, issue or matter therein, he or she shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. Section 6.04 Indemnification in Other Circumstances. Any indemnification under Sections 6.01 and 6.02 (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee, attorney or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in Sections 6.01 and 6.02. Such determination shall be made (1) by the Board of Directors of the Corporation, or its Executive Committee, by a majority vote, even if less than a quorum, of directors who were not parties to such action, suit or proceeding, or (2) there are no directors or if such directors so direct, by independent legal counsel in a written opinion, or (3) by the stockholders of the Corporation. Nothing contained herein shall be deemed a limitation on the Corporation's ability to provide indemnifications in the ordinary course of its business. Section 6.05 Payment of Defense Expenses in Advance. The Corporation shall pay or reimburse the reasonable expenses incurred by a director, officer, employee, attorney or agent who is a party or threatened to be made a party to an action, suit, or proceeding in advance of final disposition of the proceeding if all of the following apply: a. The person furnishes the Corporation a written affirmation of his or her good faith belief that he or she has met the applicable standard of conduct set forth in Section 6.01 and 6.02. b. The person furnishes the Corporation a written undertaking, executed personally or on his or her behalf, to repay the advance if it shall ultimately be determined by the Board or the Executive Committee thereof, or by a court of competent jurisdiction, that he or she is not entitled to be indemnified by the Corporation as authorized by these By-laws. c. No determination is made by the Board or the Executive Committee thereof, or by a court of competent jurisdiction, that the person is precluded from obtaining indemnification under this Section or the Delaware General Corporation Law. d. Notwithstanding anything to the contrary in this Article VI, (i) the Company shall not be obligated to indemnify a director, officer or employee or pay 20 expenses incurred by a director, officer or employee with respect to any threatened, pending or completed claim, suit or action, whether civil, criminal, administrative, investigative or otherwise ("Proceedings") initiated or brought voluntarily by a director, officer or employee and not be way of defense (other than Proceedings brought to establish or enforce a right to indemnification under the provisions of this Article VI unless a court of competent jurisdiction determines that each of the material assertions made by the director, officer or employee in such Proceedings were not made in good faith or were frivolous) and (ii) the Company shall not be obligated to indemnify a director, officer or employee for any amount paid in settlement of a Proceeding covered hereby without the prior written consent of the Company to such settlement. Section 6.06 Insurance. The Corporation has the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, attorney or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, attorney or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation has the power to indemnify him against such liability under the provisions of these By-laws. Section 6.07 No Waiver of Rights. The indemnification provided for in this Article shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee, attorney or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. ARTICLE VII. DIVIDENDS Section 7. Dividends. The Board of Directors of the Corporation may declare and pay dividends upon the shares of the Corporation's capital stock in any form determined by the Board of Directors, in the manner and upon the terms and conditions provided by law. ARTICLE VIII: MISCELLANEOUS Section 8.01. Fiscal Year. The Fiscal Year of the Corporation shall be the calendar year. Section 8.02. Seal. The Corporation shall have a seal in such form as the Board of Directors shall approve. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. Section 8.03. Power to Amend. Subject to the rights of the holders of Preferred Stock and Senior Preferred Stock of the Company, these By-laws may be adopted, amended or repealed by the Board of Directors, to the extent provided in the Certificate of Incorporation, of the 21 Corporation, or by the vote of the holders of at least 66-2/3% of the total voting power of all outstanding Common Stock, voting together as a single class. Section 8.04. Promulgation of Corporate Calendar. On or before January 31st of every calendar year, the Chairman of the Board shall promulgate the corporate calendar for that calendar year. The calendar shall set forth the dates, places and times for the Annual Meeting of Stockholders, meetings of the Board of Directors and meetings of the various committees of the Board of Directors. Copies of the corporate calendar shall be delivered to each director entitled to notice of meetings. In the event an individual becomes a director subsequent to promulgation of the corporate calendar, he or she shall be provided a copy of the corporate calendar at the time of appointment. The Chairman of the Board may amend the corporate calendar at any time by giving notice to every individual entitled to notice of the meeting whose date, place or time is being amended. ARTICLE IX: EMERGENCY BY-LAWS Section 9. Emergency By-Laws. The provisions of this Article IX, adopted pursuant to the authority of Section 109 of the Delaware Corporation Law, shall become operative during any emergency resulting from an attack on the United States or on a locality in which the Corporation conducts its business or customarily holds meetings of its Board of Directors or stockholders, or during any nuclear or atomic disaster, or during the existence of any catastrophe, or other similar emergency condition, resulting in the death, disability or inability to convene or function of a quorum of the Board of Directors. In any such event, the following procedures shall govern the conduct of the business and affairs of the Corporation: a. A meeting of the Board of Directors or of any committee thereof may be called by any officer or director upon notice to such directors as it may be feasible to reach at the time and by such means as may be feasible at the time including publication or radio. b. The director or directors in attendance at any meeting called as aforesaid shall constitute a quorum, and may take such action as may, in his or their judgment, be necessary to carry on the functions of the Board of Directors during the period the emergency continues. c. In the event no member of the Board of Directors is present to constitute a quorum at any meeting of the Board of Directors during the emergency period, the three senior officers of the Corporation who are present shall be considered in order or rank, as set forth in paragraph d. hereof, and within the same rank in order of seniority of appointment, directors for such meeting. d. During the emergency period, the duties, powers and functions of any officer of the Corporation who has died or been disabled, or is unable for any reason to perform his duties, shall devolve upon and be assumed by the officer next in rank, in the order of their respective seniority by first election, in accordance with the following table of sequence: 22 Chairman of the Board Vice Chairmen President Executive Vice Presidents Treasurer Controller Senior Vice Presidents Other Vice Presidents Assistant Vice Presidents Secretary Duties, powers and functions of any division officer similarly unable to perform shall devolve upon and be assumed by the officer next in rank, in accordance with the same sequence. New officers may be elected, or the accession of officers ratified, at the next regular meeting of the Board of Directors, or at a special meeting called for that purpose. However, as to third persons, the performance of the duties of an officer by one acting pursuant to this Article shall be conclusive evidence of his authority to do so. 23 EX-4 5 SPECIMEN STOCK CERTIFICATE: CLASS A COMMON STOCK Exhibit 4 Description of Specimen Stock Certificate for Class A Common Stock Face of Certificate: The front of the specimen stock certificate for the Company's Class A Common Stock (the "Certificate") contains (i) a picture of a man sitting with his right arm on a pillar, his right hand holding a piece of paper and books and a globe next to his left arm and leg, (ii) the name of the Company and the logo of the Company and (iii) the Common Stock's CUSIP number (4233 28 10 3). The Certificate is signed by Debra H. Snider, Executive Vice President, Chief Administrative Officer, General Counsel and Secretary of the Company, and Richard J. Almeida, Chairman and Chief Executive Officer of the Company. The Company's corporate seal appears in the middle of the lower edge of the Certificate. The face of the Certificate states that the Company is "incorporated under the laws of the State of Delaware" and that the Certificate is "transferable in New York, New York and Chicago, Illinois." The face of the Certificate also contains the following language: This certifies that ____________________ is the owner of ____________ fully paid and non-assessable shares of the par value of $.25 each of the Class A Common Stock of Heller Financial, Inc. transferable only on the books of the Corporation by the holder of record hereof in person, or by duly authorized attorney, upon surrender of this Certificate properly endorsed. This Certificate and the shares represented hereby are issued and shall be subject to all the provisions of the Certificate of Incorporation of the Corporation as now or hereafter amended, and the holder by accepting this Certificate expressly assents thereto. This Certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar. In witness whereof, the Corporation has caused the facsimile signatures of its duly authorized officers and a facsimile of its corporate seal to be hereunto affixed. Reverse of Certificate: The back of the Certificate contains the following language: The Corporation will furnish without charge to each stockholder who so requests, a copy of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof of the Corporation and the qualifications, limitations or restrictions of such preferences and/or rights. Such request may be made to the Corporation or the Transfer Agent. The back of the Certificate also contains standard stock transfer instructions. EX-5 6 OPINION OF KATTEN MUCHIN & ZAVIS AS TO LEGALITY EXHIBIT 5 April 28, 1998 Heller Financial, Inc. 500 West Monroe Street Chicago, Illinois 60661 Re: Registration Statement on Form S-2 ---------------------------------- Ladies and Gentlemen: We have acted as counsel for Heller Financial, Inc., a Delaware corporation (the "Company"), in connection with the preparation and filing of a registration statement on Form S-2, as amended (File No. 333-46915) (the "Registration Statement"), with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act"). The Registration Statement relates to the Company's public offering of up to 38,525,000 shares of its Class A Common Stock, $0.25 par value per share (the "Class A Common Stock"), including up to 5,025,000 shares of Class A Common Stock issuable upon exercise of the Underwriters' (as defined herein) over-allotment options (collectively, the "Shares"). This opinion is being furnished in accordance with the requirements of Item 601(b)(5) of Regulation S-K under the Act. In connection with this opinion, we have relied as to matters of fact, without investigation, upon certificates of public officials and others and upon affidavits, certificates and written statements of directors, officers and employees of, and the accountants and transfer agent for, the Company. We have also examined originals or copies, certified or otherwise identified to our satisfaction, of such instruments, documents and records as we have deemed relevant and necessary to examine for the purpose of this opinion, including (a) the Registration Statement, (b) the Company's Restated Certificate of Incorporation, as amended, and the form of the proposed Amended and Restated Certificate of Incorporation of the Company, (c) the Company's By-laws and the form of the proposed Amended and Restated By-Laws of the Company, (d) minutes of meetings of the Board of Directors of the Company and the Executive Committee thereof, (e) written consents of the sole stockholder of the Company, (f) the form of U.S. Underwriting Agreement (the "U.S. Underwriting Agreement") proposed to be entered into between the Company and Goldman, Sachs & Co., J.P. Morgan Securities Inc., BT Alex. Brown Incorporated, Lehman Brothers Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representatives Heller Financial, Inc. April 28, 1998 Page 2 of the several U.S. underwriters named therein (collectively, the "U.S. Underwriters"), (g) the form of International Underwriting Agreement (with the U.S. Underwriting Agreement, the "Underwriting Agreements") proposed to be entered into between the Company and Goldman Sachs International, J.P. Morgan Securities Ltd., BT Alex. Brown International, A Division of Bankers Trust International PLC, Lehman Brothers International (Europe) and Merrill Lynch International, as representatives of the several international underwriters named therein (with the U.S. Underwriters, collectively, the "Underwriters"), and (h) a proposed form of specimen certificate representing the Class A Common Stock. In connection with this opinion, we have assumed the legal capacity of all natural persons, the accuracy and completeness of all documents and records that we have reviewed, the genuineness of all signatures, the authenticity of the documents submitted to us as originals and the conformity to authentic original documents of all documents submitted to us as certified, conformed or reproduced copies. Based upon and subject to the foregoing, it is our opinion that when certificates representing the Shares in the form of the specimen certificate examined by us have been manually signed by an authorized officer of the transfer agent and registrar for the Class A Common Stock, and such certificates are delivered to, and the Shares are paid for by, the Underwriters as contemplated by the Underwriting Agreements, the up to 38,525,000 Shares covered by the Registration Statement (including the up to 5,025,000 Shares issuable upon exercise of the Underwriters' over-allotment options), will have been duly authorized, and such Shares will be validly issued, fully paid and non- assessable. Our opinion expressed above is limited to the General Corporation Law of the State of Delaware, and we do not express any opinion concerning any other laws. This opinion is given as of the date hereof and we assume no obligation to advise you of changes that may hereafter be brought to our attention. Heller Financial, Inc. April 28, 1998 Page 3 We hereby consent to use of our name under the heading "Legal Matters" in the Prospectus forming a part of the Registration Statement and to use of this opinion for filing as Exhibit 5 to the Registration Statement. In giving this consent, we do not thereby admit that we are included in the category of persons whose consent is required under Section 7 of the Act or the related rules and regulations thereunder. Very truly yours, /s/ KATTEN MUCHIN & ZAVIS KATTEN MUCHIN & ZAVIS EX-10.1 7 1998 STOCK INCENTIVE PLAN EXHIBIT 10.1 HELLER FINANCIAL, INC. 1998 STOCK INCENTIVE PLAN HELLER FINANCIAL, INC. 1998 STOCK INCENTIVE PLAN TABLE OF CONTENTS
Page ---- Article 1. Establishment, Objectives and Duration........................ 1 Article 2. Definitions................................................... 2 Article 3. Administration................................................ 6 Article 4. Shares Subject to the Plan and Maximum Awards................. 7 Article 5. Eligibility and Participation................................. 8 Article 6. Stock Options................................................. 9 Article 7. Stock Appreciation Rights..................................... 11 Article 8. Restricted Stock.............................................. 12 Article 9. Performance Units and Performance Shares...................... 14 Article 10. Performance Measures.......................................... 16 Article 11. Beneficiary Designation....................................... 17 Article 12. Deferrals..................................................... 17 Article 13. Rights of Employees........................................... 18 Article 14. Initial Public Offering Protections........................... 18 Article 15. Amendment, Modification and Termination....................... 19 Article 16. Withholding................................................... 19 Article 17. Successors.................................................... 20 Article 18. Legal Construction............................................ 20
i HELLER FINANCIAL, INC. 1998 STOCK INCENTIVE PLAN Article 1. Establishment, Objectives and Duration 1.1 Establishment of the Plan. Heller Financial, Inc., a Delaware corporation, hereby establishes a long-term incentive compensation plan to be known as the "Heller Financial, Inc. 1998 Stock Incentive Plan," as set forth in this document. Capitalized terms used but not otherwise defined herein will have the meanings given to them in Article 2. The Plan permits the grant of Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Performance Shares and Performance Units. In addition, the Plan provides the opportunity for the deferral of the payment of salary, bonuses and other forms of incentive compensation. Subject to the approval of the Company's stockholders, the Plan will become effective as of April 1, 1998 and will remain in effect as provided in Section 1.3 hereof. 1.2 Objectives of the Plan. The objectives of the Plan are to optimize the profitability and growth of the Company through long-term incentives which are consistent with the Company's objectives and which link the interests of Participants to those of the Company's stockholders; to provide Participants with an incentive for excellence in individual performance; to promote teamwork among Participants; and to give the Company a significant advantage in attracting and retaining officers, key employees and directors. The Plan is further intended to provide flexibility to the Company in its ability to motivate, attract and retain the services of Participants who make significant contributions to the Company's success and to allow Participants to share in the success of the Company. 1.3 Duration of the Plan. The Plan will commence on the Effective Date, as described in Section 1.1, and will remain in effect, subject to the right of the Board of Directors to amend or terminate the Plan at any time pursuant to Article 15, until all Shares subject to it pursuant to Article 4 have been issued or transferred according to the Plan's provisions. In no event may an Award be granted under the Plan on or after March 31, 2008. Article 2. Definitions Whenever used in the Plan, the following terms have the meanings set forth below, and when the meaning is intended, the initial letter of the word will be capitalized: "Award" means, individually or collectively, a grant under this Plan to a Participant of Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Performance Shares or Performance Units. "Award Agreement" means an agreement entered into by the Company and a Participant setting forth the terms and provisions applicable to an Award or Awards granted to the Participant or the terms and provisions applicable to an election to defer compensation under Section 8.2. "Beneficial Owner" or "Beneficial Ownership" has the meaning ascribed to that term in Rule 13d-3 of the General Rules and Regulations under the Exchange Act. "Board" or "Board of Directors" means the Board of Directors of the Company. "Cause" means: (a) an employee's fraud or criminal misconduct; or (b) the material and willful breach by an employee of his or her responsibilities or willful failure to comply with reasonable directives or policies of the Company's Board of Directors; but only if the Company has given the employee written notice specifying the breach or failure to comply, demanding that the employee remedy the breach or failure to comply and giving the employee an opportunity to be heard in connection with the breach or failure to comply, and the employee either failed to remedy the alleged breach or failed to comply within thirty days after receipt of the written notice or failed to take all reasonable steps to that end during the thirty days after her or she received the notice. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Committee" means, as specified in Article 3, the Compensation Committee of the Board or such other committee as may be appointed by the Board to administer the Plan. 2 "Company" means Heller Financial, Inc., a Delaware corporation, and any successor thereto as provided in Article 17. "Director" means any individual who is a member of the Board of Directors. "Disability" means (i) long-term disability as defined under the long-term disability plan of the Company or a Subsidiary that covers that individual, or (ii) if the individual is not covered by such a long-term disability plan, disability as defined for purposes of eligibility for a disability award under the Social Security Act. "Effective Date" means April 1, 1998. "Eligible Employee" means any employee of the Company or any of its Subsidiaries. Directors who are not employed by the Company or its Subsidiaries will be considered Eligible Employees under this Plan, but only for purposes of Awards of Nonqualified Stock Options. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto. "Exercise Price" means the price at which a Share may be purchased by a Participant pursuant to an Option. "Fair Market Value" means: (a) the average of the high and low trading prices of the Shares on the New York Stock Exchange (or, if the Shares are not traded on the New York Stock Exchange, on any other exchange on which they are traded); if the Shares are not traded on any exchange, the fair market value of the Shares as determined by the Board or, at the discretion of the Board, by an independent appraiser selected by the Board; but (b) notwithstanding the foregoing, for Options granted in connection with, and as of the date of, the initial public offering of the Shares, the initial public offering price of the Shares. "Freestanding SAR" means an SAR that is granted independently of any Options, as described in Article 7. 3 "Good Reason" exists if, without an Eligible Employee's express written consent, any of the following events occur within three years after the Company's initial public offering of the Shares: (a) the Company or a Subsidiary significantly diminishes the Eligible Employee's assigned duties and responsibilities from the level or extent at which they existed before the effective date of the initial public offering including, without limitation, if the Company or Subsidiary removes the Eligible Employee's title(s) or materially diminishes the powers associated with the Eligible Employee's title(s). For Good Reason to exist, the Eligible Employee must deliver written notice to the Company or Subsidiary specifying the diminution in assigned duties and responsibilities that he or she believes constitutes Good Reason, and the Company or Subsidiary must fail to reverse the same or to take all reasonable steps to that end within thirty days after receiving the notice; (b) the Company or a Subsidiary reduces the Eligible Employee's base salary below the greater of that in effect as of the date of the Eligible Employee's Award Agreement and that in effect as of the effective date of the initial public offering; (c) the Company or Subsidiary requires the Eligible Employee to, or assigns duties to the eligible Employee which would reasonably require him or her to, relocate his or her principal business office or his or her principal place of residence outside the Standard Metropolitan Statistical Area where the Eligible Employee was located on the effective date of the initial public offering (the "Geographical Employment Area"); (d) the Company or a Subsidiary requires the Eligible Employee to, or assigns duties to the Eligible Employee which would reasonably require him or her to, spend more than one hundred normal working days away from the Geographical Employment Area during any consecutive twelve- month period; or (e) the Company or a Subsidiary fails to continue in effect any cash or stock-based incentive or bonus plan, retirement plan, welfare benefit plan, or other benefit plan, program or arrangement that applied to the Eligible Employee on the effective date of the initial public offering, unless the aggregate value (as computed by an independent employee benefits consultant selected by the Company) of all such compensation, retirement and benefit plans, programs and arrangements provided to 4 the Eligible Employee is not materially less than the greater of their aggregate value as of the date of the Eligible Employee's Award Agreement, or their aggregate value as of the effective date of the initial public offering. "Incentive Stock Option" or "ISO" means an option to purchase Shares granted under Article 6 that is designated as an Incentive Stock Option and that is intended to meet the requirements of Code Section 422. "Nonqualified Stock Option" or "NQSO" means an option to purchase Shares granted under Article 6 that is not intended to meet the requirements of Code Section 422. "Option" means an Incentive Stock Option or a Nonqualified Stock Option, as described in Article 6. "Participant" means an Eligible Employee who has been selected by the Committee to participate in the Plan pursuant to Section 5.2 and who has outstanding an Award granted under the Plan. The term "Participant" will include Directors who are not employees of the Company or a Subsidiary only if they are chosen to receive Awards of Nonqualified Stock Options, and only for purposes of Nonqualified Stock Options. "Performance-Based Exception" means the performance-based exception from the tax deductibility limitations of Code Section 162(m) and any regulations promulgated thereunder. "Performance Period" means the time period during which performance objectives must be met in order for a Participant to earn Performance Units/Shares granted under Article 9. "Performance Share" means an Award with an initial value equal to the Fair Market Value on the date of grant which is based on the Participant's attainment of performance objectives, as described in Article 9. "Performance Unit" means an Award with an initial value established by the Committee at the time of grant which is based on the Participant's attainment of performance objectives, as described in Article 9. "Person" has the meaning ascribed to that term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) thereof. 5 "Plan" means the Heller Financial, Inc. 1998 Stock Incentive Plan, as set forth in this document. "Restriction Period" means the period during which the transfer of Shares of Restricted Stock is limited in some way (based on the passage of time, the achievement of performance objectives, or the occurrence of other events as determined by the Committee, at its discretion), and/or the Restricted Stock is not vested. "Restricted Stock" means a contingent grant of stock awarded to a Participant pursuant to Article 8. "Retirement" means termination of employment on or after reaching the age established by the Company as the normal retirement age in any unexpired employment agreement between the Participant and the Company and/or a Subsidiary, or, if different, the normal retirement age under the Heller Financial, Inc. Retirement Plan. "Shares" means the shares of Class A Common Stock, $0.25 par value, of the Company. "Stock Appreciation Right" or "SAR" means an Award, granted alone or in connection with a related Option, designated as an SAR pursuant to the terms of Article 7. "Subsidiaries" means the Company's Subsidiaries within the meaning of Code Section 424(f). "Tandem SAR" means an SAR that is granted in connection with a related Option pursuant to Article 7, the exercise of which requires forfeiture of the right to purchase a Share under the related Option (and when a Share is purchased under the Option, the Tandem SAR will similarly be canceled). Article 3. Administration 3.1 The Committee. The Plan will be administered by the Compensation Committee of the Board, or by any other Committee appointed by the Board, which Committee (unless otherwise determined by the Board) will satisfy the "nonemployee director" requirements of Rule 16b-3 under the Exchange Act and the regulations of Rule 16b-3 under the Exchange Act and the "outside director" provisions of Code Section 162(m), or any successor regulations or provisions. 6 The members of the Committee will be appointed from time to time by, and serve at the discretion of, the Board of Directors. The Committee will act by a majority of its members at the time in office and eligible to vote on any particular matter, and Committee action may be taken either by a vote at a meeting or in writing without a meeting. 3.2 Authority of the Committee. Except as limited by law and subject to the provisions of this Plan, the Committee will have full power to: select Eligible Employees to participate in the Plan; determine the sizes and types of Awards; determine the terms and conditions of Awards in a manner consistent with the Plan; construe and interpret the Plan and any agreement or instrument entered into under the Plan; establish, amend or waive rules and regulations for the Plan's administration; and (subject to the provisions of Article 15) amend the terms and conditions of any outstanding Award to the extent they are within the discretion of the Committee as provided in the Plan. Further, the Committee will make all other determinations that may be necessary or advisable to administer the Plan. As permitted by law and consistent with Section 3.1, the Committee may delegate some or all of its authority under the Plan. 3.3 Decisions Binding. All determinations and decisions made by the Committee pursuant to the provisions of the Plan will be final, conclusive and binding on all persons, including, without limitation, the Company, its Board of Directors, its stockholders, all Subsidiaries, employees, Participants and their estates and beneficiaries. Article 4. Shares Subject to the Plan and Maximum Awards 4.1 Number of Shares Available for Grants. Subject to adjustment as provided in Section 4.3, the number of Shares that may be issued or transferred to Participants under the Plan is 7.5% of the Shares outstanding upon consummation of the Company's initial public offering (4,593,088 Shares, plus up to 376,875 additional Shares if certain underwriters' overallotment options are exercised). The maximum numbers of Shares that may be issued or transferred during any calendar year to the Participants as Performance Units is 500,000. The maximum number of Shares and Share equivalent units that may be granted during any calendar year to any one Participant under Options, Freestanding SARs, Restricted Stock or Performance Shares is 500,000, which limit will apply regardless of whether the compensation is paid in Shares or in cash. 7 4.2 Lapsed Awards. If any Award granted under this Plan is canceled, terminates, expires or lapses for any reason, any Shares subject to the Award will again be available for the grant of an Award under the Plan. 4.3 Adjustments in Authorized Shares. (a) If the Shares, as currently constituted, are changed into or exchanged for a different number or kind of shares of stock or other securities of the Company or of another corporation (whether because of merger, consolidation, recapitalization, reclassification, split, reverse split, combination of shares, or otherwise) or if the number of Shares is increased through the payment of a stock dividend, then the Committee will substitute for or add to each Share previously appropriated, later subject to, or which may become subject to, an Award, the number and kind of shares of stock or other securities into which each outstanding Share was changed for which each such Share was exchanged, or to which each such Share is entitled, as the case may be. The Committee will also appropriately amend outstanding Awards as to price and other terms, to the extent necessary to reflect the events described above. If there is any other change in the number or kind of the outstanding Shares, of any stock or other securities into which the outstanding Shares have been changed, or for which they have been exchanged, the Committee may, in its sole discretion, appropriately adjust any Award already granted or which may be afterward granted. (b) Fractional Shares resulting from any adjustment in Awards pursuant to this section may be settled in cash or otherwise as the Committee determines. The Company will give notice of any adjustment to each Participant who holds an Award that has been adjusted and the adjustment (whether or not such notice is given) will be effective and binding for all Plan purposes. Article 5. Eligibility and Participation 5.1 Eligibility. All Eligible Employees, including Eligible Employees who are members of the Board, are eligible to participate in this Plan. 8 5.2 Actual Participation. Subject to the provisions of the Plan, the Committee will, from time to time, select those Eligible Employees to whom Awards will be granted, and will determine the nature and amount of each Award. Article 6. Stock Options 6.1 Grant of Options. Subject to the terms and provisions of the Plan, Options may be granted to Eligible Employees in the number, and upon the terms, and at any time and from time to time, as determined by the Committee. 6.2 Award Agreement. Each Option grant will be evidenced by an Award Agreement that specifies the Exercise Price, the duration of the Option, the number of Shares to which the Option pertains, the manner, time and rate of exercise or vesting of the Option, and such other provisions as the Committee determines. The Award Agreement will also specify whether the Option is intended to be an ISO or an NQSO, and whether reload options will be granted. 6.3 Exercise Price. The Exercise Price for each share subject to an Option will be at least one hundred percent of the Fair Market Value on the date the Option is granted. 6.4 Duration of Options. Each Option will expire at the time determined by the Committee at the time of grant, but no later than the tenth anniversary of the date of its grant. 6.5 Dividend Equivalents. The Committee may, but shall not be required to, grant payments in connection with Options that are equivalent to dividends declared and paid on the Shares underlying the Options. Such dividend equivalent payments may be made in cash or in Shares, upon such terms as the Committee, in its sole discretion, deems appropriate. 6.6 Exercise of Options. Options will be exercisable at such times and be subject to such restrictions and conditions as the Committee in each instance approves, which need not be the same for each Award or for each Participant. 6.7 Payment. The holder of an Option may exercise the Option only by delivering a written notice of exercise to the Company setting forth the number of Shares as to which the Option is to be exercised, together with full payment at the Exercise Price for the Shares and any withholding tax relating to the exercise of the Option. 9 The Exercise Price and any related withholding taxes will be payable to the Company in full either: (a) in cash, or its equivalent, in United States dollars; (b) if permitted in the governing Award Agreement, by tendering Shares owned by the Participant and duly endorsed for transfer to the Company, Shares issuable to the Participant upon exercise of the Option, or any combination of cash, certified or cashier's check and Shares described in this clause (b); or (c) by any other means the Committee determines to be consistent with the Plan's purposes and applicable law. Cashless exercise must meet the requirements of the Federal Reserve Board's Regulation T and any applicable securities law restrictions. The Committee may provide for reload options in the Award Agreement evidencing an Option. If such reload options are provided for, they shall be granted automatically in accordance with the applicable provisions in the Award Agreement. 6.8 Restrictions on Share Transferability. The Committee may impose such restrictions on any Shares acquired through exercise of an Option as it deems necessary or advisable, including, without limitation, restrictions under applicable federal securities laws, under the requirements of any stock exchange or market upon which the Shares are then listed and/or traded, and under any blue sky or state securities laws applicable to the Shares. 6.9 Termination of Employment. Each Option Award Agreement will set forth the extent to which the Participant has the right to exercise the Option after his or her termination of employment with the Company and all Subsidiaries. These terms will be determined by the Committee in its sole discretion, need not be uniform among all Options, and may reflect, among other things, distinctions based on the reasons for termination of employment. 6.10 Nontransferability of Options. Except as otherwise provided in a Participant's Award Agreement, no Option granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, except as otherwise provided in a Participant's Award Agreement, all Options will be exercisable during the Participant's lifetime only by the Participant or his or her guardian or legal representative. The Committee may, in its discretion, require a Participant's guardian or legal representative to supply it with the evidence the Committee deems necessary to establish the authority of the guardian or legal representative to act on behalf of the Participant. 10 Article 7. Stock Appreciation Rights 7.1 Grant of SARs. Subject to the terms and conditions of the Plan, SARs may be granted to Participants at any time and from time to time, as determined by the Committee. The Committee may grant Freestanding SARs, Tandem SARs or any combination of the two. Within the limits of Article 4, the Committee will have sole discretion to determine the number of SARs granted to each Participant and, consistent with the provisions of the Plan, to determine the terms and conditions pertaining to SARs. The grant price of a Freestanding SAR will equal the Fair Market Value on the date of grant of the SAR. The grant price of a Tandem SAR will equal the per Share Exercise Price of the Option to which it relates. 7.2 Exercise of Tandem SARs. Tandem SARs may be exercised for all or part of the Shares subject to the related Option, upon the surrender of the right to exercise the equivalent portion of the related Option. A Tandem SAR may be exercised only with respect to the Shares for which its related Option is then exercisable. 7.3 Exercise of Freestanding SARs. Freestanding SARs may be exercised upon whatever terms and conditions the Committee, in its sole discretion, imposes. 7.4 Award Agreement. Each SAR grant will be evidenced by an Award Agreement that specifies the grant price, the term of the SAR and such other provisions as the Committee determines. 7.5 Term of SARS. The term of an SAR will be determined by the Committee, in its sole discretion, but may not exceed ten years. 7.6 Payment of SAR Amount. Upon exercise of an SAR, a Participant will be entitled to receive payment from the Company in an amount determined by multiplying: (a) the excess (or some portion of the excess as determined at the time of the grant by the Committee) if any, of the Fair Market Value on the date of exercise of the SAR over the grant price specified in the Award Agreement; by 11 (b) the number of Shares as to which the SAR is exercised. At the discretion of the Participant, the payment upon SAR exercise may be made in cash, in Shares of equivalent Fair Market Value or in some combination of the two. 7.7 Termination of Employment. Each SAR Award Agreement will set forth the extent to which the Participant has the right to exercise the SAR after his or her termination of employment with the Company and all Subsidiaries. These terms will be determined by the Committee in its sole discretion, need not be uniform among all SARs issued under the Plan, and may reflect, among other things, distinctions based on the reasons for termination of employment. 7.8 Nontransferability of SARs. Except as otherwise provided in a Participant's Award Agreement, no SAR may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, except as otherwise provided in a Participant's Award Agreement, all SARs will be exercisable during the Participant's lifetime only by the Participant or the Participant's guardian or legal representative. The Committee may, in its discretion, require a Participant's guardian or legal representative to supply it with evidence the Committee deems necessary to establish the authority of the guardian or legal representative to act on behalf of the Participant. Article 8. Restricted Stock 8.1 Grant of Restricted Stock. Subject to the terms and provisions of the Plan, the Committee may, at any time and from time to time, grant Restricted Stock to Participants in such amounts as it determines. 8.2 Deferral of Compensation into Restricted Stock. Subject to the terms and provisions of the Plan, the Committee may, at any time and from time to time, allow (or require, as to bonuses) selected Eligible Employees to defer the payment of any portion of their salary and/or annual bonuses pursuant to this section. A Participant's deferral under this section will be credited to the Participant in the form of Shares of Restricted Stock. The Committee will establish rules and procedures for the deferrals, as it deems appropriate. In consideration for forgoing compensation, the dollar amount deferred by a Participant may be increased by twenty-five percent (or such lesser percentage as the Committee may determine) for purposes of determining the number of Shares of Restricted Stock to grant the Participant. If a 12 Participant's compensation is deferred under this Section 8.2, he or she will be credited, as of the date specified in the Award Agreement, with a number of shares of Restricted Stock equal to the amount of the deferral (increased as described above) divided by the Fair Market Value on that date. 8.3 Award Agreement. Each Restricted Stock grant will be evidenced by an Award Agreement that specifies the Restriction Periods, the number of Shares granted, and such other provisions as the Committee determines. 8.4 Nontransferability. The Restricted Stock granted herein may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distributions, until the end of the applicable Restriction Period as specified in the Award Agreement, or upon earlier satisfaction of any other conditions specified by the Committee in its sole discretion and set forth in the Award Agreement. All rights with respect to Restricted Stock will be available during the Participant's lifetime only to the Participant or the Participant's guardian or legal representative. The Committee may, in its discretion, require a Participant's guardian or legal representative to supply it with evidence the Committee deems necessary to establish the authority of the guardian or legal representative to act on behalf of the Participant. 8.5 Other Restrictions. Subject to Article 11, the Committee may impose such other conditions and/or restrictions on any Restricted Stock as it deems advisable including, without limitation, restrictions based upon the achievement of specific performance objectives (Company-wide, business unit, and/or individual), time-based restrictions on vesting following the attainment of the performance objectives, and/or restrictions under applicable federal or state securities laws. The Committee may provide that restrictions established under this Section 8.5 as to any given Award will lapse all at once or in installments. The Company will retain the certificates representing Shares of Restricted Stock in its possession until all conditions and/or restrictions applicable to the Shares have been satisfied. 8.6 Payment of Awards. Except as otherwise provided in this Article 8, Shares covered by each Restricted Stock grant will become freely transferable by the Participant after the last day of the applicable Restriction Period. 8.7 Voting Rights. During the Restriction Period, Participants holding Shares of Restricted Stock may exercise full voting rights with respect to those Shares. 13 8.8 Dividends and Other Distributions. During the Restriction Period, Participants awarded Shares of Restricted Stock hereunder will be credited with regular cash dividends paid on those Shares. Dividends may be paid currently, accrued as contingent cash obligations, or converted into additional Shares of Restricted Stock, upon such terms as the Committee establishes. The Committee may apply any restrictions it deems advisable to the crediting and payment of dividends and other distributions. Without limiting the generality of the preceding sentence, if the grant or vesting of Restricted Stock is designed to qualify for the Performance-Based Exception, the Committee may apply any restrictions it deems appropriate to the payment of dividends declared with respect to the Restricted Stock, so that the dividends and/or the Restricted Stock continue to be eligible for the Performance-Based Exception. 8.9 Termination of Employment. Each Award Agreement will set forth the extent to which the Participant has the right to retain unvested Restricted Stock after his or her termination of employment with the Company or a Subsidiary. These terms will be determined by the Committee in its sole discretion, need not be uniform among all Awards of Restricted Stock, and may reflect, among other things, distinctions based on the reasons for termination of employment. Article 9. Performance Units and Performance Shares 9.1 Grant of Performance Units/Shares. Subject to the terms of the Plan, Performance Units and/or Performance Shares may be granted to Participants in such amounts and upon such terms, and at any time and from time to time, as the Committee determines. 9.2 Value of Performance Units/Shares. Each Performance Unit will have an initial value established by the Committee at the time of grant. Each Performance Share will have an initial value equal to the Fair Market Value on the date of grant. The Committee will set performance objectives in its discretion which, depending on the extent to which they are met, will determine the number and/or value of Performance Units/Shares that will be paid out to the Participant. For purposes of this Article 9, the time period during which the performance objectives must be met will be called a "Performance Period" and will be set by the Committee in its discretion. 9.3 Earning of Performance Units/Shares. Subject to the terms of this Plan, after the applicable Performance Period has ended, the holder of Performance Units/Shares will be entitled to receive payout on the number and value of Performance Units/Shares earned by the Participant 14 over the Performance Period, to be determined as a function of the extent to which the corresponding performance objectives have been achieved. 9.4 Award Agreement. Each grant of Performance Units and/or Performance Shares will be evidenced by an Award Agreement specifying the material terms and conditions of the Award (including the form of payment of earned Performance Units/Shares), and such other provisions as the Committee determines. 9.5 Form and Timing of Payment of Performance Units/Shares. Except as provided in Article 12, payment of earned Performance Units/Shares will be made as soon as practicable after the close of the applicable Performance Period, in a manner determined by the Committee in its sole discretion. The Committee will pay earned Performance Units/Shares in the form of cash, in Shares, or in a combination of cash and Shares, as specified in the Award Agreement. Performance Shares may be paid subject to any restrictions deemed appropriate by the Committee. 9.6 Termination of Employment Due to Death or Disability. Unless determined otherwise by the Committee and set forth in the Participant's Award Agreement, if a Participant's employment is terminated by reason of death or Disability during a Performance Period, the Participant will receive a prorated payout of the Performance Units/Shares, as specified by the Committee in its discretion in the Award Agreement. Payment of earned Performance Units/Shares will be made at a time specified by the Committee in its sole discretion and set forth in the Participant's Award Agreement. 9.7 Termination of Employment for Other Reasons. If a Participant's employment terminates during a Performance Period for any reason other than death or Disability, the Participant will forfeit all Performance Units/Shares to the Company, unless the Participant's Award Agreement provides otherwise. 9.8 Nontransferability. Except as otherwise provided in a Participant's Award Agreement, Performance Units/Shares may not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, except as otherwise provided in a Participant's Award Agreement, a Participant's rights under the Plan will be exercisable during the Participant's lifetime only by the Participant or Participant's guardian or legal representative. The Committee may, in its discretion, require a Participant's guardian or legal representative to supply it with evidence the Committee deems necessary to establish the authority of the guardian or legal representative to act on behalf of the Participant. 15 Article 10. Performance Measures Unless and until the Committee proposes and the Company's stockholders approve a change in the general performance measures set forth in this Article 10, the performance measure(s) to be used for purposes of Awards designed to qualify for the Performance-Based Exception will be chosen from among the following alternatives: (a) net earnings; (b) operating earnings or income; (c) earnings growth; (d) net income (absolute or competitive growth rates comparative); (e) net income applicable to Common Stock; (f) cash flow, including operating cash flow, free cash flow, discounted cash flow return on investment, and cash flow in excess of cost of capital; (g) earnings per Common share; (h) return on stockholders equity (absolute or peer-group comparative); (i) stock price (absolute or peer-group comparative); (j) absolute and/or relative return on common stockholders equity; (k) absolute and/or relative return on capital; (l) absolute and/or relative return on assets; (m) economic value added (income in excess of cost of capital); (n) customer satisfaction; (o) expense reduction; and 16 (p) ratio of operating expenses to operating revenues. The Committee will have the discretion to adjust targets set for preestablished performance objectives; however, Awards designed to qualify for the Performance-Based Exception may not be adjusted upward, except to the extent permitted under Code Section 162(m), to reflect accounting changes or other events. If Code Section 162(m) or other applicable tax and/or securities laws change to allow the Committee discretion to change the types performance measures without obtaining shareholder approval, the Committee will have sole discretion to make such changes without obtaining stockholder approval. In addition, if the Committee determines it is advisable to grant Awards that will not qualify for the Performance-Based Exception, the Committee may grant Awards that do not so qualify. Article 11. Beneficiary Designation Each Participant may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be paid in case the Participant should die before receiving any or all of his or her Plan benefits. Each beneficiary designation will revoke all prior designations by the same Participant, must be in a form prescribed by the Committee, and must be made during the Participant's lifetime. If the Participant's designated beneficiary predeceases the Participant or no beneficiary has been designated, benefits remaining unpaid at the Participant's death will be paid to the Participant's estate or other entity described in the Participant's Award Agreement. Article 12. Deferrals The Committee may permit or require a Participant to defer receipt of cash or Shares that would otherwise be due to him or her by virtue of an Option or SAR exercise, the lapse or waiver of restrictions on Restricted Stock, or the satisfaction of any requirements or objectives with respect to Performance Units/Shares. If any such deferral election is permitted or required, the Committee will, in its sole discretion, establish rules and procedures for such deferrals. Notwithstanding the foregoing, the Committee in its sole discretion may defer payment of cash or the delivery of Shares that would otherwise be due to a Participant under the Plan if payment or delivery would result in the Company's or a Subsidiary's being unable to deduct compensation under Code Section 162(m). 17 Deferral of payment or delivery by the Committee may continue until the Company or Subsidiary is able to deduct the payment or delivery under the Code. Article 13. Rights of Employees 13.1 Employment. Nothing in the Plan will interfere with or limit in any way the right of the Company or any affiliate of the Company (as defined in federal securities laws) to terminate any Participant's employment at any time, or confer upon any Participant any right to continue in the employ of the Company or any Subsidiary. 13.2 Participation. No Eligible Employee will have the right to receive an Award under this Plan, or, having received any Award, to receive a future Award. Article 14. Initial Public Offering Protections. If, within three years after the Company's initial public offering of the Shares, a Participant's employment with the Company and all Subsidiaries is terminated for a reason other than Cause, or the Participant terminates his or her employment with the Company and all Subsidiaries for Good Reason, unless otherwise specifically prohibited under applicable law or by applicable rules and regulations of any governmental agencies or national securities exchanges, upon such termination: (a) any and all outstanding Options and SARs will become immediately exercisable, and will remain exercisable throughout their entire term; (b) any Restriction Periods or restrictions imposed on Restricted Stock will lapse, but the degree of vesting in Restricted Stock that has been conditioned upon the achievement of performance conditions under Section 8.5 will be determined in the manner set forth in Section 14.1(c); and (c) except as otherwise provided in the Award Agreement, all Performance Units and Performance Shares will fully vest, and within thirty days following the Participant's termination of employment, he or she will be paid in cash a pro rata amount based upon assumed achievement of all relevant performance objectives at target levels, and upon the fraction of the total Performance Period completed before the effective date of the termination in employment. 18 Article 15. Amendment, Modification and Termination 15.1 Amendment, Modification and Termination. Subject to Section 14.2, the Board may at any time and from time to time, alter, amend, modify or terminate the Plan in whole or in part. Subject to the terms and conditions of the Plan, the Committee may modify, extend or renew outstanding Awards under the Plan, or accept the surrender of outstanding Awards (to the extent not already exercised) and grant new Awards in substitution of them (to the extent not already exercised). The Committee will not, however, modify any outstanding Incentive Stock Option so as to specify a lower Exercise Price. Notwithstanding the foregoing, no modification of an Award will, without the prior written consent of the Participant, alter or impair any rights or obligations under any Award already granted under the Plan. 15.2 Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events. In recognition of unusual or nonrecurring events (including, without limitation, the events described in Section 4.3) affecting the Company or its financial statements, or in recognition of changes in applicable laws, regulations, or accounting principles, and, whenever the Committee determines that adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, the Committee may, using reasonable care, make adjustments in the terms and conditions of, and the criteria included in, Awards. In case of an Award designed to qualify for the Performance-Based Exception, the Committee will take care not to make an adjustment that would disqualify the Award. 15.3 Compliance with Code Section 162(m). Awards will comply with the requirements of Code Section 162(m), unless the Committee determines that such compliance is not desired with respect to an Award available for grant under the Plan. In addition, if changes are made to Code Section 162(m) to permit greater flexibility as to any Award available under the Plan, the Committee may, subject to this Article 15, make any adjustments it deems appropriate. Article 16. Withholding 16.1 Tax Withholding. The Company will have the power and the right to deduct or withhold, or require a Participant to remit to the Company, an amount (either in cash or Shares) sufficient to satisfy federal, state, and local taxes, domestic or foreign, required by law or regulation to be withheld with respect to any taxable event arising under this Plan. Each Award Agreement will specify whether reload options will be granted in connection with payment of tax withholding by tendering Shares owned by the Participant. 19 16.2 Share Withholding. With respect to withholding required upon the exercise of Options or SARs, upon the lapse of restrictions on Restricted Stock, or upon any other taxable event arising as a result of Awards granted hereunder, the Company may satisfy the minimum withholding requirement for supplemental wages, in whole or in part, by withholding Shares having a Fair Market Value (determined on the date the Participant recognizes taxable income on the Award) equal to the withholding tax required to be collected on the transaction. The Participant may elect, subject to the approval of the Committee, to deliver the necessary funds to satisfy the withholding obligation to the Company, in which case there will be no reduction in the Shares otherwise distributable to the Participant. Article 17. Successors All obligations of the Company under the Plan or any Award Agreement will be binding on any successor to the Company, whether the existence of the successor results from a direct or indirect purchase of all or substantially all of the business and/or assets of the Company, or a merger, consolidation, or otherwise. Article 18. Legal Construction 18.1 Number. Except where otherwise indicated by the context, any plural term used in this Plan includes the singular and a singular term includes the plural. 18.2 Severability. If any provision of the Plan is held illegal or invalid for any reason, the illegality or invalidity will not affect the remaining parts of the Plan, and the Plan will be construed and enforced as if the illegal or invalid provision had not been included. 18.3 Requirements of Law. The granting of Awards and the issuance of Share and/or cash payouts under the Plan will be subject to all applicable laws, rules, and regulations, and to any approvals by governmental agencies or national securities exchanges as may be required. 18.4 Securities Law Compliance. As to any individual who is, on the relevant date, an officer, director or ten percent beneficial owner of any class of the Company's equity securities that is registered pursuant to Section 12 of the Exchange Act, all as defined under Section 16 of the Exchange Act, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 under the Exchange Act, or any successor rule. To the extent any provision of the Plan 20 or action by the Committee fails to so comply, it will be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. 18.5 Awards to Foreign Nationals and Employees Outside the United States. To the extent the Committee deems it necessary, appropriate or desirable to comply with foreign law of practice and to further the purposes of this Plan, the Committee may, without amending the Plan, (i) establish rules applicable to Awards granted to Participants who are foreign nationals, are employed outside the United States, or both, including rules that differ from those set forth in this Plan, and (ii) grant Awards to such Participants in accordance with those rules. 18.6 Unfunded Status of the Plan. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments or deliveries of Shares not yet made to a Participant by the Company, the Participant's rights are no greater than those of a general creditor of the Company. The Committee may authorize the establishment of trusts or other arrangements to meet the obligations created under the Plan, so long as the arrangement does not cause the Plan to lose its legal status as an unfunded plan. 18.7 Governing Law. To the extent not preempted by federal law, the Plan and all agreements hereunder will be construed in accordance with and governed by the laws of the State of Delaware. 21 EX-10.2 8 REGISTRATION RIGHTS AGREEMENT EXHIBIT 10.2 REGISTRATION RIGHTS AGREEMENT ----------------------------- THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made and entered into this ____th day of ______, 1998, by and between HELLER FINANCIAL, INC., a Delaware corporation (the "Company"), and THE FUJI BANK LIMITED, a Japanese banking corporation (together with its subsidiaries is hereinafter referred to as "Fuji Bank"). WHEREAS, in connection with the initial public offering of shares of Class A common stock, $0.25 par value per share, of the Company (the "Class A Common Stock"), the Company desires to grant to Fuji Bank and a Qualified Transferee (as defined below) certain registration rights with respect to the Class A Common Stock held directly or indirectly by Fuji Bank or a Qualified Transferee or issuable upon conversion of any other security (including shares of the Class B common stock, $0.25 par value per share, of the Company (the "Class B Common Stock") held by Fuji Bank or such Qualified Transferee. WHEREAS, the parties hereto desire to set forth the terms and conditions of the Company's covenants and agreements in respect of the registration of the Class A Common Stock with the Securities and Exchange Commission and all applicable state securities agencies. NOW, THEREFORE, in consideration of the foregoing and the mutual convents and agreements herein contained, and intending to be legally bound hereby, the parties hereto hereby agree as follows: 1. Certain Definitions. The following terms, as used herein, have the ------------------- following meanings: "Affiliate" of a Holder means a Person who controls, is controlled by --------- or is under common control with such Holder or the spouse or children (or a trust exclusively for the benefit of a spouse or children) of such Holder or, in the case of a Holder that is a partnership, its partners. "Agreement" has the meaning set forth in the preamble to this --------- Agreement. "Class A Common Stock" has the meaning set forth in the preamble to -------------------- this Agreement. "Class B Common Stock" has the meaning set forth in the preamble to -------------------- this Agreement. "Common Stock" means the Class A Common Stock and the Class B Common ------------ Stock, collectively. "Company" has the meaning set forth in the preamble to this Agreement. ------- "Exchange Act" means the Securities Exchange Act of 1934, as amended, ------------ or any similar federal statute, and the rules and regulations of the SEC thereunder, all as the same shall be in effect at the time. "Fuji Bank" has the meaning set forth in the preamble to this --------- Agreement. "Holder(s)" means Fuji Bank and a Qualified Transferee. --------- "Initiating Holders" has the meaning set forth in Section 2(a). ------------------ "IPO" means the initial public offering of the Class A Common Stock. --- "NASD" means the National Association of Securities Dealers, Inc. ---- "Person" means an individual, corporation, partnership, limited ------ liability company, limited partnership, syndicate, person (including, without limitation, a "person" as defined in Section 13(d)(3) of the Exchange Act), trust, association or entity or government, political subdivision, agency or instrumentality of a government. "Qualified Transferee" means one unrelated person or its subsidiaries -------------------- to whom shares of Class B Common Stock representing more than 50% of the combined voting power of all outstanding shares of the Company's voting stock are transferred by Fuji Bank in a single transaction. "register," "registered" and "registration" refer to a registration -------- ---------- ------------ effected by preparing and filing a registration statement or similar document in compliance with the Securities Act and the declaration or ordering of effectiveness by the SEC of such registration statement or document. "Registrable Stock" means (a) the Class A Common Stock issuable upon ----------------- the conversion of the Class B Common Stock owned by a Holder immediately after the IPO, (b) any Class A Common Stock acquired by a Holder in the open market at a time when such Holder is deemed to be an Affiliate of the Company, so long as (i) such Class A Common Stock is owned by such Holder and (ii) such Holder continues to be deemed an Affiliate of the Company, and (c) any shares of Class A Common Stock issued or issuable with respect to any such shares of Registrable Stock referred to in clauses (a) and (b) above by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise. For purposes of this Agreement, any Registrable Stock shall cease to be Registrable Stock when (1) a registration statement covering such Registrable Stock has been declared effective and such Registrable Stock has been disposed of pursuant to such effective registration statement, (2) such Registrable Stock is sold or otherwise transferred by a Person in a transaction in which the rights under the provisions of this Agreement are not assigned or (3) such Registrable Stock is sold pursuant to Rule 144 -2- (including Rule 144(k)) (or any similar provision then in force under the Securities Act) without registration under the Securities Act. "SEC" means the Securities and Exchange Commission. --- "Securities Act" means the Securities Act of 1933, as amended, or any -------------- similar federal statute, as the same shall be in effect at the time. 2. Demand for Registration. ----------------------- (a) On and after the date that is six (6) months from the date of the final prospectus (as included in a registration statement filed under the Securities Act and declared effective by the SEC) covering the shares of Class A Common Stock sold by the Company in the IPO, the Holders of the Registrable Stock (the "Initiating Holders") may demand in a written notice ------------------ that the Company file a registration statement under the Securities Act covering the registration of any or all Registrable Stock held by such Initiating Holders in the manner specified in such notice. Following receipt of any notice under this Section 2 the Company shall (i) within twenty (20) days notify all other Holders, if any, of such request in writing and (ii) use its reasonable efforts to effect the registration (as set forth in Section 4) of all Registrable Stock that the Initiating Holders and such other Holders have demanded, within ten (10) days after the Company has given such notice, be registered in accordance with the manner of disposition specified in such notice by the Initiating Holders. (b) If the Initiating Holders have set forth in their written demand for registration that they intend to have the Registrable Stock distributed by means of an underwritten offering, the Company shall include such information in the written notice referred to in clause (i) of Section 2(a). In such event, the right of any Holder to include its Registrable Stock in such registration shall be conditioned upon such Holder's participation in such underwritten offering and the inclusion of such Holder's Registrable Stock in the underwritten offering (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder) on the terms provided below. All Holders proposing to distribute Registrable Stock through such underwritten offering shall enter into an underwriting agreement in customary form with the underwriter or underwriters. Such underwriter or underwriters shall be selected by a majority in interest of the Initiating Holders and shall be approved by the Company, which approval shall not be unreasonably withheld, provided, that -------- (i) all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of such Holders of Registrable Stock, and (ii) any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement shall be conditions precedent to the obligations of such Holders of Registrable Stock. If Holder of Registrable Stock disapproves of the terms of the underwriting, such Holder may elect to withdraw all its Registrable Stock by written notice to the Company, the managing underwriter or -3- underwriters, and the Initiating Holders. The Registrable Stock so withdrawn shall also be withdrawn from registration. (c) Notwithstanding any provision of this Agreement to the contrary: (i) the Company shall not be required to effect a registration pursuant to this Section 2 during the period starting with the date thirty (30) days prior to the filing by the Company of, and ending on a date one hundred eighty (180) days following the effective date of, a registration statement pertaining to a public offering of securities for the account of the Company or on behalf of selling stockholders under any other registration rights agreement which the Holders have been entitled to join pursuant to Section 3; provided that the Company shall actively employ in good -------- faith all reasonable efforts to cause such registration statement to become effective as soon after such period as possible; and (ii) if the Company shall determine in good faith that such registration would require the Company to disclose a material financing, acquisition or other transaction then being pursued by the Company and the Company shall determine in good faith that such disclosure is not in the best interests of the Company or would interfere with such transaction, the Company's obligation to use its reasonable efforts to file a registration statement shall be deferred for a period not to exceed ninety (90) days. (d) The Company shall not be obligated to effect or pay for more than one (1) registration pursuant to this Section 2; provided, that a -------- registration demanded pursuant to this Section 2 shall not be deemed to have been effected for purposes of this Section 2(d) unless (i) it has been declared effective by the SEC, (ii) it has remained effective for the period set forth in Section 4 and (iii) the offering of Registrable Stock pursuant to such registration is not subject to any stop order, injunction, or other order or requirement of the SEC preventing the use of the registration statement (other than any such stop order, injunction, or other order or requirement of the SEC prompted by any act or omission of Holders of Registrable Stock). 3. Participatory Registration. If at any time the Company determines -------------------------- that it shall file a registration statement under the Securities Act (other than a registration statement on a Form S-4 or S-8 or any successor forms or filed in connection with a merger, acquisition, exchange offer or other business combination transaction or an offering of securities solely to the Company's existing securityholders or employees) on any form that would also permit the registration of the Registrable Stock and such filing is to be on its behalf or on behalf of selling holders of its securities, or on behalf of both, for the general registration of its Class A Common Stock to be sold for cash, the Company shall each such time promptly give each Holder written -4- notice of such determination setting forth the date on which the Company proposes to file such registration statement, which date shall be no earlier than fifteen (15) days from the date of such notice, and advising each Holder of its right to request that its Registrable Stock be included in such registration. Upon the written request of any Holder received by the Company no later than ten (10) days after the date of receipt of the Company's notice, the Company shall use its reasonable efforts to effect the registration (as set forth in Section 4) of all of the Registrable Stock that each such Holder has so requested to be registered and to cause the managing underwriter or underwriters of the proposed underwritten offering to permit such Holder to include its Registrable Stock in such offering on the same terms and conditions as the shares of Class A Common Stock to be sold by the Company (or, if no shares are to be sold by the Company, the shares of Class A Common Stock to be sold by selling stockholders) included therein. If, in the written opinion of the managing underwriter or underwriters (or, in the case of a non-underwritten offering, in the reasonable good faith opinion of the Company), the total number of shares of Class A Common Stock to be so registered, including such Registrable Stock, will exceed the maximum number of shares of Class A Common Stock which can be marketed (a) at a price per share reasonably related to the then current market value per share of the Class A Common Stock, and (b) without otherwise materially and adversely affecting the entire offering, then the Company shall be entitled to reduce the number of shares of Registrable Stock to be registered. Any reduction made pursuant to the immediately preceding sentence shall be allocated among all such Holders in proportion (as nearly as practicable) to the amount of Registrable Stock owned by each Holder at the time of filing the registration statement. The Company shall not be required under this Section 3 to include shares of Registrable Stock in any underwritten offering unless the Holders of such shares of Registrable Stock accept the terms of the underwriting of such offering that have been reasonably agreed upon between the Company and the underwriters selected by the Company. 4. Registration Procedures. Whenever required under Section 2 or 3 to ----------------------- use its reasonable efforts to effect the registration of any Registrable Stock, the Company shall, as expeditiously as reasonably possible: (a) prepare and file with the SEC a registration statement, signed, pursuant to Section 6(a) of the Securities Act, by the requisite officers and directors of the Company, with respect to such Registrable Stock and use its reasonable efforts to cause such registration statement to become and remain effective for the period of the distribution contemplated thereby determined as hereinafter provided; (b) prepare and file with the SEC such amendments and supplements to such registration statement, signed, pursuant to Section 6(a) of the Securities Act, by the requisite officers and directors of the Company, and the prospectus used in connection therewith as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Stock covered by such registration statement; (c) furnish to the Holders such numbers of copies of the registration statement and the prospectus included therein (including each preliminary prospectus and any -5- amendments or supplements thereto in conformity with the requirements of the Securities Act) and such other documents and information as they may reasonably request; (d) use its reasonable efforts to register or qualify the Registrable Stock covered by such registration statement under such other securities or blue sky laws of such jurisdictions (if any) within the United States and Puerto Rico as shall be reasonably appropriate for the distribution of the Registrable Stock covered by the registration statement; provided, however, ----------------- that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business in or to file a general consent to service of process in any jurisdiction wherein it would not but for the requirements of this paragraph (d) be obligated to do so; and provided, --------- further, that the Company shall not be required to qualify such Registrable ------- Stock in any jurisdiction in which the securities regulatory authority requires that any Holder submit any shares of its Registrable Stock to the terms, provisions and restrictions of any escrow, lockup or similar agreement(s) for consent to sell Registrable Stock in such jurisdiction, unless such Holder agrees to do so; (e) promptly notify each Holder for whom such Registrable Stock is covered by such registration statement, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made, and at the request of any such Holder promptly prepare and furnish to such Holder a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made (and the Holders shall suspend the use of the prospectus until the requisite changes thereto have been made); (f) furnish, at the request of any Holder demanding registration of Registrable Stock pursuant to Section 2, if the method of distribution is by means of an underwriting, on the date that the shares of Registrable Stock are delivered to the underwriters for sale pursuant to such registration, or if such Registrable Stock is not being sold through underwriters, on the date that the registration statement with respect to such shares of Registrable Stock becomes effective, (i) a signed opinion, dated such date, of legal counsel representing the Company for the purpose of such registration, addressed to the underwriters, if any, and if such Registrable Stock is not being sold through underwriters, then to the Holders making such request, as to such matters as such underwritten or the Holders holding a majority of the Registrable Stock included in such registration, as the case may be, may reasonably request and as would be customary in such a transaction; and (ii) letters dated such date and the date the offering is priced from -6- the independent certified public accountants of the Company, addressed to the underwriters, if any, and if such Registrable Stock is not being sold through underwriters, then to the Holders making such request and, if such accountants refuse to deliver such letters to such Holders, then to the Company (A) stating that they are independent certified public accountants within the meaning of the Securities Act and that, in the opinion of such accountants, the financial statements and other financial data of the Company included in the registration statement or the prospectus, or any amendment or supplement thereto, comply as to form in all material respects with the applicable accounting requirements of the Securities Act and (B) covering such other financial matters (including information as to the period ending not more than five (5) business days prior to the date of such letters) with respect to the registration in respect of which such letter is being given as such underwriters or the Holders holding a majority of the Registrable Stock included in such registration, as the case may be, may reasonably request and as would be customary in such a transaction; (g) enter into customary agreements (including if the method of distribution is by means of an underwriting, an underwriting agreement in customary form) and take such other actions as are reasonably required in order to expedite or facilitate the disposition of the Registrable Stock to be so included in the registration statement; (h) otherwise use its reasonable efforts to comply with all applicable rules and regulations of the SEC, and make available to its security holders, as soon as reasonably practicable, but not later than eighteen (18) months after the effective date of the registration statement, an earnings statement covering the period of at least twelve (12) months beginning with the first day of the first full fiscal quarter after the effective date of such registration statement, which earnings statements shall satisfy the provisions of Section 11(a) of the Securities Act; (i) use its reasonable efforts to list the Registrable Stock covered by such registration statement with any securities exchange on which the Class A Common Stock is then listed; and (j) notwithstanding any provision of this Section 4 to the contrary, the Company shall not be required to amend or supplement a prospectus for a period not to exceed ninety (90) days if (i) such amendment or supplement would require the Company to disclose a material financing, acquisition or other transaction then being pursued by the Company and the Company shall determine in good faith that such disclosure is not in the best interests of the Company or would interfere with such transaction or (ii) the Company shall determine in good faith that there is a valid business purpose or reason for suspending the use of such prospectus in accordance with Section 4(e) hereof instead of making such amendment or supplement. For purposes of Sections 4(a) and 4(b), the period of distribution of Registrable Stock in a firm commitment underwritten public offering shall be deemed to extend until each -7- underwriter has completed the distribution of all securities purchased by it, and the period of distribution of Registrable Stock in any other registration shall be deemed to extend until the earlier of (i) the sale of all Registrable Stock covered thereby and (ii) six (6) months after the effective date thereof. 5. Information from Holders. It shall be a condition precedent to the ------------------------ obligations of the Company to take any action pursuant to this Agreement that the Holders shall furnish to the Company such information regarding themselves, the Registrable Stock held by them, and the intended method of disposition of such securities as the Company shall reasonably request and as shall be required in connection with the action to be taken by the Company. 6. Expenses of Registration. All expenses incurred in connection with ------------------------ each registration pursuant to Section 2 and Section 3 of this Agreement, excluding underwriters' discounts and commissions, but including without limitation all registration, filing and qualification fees, word processing, duplicating, printers' and accounting fees (including the expenses of any special audits or "cold comfort" letters required by or incident to such performance and compliance), fees of the New York Stock Exchange or other listing fees, NASD filing fees, messenger and delivery expenses, fees and expenses of complying with state securities or blue sky laws, fees and disbursements of counsel for the Company, and the reasonable fees and disbursements of one counsel for the selling Holders (which counsel shall be selected by the Holders holding a majority in interest of the Registrable Stock being registered), shall be paid by the Company; provided, however, that if a ----------------- registration request pursuant to Section 2 of this Agreement is subsequently withdrawn at the request of the Holders, such withdrawing Holders shall bear such expenses. The Holders shall bear and pay the underwriting commissions and discounts applicable to securities offered for their account in connection with any registrations, filings and qualifications made pursuant to this Agreement. 7. Information from the Company. With a view to making ----------------------------- available the benefits of certain rules and regulations of the SEC which may at any time permit the sale of the Registrable Stock to the public without registration, (a) at all times after ninety (90) days after the registration statement under the Securities Act covering the IPO shall have been declared effective by the SEC, the Company agrees to: (i) use its reasonable best efforts to file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act, or otherwise make and keep public information available (as those terms are understood and defined in Rule 144 under the Securities Act); and (ii) furnish to each Holder of Registrable Stock forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of the Exchange Act, a copy of the most recent annual report on Form 10-K or quarterly report on Form 10-Q of the Company, and such other reports and documents -8- so filed by the Company as such Holder may reasonably request in availing itself of any rule or regulation of the SEC allowing such Holder to sell any Registrable Stock without registration; and (b) at all times during which the Company is neither subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, it will provide, upon the written request of any Holder of Registrable Stock in written form (as promptly as reasonably practicable and in any event within 15 business days), to any prospective buyer of such stock designated by such Holder, all information required by Rule 144A(d)(4)(i) of the General Regulations promulgated by the SEC under the Securities Act. 8. Indemnification. In the event any Registrable Stock is included in a --------------- registration statement under this Agreement: (a) The Company shall indemnify and hold harmless each Holder, such Holder's directors and officers, each underwriter (as defined in the Securities Act) who participates in the offering of the Registrable Stock, and each Person who controls such Holder within the meaning of Section 15 of the Securities Act, against any losses, claims, damages or liabilities, joint or several, which a Holder, any such director or officer, underwriter or controlling Person may incur under the Securities Act or otherwise, insofar as such losses, claims, damages, liabilities (or proceedings in respect thereof) arise out of or are based on any untrue or alleged untrue statement of any material fact contained in such registration statement on the effective date thereof (including any preliminary prospectus, final prospectus or other prospectus filed pursuant to Rule 424 under the Securities Act or any amendments or supplements to any of the foregoing) or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and shall reimburse each such Holder, such Holder's directors and officers, such underwriter or controlling Person for any legal or other expenses reasonably incurred by him, her or it (but not in excess of expenses incurred in respect of one counsel for all of them unless, in the reasonable judgement of an indemnified party there is a conflict of interest with another indemnified party, in which case the Company will reimburse the indemnified parties for one additional counsel) in connection with investigating or defending any such loss, claim, damage, liability or proceeding; provided, however, that -------- ------- the indemnity agreement contained in this Section 8(a) shall not apply to any Holder, such Holder's directors and officers, underwriter or controlling Person in any such case for any such loss, claim, damage, liability or proceeding if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld); provided, further, that the Company shall not be liable to any Holder, such -------- ------- Holder's directors and officers, underwriter or controlling Person in any such case for any such loss, claim, damage, liability or expenses to the extent that it arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in connection with such registration statement, preliminary -9- prospectus, final prospectus, a prospectus filed under Rule 424 of the Securities Act or amendments or supplements to any of the foregoing, in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, such Holder's directors and officers, underwriter or controlling Person; and provided, further that, with respect to any untrue statement or -------- ------- alleged untrue statement or omission or alleged omission made in any prospectus (preliminary or otherwise), the foregoing indemnity agreement shall not inure to the benefit of any underwriter or (in the case of an offering that is not underwritten) any Holder from whom the person asserting any such loss, claim, damage, liability or proceeding purchased the Registrable Stock concerned, or any officer or director of or Person controlling such underwriter or (in the case of an offering that is not underwritten) such Holder, to the extent any such loss, claim, damage, liability or proceeding of such underwriter or Holder results from the fact that a copy of the final prospectus (or the final prospectus as amended or supplemented) was not sent or given to such person, if required by the Securities Act so to have been delivered, at or prior to the written confirmation of the sale of such Registrable Stock to such person, and the untrue statement or the alleged untrue statement or the omission or the alleged omission was corrected in such final prospectus (or the final prospectus as amended or supplemented) if the Company had previously furnished copies of such final prospectus (or the final prospectus as amended or supplemented) to such underwriter or Holder. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of any such Holder, such Holder's directors and officers, underwriter or controlling Person, and shall survive the transfer of such securities by such Holder. (b) The Holders demanding or joining in a registration, severally and not jointly, shall indemnify and hold harmless the Company, each of its directors and officers, each Person, if any, who controls the Company within the meaning of Section 15 of the Securities Act, and each underwriter (within the meaning of the Securities Act) who participates in the offering of the Registrable Stock and each Person who controls such underwriter against any losses, claims, damages or liabilities, joint or several, to which the Company or any such director, officer, controlling Person or underwriter may incur, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or proceedings in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in such registration statement on the effective date thereof (including any preliminary prospectus, final prospectus or other prospectus filed pursuant to Rule 424 under the Securities Act or any amendments or supplements to any of the foregoing) or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in such registration statement, preliminary prospectus, final prospectus or other prospectus filed pursuant to Rule 424 of the Securities Act or amendments or supplements to any of the foregoing, in reliance upon and in conformity with written information furnished by or on behalf of such Holder expressly for use in connection with such registration and each such -10- Holder shall reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, controlling Person or underwriter (but not in excess of expenses incurred in respect of one counsel for all of them unless, in the reasonable judgement of an indemnified Person, there is a conflict of interest with another indemnified Person, in which case such Holder shall reimburse the indemnified Persons for one additional counsel) in connection with investigating or defending any such loss, claim, damage, liability or proceeding; provided, however, that the indemnity agreement contained in -------- ------- this Section 8(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or proceeding if such settlement is effected without the consent of such Holder (which consent shall not be unreasonably withheld), and provided, further, that the liability of each Holder -------- ------- hereunder shall not in any event exceed the net proceeds received by such Holder from the sale of Registrable Stock covered by such registration statement. (c) Promptly after receipt by an indemnified Person under this Section 8 of notice of the commencement of any action or proceeding, such indemnified Person shall, if a claim in respect thereof is to be made against any indemnifying Person under this Section, notify the indemnifying Person in writing of the commencement thereof, and the indemnifying Person shall have the right to participate in and assume the defense thereof with counsel selected by the indemnifying Person and reasonably satisfactory to the indemnified Person; provided, however, that an indemnified Person shall -------- ------- have the right to retain its own counsel, with all fees and expenses thereof to be paid by such indemnified Person (except as provided in paragraph (a) and (b) above), and to be apprised of all progress in any proceeding the defense of which has been assumed by the indemnifying Person. The failure to notify an indemnifying Person promptly of the commencement of any such action shall only release the indemnifying Person from any of its obligations under this Section 8 if, and only to the extent that, such indemnifying Person is materially prejudiced by such failure, but the omission to so notify the indemnifying Person will not relieve it of any liability that it may have to any indemnified Person otherwise than under this Section. (d) To the extent any indemnification by an indemnifying Person provided for in this Section 8 is prohibited or limited by law, the indemnifying Person, in lieu of indemnifying such indemnified Person, shall contribute to the amount paid or payable by such indemnified Person as a result of such losses, claims, damages or liabilities in such proportion as is appropriate to reflect the relative fault of the indemnifying Person and the indemnified Person in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault of such indemnifying Person and indemnified Person shall be determined by reference to, among other things, whether an untrue or alleged untrue statement of material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such indemnifying Person or indemnified Person, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or -11- payable by a Person as a result of losses, claims, damages or liabilities referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such Person in connection with any investigation or proceeding. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 8(d) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. 9. Lockup. Each Holder shall, in connection with any registration of the ------ Company's securities, upon the request of the Company or the underwriters managing any underwritten offering of the Company's securities, agree in writing not to effect any sale, disposition or distribution of any Registrable Stock (other than that included in the registration) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time not to exceed one hundred eighty (180) days from the effective date of such registration as the Company or the underwriters may specify; provided that all -------- executive officers and directors of the Company shall also have agreed not to effect any sale, disposition or distribution of any Registrable Stock under the circumstances and pursuant to the terms set forth in this Section 9. 10. Assignment of Registration Rights. The registration rights of any --------------------------------- Holder under this Agreement with respect to any Registrable Stock may be assigned to an Affiliate of such Holder; provided that (a) the assigning Holder -------- shall give the Company written notice at or prior to the time of such assignment stating the name and address of the assignee and identifying the securities with respect to which the rights under this Agreement are being assigned; (b) such assignee shall agree in writing, in form and substance reasonably satisfactory to the Company, to be bound as a Holder by the provisions of this Agreement; and (c) immediately following such assignment the further disposition of such securities by such assignee is restricted under the Securities Act. No assignment of the registration rights of any Holder with respect to any Registrable Stock in accordance with this Section 10 shall cause such Registrable Stock to lose such status. 11. Binding Effect; Benefit. This Agreement shall be binding upon and ----------------------- shall inure to the benefit of the parties hereto and their respective permitted successors and assigns. Nothing in this Agreement, expressed or implied, is intended to confer on any Person other than the parties hereto or their respective permitted successors and assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement. 12. Governing Law. This Agreement shall be governed by, and construed in ------------- accordance with, the Laws of the State of New York. -12- 13. Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which when executed and delivered shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement. 14. Headings. The descriptive headings contained in this Agreement are -------- included for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. 15. Notices. All notices, requests, claims, demands and other ------- communications hereunder shall be in writing and shall be given (and shall be deemed to have been duly given upon receipt) by delivery in person, by telecopy upon written confirmation of receipt by the recipient or by registered or certified mail (postage prepaid, return receipt requested) to the respective parties at the following addresses (or at such other address for a party as shall be specified in a notice given in accordance with this Section 15): if to the Company: Heller Financial, Inc. 500 West Monroe Street Chicago, Illinois 60661 Attention: General Counsel Telecopy Number: (312) 441-7456 if to The Fuji Bank Limited: [insert address] Attention: ______________________ Telecopy Number: ________________ 16. Amendments and Waivers. Any provision of this Agreement may be ---------------------- amended or waived if such amendment or waiver is in writing and is signed, in the case of an amendment, by each party to this Agreement, or in the case of a waiver, by the party against whom the waiver is to be effective. No failure or delay by any party in exercising any rich, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. 17. Severability. If any term or other provision of this Agreement is ------------ invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions set forth in this Agreement is not affected in any manner materially adverse to any party hereto. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely -13- as possible in a mutually acceptable manner in order that the transactions set forth in this Agreement be consummated as originally contemplated to the fullest extent possible. 18. Entire Agreement. This Agreement constitutes the entire agreement ---------------- among the parties with respect to the subject matter hereof and supersedes all prior agreements and understandings among the parties with respect thereto. 19. Attorneys' Fees. In the event that any party hereto shall file suit --------------- to enforce any of the terms of this Agreement or to recover damages for a breach Of this Agreement, the prevailing party shall be entitled to recover reasonable attorney's fees and costs incurred in such proceeding. -14- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. HELLER FINANCIAL, INC. By --------------------------------- Name: Title: THE FUJI BANK LIMITED By --------------------------------- Name: Title: -15- EX-10.5 9 AMENDED & RESTATED KEEP WELL AGREEMENT EXHIBIT 10.5 AMENDED AND RESTATED KEEP WELL AGREEMENT Dated as of April 15, 1998 This Amended and Restated Keep Well Agreement, dated as of April 15, 1998, amends and restates that certain Restated Keep Well Agreement dated as of June 17, 1997 (the "Prior Restated Keep Well Agreement") between The Fuji Bank, Limited, a Japanese banking corporation ("Fuji"), acting by and through its New York Branch (the "Branch"), and Heller Financial, Inc, a Delaware corporation ("Finance"). W I T N E S S E T H: WHEREAS, Fuji on January 26, 1984 purchased from Walter E. Heller International Corporation, a Delaware corporation ("Heller"), pursuant to a Stock Purchase Agreement dated as of April 23, 1983 (the "Stock Purchase Agreement"), all of the issued and outstanding shares of common stock of Finance and of Walter E. Heller Overseas Corporation; and WHEREAS, pursuant to the Stock Purchase Agreement, Fuji and Finance entered into a Keep Well Agreement dated as of April 23, 1983 (the "Original Keep Well Agreement") in order to assist Finance in maintaining its credit rating; and WHEREAS, the Prior Restated Keep Well Agreement was executed in order to reflect various amendments that had been made to the Original Keep Well Agreement; and WHEREAS, Finance and Fuji now desire to amend the Prior Restated Keep Well Agreement and to further restate such Prior Restated Keep Well Agreement to reflect such amendment; NOW, THEREFORE, the parties hereto agree to amend and restate the Prior Restated Keep Well Agreement as follows (the Prior Restated Keep Well Agreement as so amended and restated being referred to herein as the "Keep Well Agreement" or this "Agreement"): SECTION 1. Definitions. For the purposes of this Agreement: "Business Day" shall mean a day of the year on which dealings are carried on in the London interbank market and banks are open for business in London and not required or authorized to close in New York City or Chicago. "Commercial Paper" shall mean all commercial paper issued and sold by Finance (or by any issuing agent acting on behalf of Finance) after the date of the Original Keep Well Agreement and on or prior to the 30th Business Day after notice or termination of this Agreement is given by Fuji pursuant to Section 8(c) or by Finance pursuant to Section 8(d). "Illiquidity Certification" shall mean a certificate of the chief financial officer or chief accounting officer of Finance, in substantially the form of Exhibit A hereto. "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 C 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 1 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. "Net Worth" for any period shall mean the stockholders' equity of Finance (including preferred stock, common stock and earned surplus and all other items listed under the heading "Stockholders' Equity" on the balance sheet of Finance) as determined in accordance with generally accepted accounting principles, consistently applied, and shown on the balance sheet of Finance as at the close of such period; provided, however, that for the purposes of this Agreement, Net Worth shall be increased by the aggregate amount of the accrued and unpaid dividends on all shares of NW Preferred Stock outstanding on the last day of the period in respect of which Net Worth is being determined (and by the aggregate amount of the liquidation preference of all such shares of NW Preferred Stock to the extent not otherwise included in Net Worth pursuant to the foregoing provisions of this definition). "Net Worth Certification" for any period shall mean a certificate of the chief financial officer or chief accounting officer of Finance, in substantially the form of Exhibit B hereto, setting forth in detail the Net Worth for such period and the calculations upon which it has been determined and containing a notice of issuance of NW Preferred Stock. "Net Worth Deficiency" for any period shall mean the amount by which $500,000,000 exceeds the Net Worth in respect of such period. "NW Preferred Stock" shall mean the preferred stock of Finance entitled "NW Preferred Stock" and to be issued pursuant to Section 2 to Fuji or a subsidiary of Fuji as Fuji shall elect by written notice to Finance (such notice to be given to Finance no later than three Business Days prior to the date of issuance of any such NW Preferred Stock pursuant to Section 2), from time to time in one or more series, each without voting rights except as shall be provided for under the statutes of the State of Delaware, and having the following provisions: (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 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; (b) Redemption. Shares of NW Preferred Stock shall be redeemable no less than 30 and no more than 45 days following the end of a calendar quarter, in an aggregate amount in respect of such calendar quarter not exceeding the excess of Net Worth as of the end of such calendar quarter over $500,000,000, upon five Business Days' prior written notice to Finance from the holder thereof, at a redemption price equal to the price paid to the issuer for such shares upon the issuance thereof plus accumulated unpaid dividends; provided, however, that Finance shall be obligated to effect any such redemption only to the extent that its 2 doing so will not (i) result in a breach of or default under any agreement for or instrument evidencing indebtedness of Finance or guaranteed by Finance and (ii) conflict with the terms of the provisos to paragraph (a) of the definition of NW Preferred Stock; (c) No Sinking Fund. No shares of any series of NW Preferred Stock shall be subject or entitled to the benefit of a sinking fund; and (d) Liquidation Rights. Upon the liquidation, dissolution or winding up of Finance, the holders of the shares of each series of NW Preferred Stock shall be entitled to receive, out of the assets of the Company available therefor, an amount equal to the price paid for each such share upon the issuance thereof plus an amount equal to accrued dividends thereon to and including the date of payment. "Preferred Stock" shall mean either the Series A Preferred Stock or the Series C Preferred Stock, or both, as the context shall require. "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 C 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. "S&P" shall mean Standard & Poor's Ratings Services, A Division of The McGraw-Hill Companies, Inc. 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 C 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. "Series A Preferred Stock" shall mean the "Cumulative Perpetual Senior Preferred Stock, Series A" issued by Finance. "Series C Preferred Stock" shall mean the "Fixed Rate Noncumulative Perpetual Senior Preferred Stock, Series C" issued by Finance. "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 herein; 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 herein. "Series C 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 herein; 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 herein. "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. 3 SECTION 2. Net Worth Maintenance. If at the close of any month, there is a Net Worth Deficiency for such month, Finance shall forthwith send to Fuji a Net Worth Certification with respect thereto (accompanied by financial statements for such period) requesting Fuji to purchase, or to cause a subsidiary of Fuji to purchase, shares of NW Preferred Stock from Finance having an aggregate liquidation preference equal to such Net Worth Deficiency, and Fuji shall, within five Business Days after receipt by Fuji of such written request from Finance, purchase, or cause a subsidiary of Fuji to purchase, shares of NW Preferred Stock from Finance in such amount, against delivery of such shares to Fuji or the Branch or such subsidiary, as Fuji shall elect by three Business Days' prior written notice to Finance. SECTION 3. Liquidity Maintenance. If on or before the effectiveness of termination of this Agreement, Finance reasonably and in good faith determines that it will have insufficient cash or other liquid assets to meet its payment obligations on Commercial Paper maturing on the date in respect of which such determination is made (each such date being a "Shortfall Date" and the amount of such insufficiency occurring on such Shortfall Date being the "Liquidity Shortfall" in respect of such Shortfall Date), and it shall have available no unused commitments under its lines of credit, credit agreements and other credit facilities with lenders other than Fuji, then Finance shall forthwith send to the Branch an Illiquidity Certification requesting Fuji, through the Branch, to make an advance to Finance in an amount not exceeding such Liquidity Shortfall (such advance being a "Liquidity Advance"), and, upon receipt by the Branch no later than 11:00 A.M. (New York City time) on such Shortfall Date of such Illiquidity Certification and an executed promissory note (which may be signed manually by facsimile) in the form of Exhibit C hereto (a "Liquidity Advance Note") in respect of such Liquidity Advance, the Branch shall make a Liquidity Advance in such amount on such Shortfall Date. Each Liquidity Advance shall be repayable on demand made at any time after the Business Day following the 29th day after the day on which such Liquidity Advance is made, shall bear interest on the unpaid principal amount thereof from the date of such Advance until the principal amount thereof shall be paid in full, payable in arrears on the maturity thereof (and, in the case of any overdue principal, on demand), at a rate of interest equal to a fluctuating interest rate per annum equal at all times to 1/4 of 1% per annum above, but on any overdue principal amount 1 1/4 % per annum above, the rate of interest announced publicly by Morgan Guaranty Trust Company of New York in New York, New York from time to time as its prime commercial lending rate, and shall be prepayable by Finance, as a whole or in part, without premium, upon five Business days' prior written notice to Fuji; provided, however, that no repayment of a Liquidity Advance shall be made during the continuance of a default in the payment of any indebtedness of Finance for borrowed money which indebtedness is not by its terms subordinated to other indebtedness of Finance; and provided, further, that in no event shall Fuji's obligation pursuant to this Section 3 to make Liquidity Advances exceed in the aggregate for all Liquidity Advances at any time outstanding $500,000,000 (the "Liquidity Commitment"). SECTION 4. Limitation on Sale or Issuance of Common Stock of Finance. Fuji will not, prior to giving notice of termination of this Agreement pursuant to Section 8(c) or consenting to termination of this Agreement pursuant to Section 8(d), sell, pledge or otherwise dispose of, or permit any subsidiary to sell, pledge or otherwise dispose of, or permit Finance to issue, any shares of common stock of Finance, except that (i) Finance may issue shares of its common stock to Fuji or to any corporation all of whose outstanding common stock is owned directly or indirectly by Fuji, (ii) Fuji or any corporation all of whose outstanding common stock is owned directly or indirectly by Fuji may transfer shares of common stock of Finance to any corporation all of whose outstanding common stock is owned directly or indirectly by Fuji or to Fuji and (iii) Finance may issue, and Fuji or any corporation all of whose outstanding common stock is owned directly or indirectly by Fuji, may sell, pledge or otherwise dispose of, shares of the common stock of Finance to any one or more persons, corporations or other entities provided that, after giving effect thereto, Fuji (directly or indirectly through one or more subsidiaries) continues to hold greater than 50% of the combined voting power of all of the issued and outstanding common stock of Finance. SECTION 5. Representations and Warranties of Finance. Finance represents and warrants as follows: (a) The execution, delivery and performance by Finance of this Agreement and the performance of the transactions contemplated thereby are within Finance's corporate powers, have been duly authorized by all necessary corporate action, and do not contravene (i) Finance's charter or by-laws or (ii) any law or contractual restriction binding on or affecting Finance. (b) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by Finance of this Agreement or for the performance by Finance of the transactions contemplated hereby. 4 (c) This Agreement is, and each Liquidity Advance Note when issued hereunder will be, legal, valid and binding obligations of Finance enforceable against Finance in accordance with their respective terms, except as may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally. (d) A sufficient number of shares of NW Preferred Stock have been duly authorized for issuance and sale pursuant to this Agreement and, when issued and delivered pursuant to the provisions of this Agreement against payment of the consideration therefor described herein, each such share will be validly issued, fully paid and non-assessable; and each such share will conform to the description thereof contained herein, and such description will conform to such share. Upon its issuance, no share of NW Preferred Stock will be subject to the preemptive rights of any stockholder of Finance. (e) The offering, sale and delivery of the NW Preferred Stock to Fuji or a subsidiary of Fuji under the circumstances contemplated hereby do not require registration of the NW Preferred Stock under the Securities Act of 1933, as amended (the "1933 Act"), and do not require qualification of this Agreement or any indenture under the Trust Indenture Act of 1939, as amended. (f) All Commercial Paper will be exempt from registration under the 1933 Act by virtue of Section 3(a)(3) thereof. (g) Finance is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System), and no proceeds of any sale of NW Preferred Stock or any Liquidity Advance will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock. SECTION 6. Covenants of Finance. Finance covenants and agrees that, until the latest of the effective date of termination of this Agreement as herein provided, the redemption in full of all NW Preferred Stock and the repayment in full of all Liquidity Advances made by Fuji: (a) Finance will not issue or permit to be issued any Commercial Paper having maturity later than the Business Day immediately following the 269th day after its date of issue; (b) Finance will issue Commercial Paper only on such terms as will enable such Commercial Paper to be exempt from registration under the 1933 Act by virtue of Section 3(a)(3) thereof; (c) Finance will use its best efforts to meet maturities of outstanding Commercial Paper when due from sources (including the proceeds of commercial paper issued by Finance after notice of termination of this Agreement shall have been given pursuant to Section 8(c) or 8(d)) other than the proceeds of Liquidity Advances, and will use the proceeds of each Liquidity Advance solely for the payment at maturity of the Commercial Paper in respect of which such Liquidity Advance was requested; (d) Finance will, not less often than at the close of each month, determine whether there is a Net Worth Deficiency for the period as to which such determination is made; (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 (f) Immediately upon receipt of notice of (i) termination of this Agreement given by Fuji pursuant to Section 8(c) or (ii) consent by Fuji to termination of this Agreement by Finance pursuant to Section 8(d), Finance shall furnish notice of such termination to all Commercial Paper dealers and to each statistical rating agency that has issued a rating in respect of Finance or any of its commercial paper or other debt obligations. 5 SECTION 7. No Guarantee; Limitation on Applicability; No Commercial Paper Holder To Have Rights. This Agreement is not, and nothing herein contained and nothing done pursuant hereto by Fuji shall be deemed to constitute a guarantee, directly or indirectly, by Fuji of the payment of any Commercial Paper or other commercial paper, indebtedness, liability or obligation of any kind or character of Finance or any subsidiary of Finance, nor shall this Agreement or anything contained herein have any effect, directly or indirectly, upon or in respect of any commercial paper or upon or in respect of any Commercial Paper not issued and outstanding on the day notice of termination of this Agreement is given pursuant to Section 8(c) or on the day Fuji shall consent to termination of this Agreement pursuant to Section 8(d), as the case may be. Fuji shall not, by virtue of this Agreement, the transactions contemplated hereby or otherwise, have any obligation or liability of any kind or character to or in respect of any holder of any commercial paper or other indebtedness, liability or obligation of any kind or character of Finance or any subsidiary of Finance. SECTION 8. Modification, Amendment and Termination. (a) This Agreement may be modified or amended only by the written agreement of Fuji and Finance; provided, however, that (i) no such modification or amendment shall have any adverse effect upon any Commercial Paper outstanding at the time of such modification or amendment for so long as such Commercial Paper is outstanding; (ii) the provisions of Section 8(b), 8(c) and 8(d) shall not be modified or amended for any reason except and unless to extend the dates set forth therein; and (iii) prior to the Termination Date, the dollar amount of $500,000,000 set forth in each of Section 1 (in each of the definitions of "Net Worth Deficiency" and "NW Preferred Stock" - (b) Redemption) and Section 3 shall not be decreased for any reason. (b) This Agreement may not be terminated for any reason by either party hereto, and shall continue in full force and effect, until the Termination Date. After the Termination Date, this Agreement may be terminated by Fuji, in accordance with the provisions of Section 8(c) hereof, or by Finance, in accordance with the provisions of Section 8(d) hereof. (c) At any time after the Termination Date, this Agreement may be terminated by Fuji upon 30 Business Days' prior written notice to Finance (with a copy of such notice to each statistical rating agency referred to in Section 6(f) and, if Fuji shall so elect, to each Commercial Paper dealer). However, such termination shall not in any way relieve Finance of its obligations under the NW Preferred Stock outstanding on the date of such termination or under the Liquidity Advance Notes outstanding on the date of such termination, or in respect of Fuji's fee set forth in Section 9. Also, such termination shall not be effective as to the obligations of Fuji contained in Sections 2 and 3 until the scheduled maturity of all Commercial Paper issued in accordance with the terms hereof and outstanding on the 30th Business Day after notice of such termination is given. (d) At any time after the Termination Date, this Agreement may be terminated by Finance upon (i) thirty Business Days' prior written notice to Fuji and (ii) receipt by Finance of written consent from Fuji to such termination (with notice of such termination to be given by Finance, after receipt of Fuji's consent to such termination, to each Commercial Paper dealer and statistical rating agency referred to in Section 6(f)). However, such termination by Finance shall not in any way relieve Finance of its obligations under the NW Preferred Stock outstanding on the date of such termination or under the Liquidity Advance Notes outstanding on the date of such termination, or in respect of Fuji's fee set forth in Section 9. Also, such termination shall not be effective as to the obligations of Fuji contained in Sections 2 and 3 until the scheduled maturity of all Commercial Paper issued in accordance with the terms hereof and outstanding on the 30th Business Day after notice of such termination is given. (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. (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 C 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 C Preferred Stock will be rated no lower than the Series C Minimum Rating. 6 (3) For purposes of the each of the foregoing clauses (1) and (2), the Series A Preferred Stock or the Series C 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. (f) For the purposes hereof, no portion of any Commercial Paper shall be considered to be "outstanding" if moneys or securities in an amount sufficient for the payment of principal thereof and interest and premium, if any, thereon shall have been deposited with the proper party or parties for the satisfaction and discharge of such portion of such Commercial Paper, all in accordance with the governing instrument defining the rights of the holders thereof or shall have been deposited in trust with a commercial bank in The City of New York. SECTION 9. Fuji's Fee. Finance shall pay to Fuji a fee, payable in same day funds, on the average daily unused portion of the Liquidity Commitment from the date hereof until the date of the payment in full of all Commercial Paper outstanding on the day on which Fuji shall give notice to Finance of the termination of this Agreement pursuant to Section 8(c) or on the day Fuji shall consent to the termination of this Agreement pursuant to Section 8(d), as the case may be, at the rate of 1/16 of 1% per annum, payable on July 1, 1983 and on the first Business Day of each calendar quarter thereafter until the date of such payment in full of all such Commercial Paper, and on the date of such payment in full of all such Commercial Paper. SECTION 10. Representation by Fuji. Fuji represents that it is acquiring the shares of NW Preferred Stock as contemplated hereby for its own account in the ordinary course of its business and not with a view to the public distribution or sale thereof nor with any present intention of selling or distributing such shares, but subject, nevertheless, to any legal or administrative requirement that the disposition of its property shall at all times be within its control. SECTION 11. Notices. All notices, requests and other communications required or permitted hereunder shall, unless otherwise stated herein, be given by hand delivery or by telecopy, addressed as follows: To Fuji: The Fuji Bank, Limited New York Branch Two World Trade Center 79th Floor New York, New York 10048 Attention: Vice President and Manager, U.S. Corporate Finance and Credit Group II Telecopy: 212.898.2770 To Finance: Heller Financial, Inc. 500 West Monroe Chicago, Illinois 60661 Attention: Treasurer Telecopy: 312.441.7568 or at such other address as either party shall specify to the other party in writing. SECTION 12. Accounting Terms; Interest Computation. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles consistently applied, except as otherwise stated herein. All computations of interest under or in connection with this Agreement shall be made on the basis of a year of 360 days for the actual number of days elapsed. Whenever any payment to be made hereunder or in connection 7 herewith shall be due on a day other than a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest. SECTION 13. No Waiver; Remedies. No failure on the part of Fuji to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. SECTION 14. Original Keep Well Agreement Superseded. This Agreement amends and supersedes the Prior Restated Keep Well Agreement as that document has been amended from time to time. SECTION 15. Submission to Jurisdiction. Fuji hereby irrevocably submits to the jurisdiction of any New York State or Federal court sitting in the County of New York, State of New York, over any action or proceeding arising out of this Agreement. Fuji hereby irrevocably appoints the Branch as its agent to receive on behalf of Fuji service of copies of the summons and complaint and any other process that may be served in any such action or proceeding. SECTION 16. Binding Effect; Successors. This Agreement shall be binding upon, and inure to the benefit of, Fuji and Finance and their respective successors and assigns, except that Finance shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of Fuji. Fuji may assign to any financial institution all or any part of, or any interest in, its rights and benefits hereunder and under any of the Liquidity Advance Notes and, subject to the provisions of Section 10, the shares of NW Preferred Stock owned by Fuji. SECTION 17. Governing Law. This Agreement shall be governed by, and construed in accordance with, the law of the State of New York. In Witness Whereof, the parties hereto have caused this Agreement to be executed and delivered by their respective officers thereunto duly authorized as of the date first above written. THE FUJI BANK, LIMITED By: -------------------- 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: ------------------- Name: Tsutomu Hayano Its: Director and General Manager HELLER FINANCIAL, INC. By: ------------------- Name: Richard J. Almeida Title: Chairman of the Board and Chief Executive Officer 8 EXHIBIT A TO AMENDED AND RESTATED KEEP WELL AGREEMENT Form of Illiquidity Certificate I, _______________________, [Chief Financial Officer] [Chief Accounting Officer] of Heller Financial, Inc., a Delaware corporation ("Finance"), DO HEREBY CERTIFY to The Fuji Bank, Limited ("Fuji"), in connection with Section 3 of the Amended and Restated Keep Well Agreement dated as of April 15, 1998 between Finance and Fuji (the "Keep Well Agreement", the terms defined therein being used herein as therein defined), THAT: 1. This Illiquidity Certificate constitutes the irrevocable request of Finance that Fuji make a Liquidity Advance to Finance in the amount of $__________(the "Requested Advance") on the fifth Business Day after the receipt by Fuji of this Certificate. The Requested Advance shall be evidenced by the Liquidity Advance Note accompanying this Certificate (the "Note") and shall have such terms and conditions as are set forth in the Keep Well Agreement and the Note. The Note has been duly authorized, executed and delivered by Finance and is in the form of Liquidity Advance Note set forth in the Keep Well Agreement. 2. Finance has reasonably and in good faith determined that it will have a Liquidity Shortfall in the amount of the Requested Advance on the fifth Business Day after the date hereof and that it has available no unused commitments under its line of credit, credit agreements and other credit facilities with lenders other than Fuji. 3. Fuji is to make the Requested Advance available to Finance on the fifth Business Day after the receipt by Fuji of this Certificate by crediting Finance's account no. _____________ maintained at _______________________ in New York, New York in the amount of the Requested Advance. In Witness Whereof, I have signed this Certificate this _____ day of__________________, 19___ Heller Financial, Inc. By: ------------------------------------- Title: ---------------------------------- 9 EXHIBIT B TO RESTATED KEEP WELL AGREEMENT Form of Net Worth Certificate I, _______________________, the [Chief Financial Officer] [Chief Accounting Officer] of Heller Financial, Inc., a Delaware corporation ("Finance"), DO HEREBY CERTIFY to The Fuji Bank, Limited ("Fuji"), in connection with Section 2 of the Amended and Restated Keep Well Agreement dated as of April 15, 1998 between Finance and Fuji (the "Keep Well Agreement", the terms defined therein being used herein as therein defined), THAT: 1. Accompanying this Certificate are financial statements of Finance for the calendar quarter ended immediately prior to the date hereof. The Net Worth for such calendar quarter is equal to $_____________, and the calculations upon which it has been determined are the following: _____________. Such Net Worth has been determined in a manner consistent with the definition of "Net Worth" contained in the Keep Well Agreement. 2. There is a Net Worth Deficiency for such calendar quarter (the "Net Worth Deficiency" equal to $___________, which is the excess of $500,000,000 over the Net Worth set forth in Paragraph 1. 3. This Net Worth Certificate constitutes (i) notice to Fuji that Finance shall issue shares of its NW Preferred Stock in the amount of the Net Worth Deficiency (the "Issued Amount") on the fifth Business Day after the date hereof (the "Issuance Date") and (ii) the irrevocable request of Finance that Fuji purchase shares of NW Preferred Stock in the aggregate amount equal to the Issuance Amount on the fifth Business Day after receipt by Fuji of this Certificate. Shares of NW Preferred Stock issued on the Issuance Date shall be evidenced by one or more certificates of NW Preferred Stock issued to Fuji or the Branch, as Fuji shall request not later than two Business Days after receipt by Fuji of this Certification, and shall have such terms and conditions as are set forth in the Keep Well Agreement. Each such share, when issued, will have been duly authorized, issued and delivered by Finance and will be in the form of NW Preferred Stock specified in the Keep Well Agreement. In Witness Whereof, I have signed this certificate this _____ day of ___________________, 19____. Heller Financial, Inc. By: --------------------------------- Title: ------------------------------ 10 EXHIBIT C TO RESTATED KEEP WELL AGREEMENT Form of Liquidity Advance Note LIQUIDITY ADVANCE PROMISSORY NOTE U.S. $[amount of Liquidity Dated: _________________________, 19____ Advance in figures] FOR VALUE RECEIVED, the undersigned, HELLER FINANCIAL, INC., a corporation organized and existing under the laws of Delaware (the "Borrower"), HEREBY PROMISES TO PAY to the order of THE FUJI BANK, LIMITED (the "Bank"), a Japanese banking corporation, the principal sum of [amount of the Liquidity Advance in words] United States Dollars (U.S. $ [amount of the Liquidity Advance in figures]) on _______________, 19___ [insert the date of the Business day next succeeding the day that is twenty-nine days after the date of Note], together with interest on the principal amount remaining unpaid hereunder from the date hereof until said principal amount is paid in full, payable on the day said principal amount becomes due and, with respect to interest on any overdue principal amount, payable on demand, at a fluctuating interest rate per annum equal at all times to 1/4 of 1% per annum above, but on any overdue principal amount 1 1/4% per annum above, the rate of interest announced publicly by Morgan Guaranty Trust Company of New York in New York, New York from time to time as its prime commercial lending rate (the "Prime Rate"). Each change in the fluctuating interest rate hereunder shall take effect simultaneously with the corresponding change in the Prime Rate. The Borrower may, upon at least five Business Days' notice to the Bank, prepay this Liquidity Advance Note, without premium, in whole or in part, with accrued interest to the date of such prepayment on the amount prepaid, provided that each partial prepayment shall be in a principal amount not less than U.S. $10,000,000 or a multiple thereof. The Borrower shall make each payment of principal and interest hereunder not later than 12:00 noon (New York City time) on the day when due in lawful money of the United States to the Bank at the office of The Fuji Bank, Limited, New York Branch, Two World Trade Center, 79th Floor, New York, New York 10048, by wire transfer of Federal funds to the account of the Bank at Morgan Guaranty Trust Company of New York, account no. 631-19-808. All computations of interest shall be made by the Bank on the basis of a year of 360 days for the actual number of days (including the first day but excluding the last day occurring in the period for which such interest is payable) elapsed. This Liquidity Advance Promissory Note is one of the Liquidity Advance Notes referred to in, and is entitled to the benefits of, the Amended and Restated Keep Well Agreement dated as of April 15, 1998 between the Borrower and the Bank, and shall be governed by, and construed in accordance with, the law of the State of New York. Heller Financial, Inc. By: ----------------------------------- Title: -------------------------------- 11 EX-10.19 10 6TH AMEND., EXECUTIVE DEFERRED COMPENSATION PLAN EXHIBIT 10.19 SIXTH AMENDMENT OF HELLER INTERNATIONAL CORPORATION EXECUTIVE DEFERRED COMPENSATION PLAN ------------------------------------ WHEREAS, Heller International Corporation ("HIC") has established the Heller International Corporation Executive Deferred Compensation Plan effective as of January 1, 1994 (the "Plan") for a select group of its management and highly compensated employees; and WHEREAS, Heller Financial, Inc. ("HFI"), Heller Financial Leasing, Inc. ("HFLI"), Heller International Group, Inc. ("HIG") and Heller International Holdings, Inc. ("HIHI") have adopted the Plan for certain of their respective management and highly compensated employees in accordance with Section 7 of the Plan; and WHEREAS, the Plan has previously been amended and HIC has determined that further amendment thereof is necessary and desirable; NOW, THEREFORE, in exercise of the power reserved to the Compensation Committee of the Board of Directors of HIC by Section 8 of the Plan, the Plan is amended, effective January 1, 1997, in the following particulars: 1. By substituting the following for Section 2.3(a) of the Plan: "(a) All or any portion of his incentive payments (`Incentive Payments') under the Long-term Incentive Plan of Heller International Corporation with respect to performance in the calendar year in which the Deferral Election is made in increments of 1%." Executed as of the 30th day of April, 1997. HELLER INTERNATIONAL CORPORATION By /s/ Kristin M. Zivilik --------------------------------- Its AVP, Human Resources, Benefits -------------------------------- EX-10.20 11 7TH AMEND., EXECUTIVE DEFERRED COMPENSATION PLAN EXHIBIT 10.20 SEVENTH AMENDMENT OF HELLER INTERNATIONAL CORPORATION EXECUTIVE DEFERRED COMPENSATION PLAN ------------------------------------ WHEREAS, Heller International Corporation ("HIC") has established the Heller International Corporation Executive Deferred Compensation Plan effective as of January 1, 1994 (the "Plan") for a select group of its management and highly compensated employees; and WHEREAS, HIC transferred sponsorship of the Plan to Heller Financial, Inc. (the "Company"), effective as of January 1, 1998; and WHEREAS, the Plan has previously been amended and HIC has determined that further amendment thereof is necessary and desirable; NOW, THEREFORE, in exercise of the power reserved to the Company by Section 8 of the Plan and delegated to the undersigned officer by resolutions of the Board of Directors of the Company, the Plan as previously amended, is further amended, effective as of January 1, 1998, in the following particulars: 1. By changing the name of the Plan from "Heller International Corporation Executive Deferred Compensation Plan" to Heller Financial, Inc. Executive Deferred Compensation Plan." 2. By substituting the following two sentences for the first sentence of subsection 1.1 of the Plan: "The Heller International Corporation Executive Deferred Compensation Plan (the `Original Plan') was established by Heller International Corporation effective as of January 1, 1994 (the `Effective Date'). The Original Plan was renamed the Heller Financial, Inc. Executive Deferred Compensation Plan (the `Plan') effective as of January 1, 1998." 3. By substituting the following two sentences for the first sentence of subsection 1.2 of the Plan: "Heller International Corporation established the Original Plan effective January 1, 1994 for a select group of management and highly compensated employees of Heller International Corporation or any subsidiary or affiliate that adopted the Original Plan in accordance with Section 7 to retain and attract highly qualified personnel by offering the benefits of a non-qualified, unfunded plan of deferred compensation. Heller International Corporation transferred sponsorship of the Original Plan to Heller Financial, Inc. (the `Company'), effective as of January 1, 1998." 4. By substituting the year "2004" for the year "1999" where the latter appears in subsection 2.2(I) of the Plan. 5. By substituting the words "one-hundred thousand dollars ($100,000)" for the words "ten thousand dollars ($10,000) where the latter appear in subsection 5.8 of the Plan. * * * IN WITNESS WHEREOF, on behalf of the Company, the undersigned officer has executed this amendment this 2/nd/ day of March, 1998. HELLER FINANCIAL, INC. By /s/ C.J. Deviney -------------------------------- Its Vice President ------------------------------- 2 EX-10.21 12 8TH AMEND., EXECUTIVE DEFERRED COMPENSATION PLAN EXHIBIT 10.21 EIGHTH AMENDMENT OF HELLER FINANCIAL, INC. EXECUTIVE DEFERRED COMPENSATION PLAN ------------------------------------ WHEREAS, Heller Financial, Inc. (the "Company") maintains the Heller Financial, Inc. Executive Deferred Compensation Plan (the "Plan") for a select group of its management and highly compensated employees; and WHEREAS, the Plan has previously been amended and the Company has determined that further amendment thereof is necessary and desirable; NOW, THEREFORE, in exercise of the power reserved to the Company by Section 8 of the Plan and delegated to the undersigned officer by resolution of the Board of Directors of the Company, the Plan, as previously amended, is further amended in the following particulars: 1. By adding the following new sentence immediately after the first sentence of Section 1.2 of the Plan, effective as of January 1, 1998: "This plan allows Eligible Employees to make deferrals and receive benefits regardless of the benefit and contribution limits applicable to qualified retirement plans under the Internal Revenue Code of 1986, as amended." 2. By adding the following new paragraph at the end of Section 4.2 of the Plan, effective as of April 1, 1998: "Notwithstanding the foregoing provisions of this Section 4.2, the date on which shares of the Company's Class A Common Stock, par value $0.25 ("Common Stock") are first offered to the public in connection with the initial public offering undertaken in April of 1998 (the "Public Offering Date") will be the Valuation Date for April, 1998. The Public Offering Date will also be a special investment election change date, but only for purposes of electing into an investment fund consisting of Company Stock. Provided a Participant files the prescribed form with the Committee no later than the date prescribed by the Committee, his or her election to invest a portion of his or her future deferrals or already existing Deferral Account in an investment fund consisting of Company Stock will be effective on the Public Offering Date." * * * IN WITNESS WHEREOF, on behalf of the Company, the undersigned officer has executed this amendment the ___ day of April, 1998 HELLER FINANCIAL, INC. By: /s/ SIGNATURE ------------------------------------- Its: ------------------------------------ 2 EX-10.29 13 5TH AMEND., SAVINGS & PROFIT SHARING PLAN EXHIBIT 10.29 FIFTH AMENDMENT OF HELLER FINANCIAL, INC. SAVINGS AND PROFIT SHARING PLAN ------------------------------- WHEREAS, Heller Financial, Inc. (the "Company") maintains the Heller Financial, Inc. Savings and Profit Sharing Plan, as amended and restated effective as of January 1, 1989 (the "Plan") for the benefit of its eligible employees and the eligible employees of its affiliates that adopt the Plan with the Company's consent; and WHEREAS, the Plan has previously been amended and further amendment thereof now is considered desirable; NOW, THEREFORE, in exercise of the power reserved to the Company by Section 11.2 of the Plan and delegated to the undersigned officer by resolution of the Board of Directors of the Company, the Plan, as previously amended, is further amended in the following particulars, effective as of April 30, 1998: 1. By adding the following new sentence to the end of Section 7.7(a): "The Plan will permit investment in stock of the Company, and the Committee will be permitted to establish as one of the Investment Funds a fund which consists of Class A Common Stock, par value $0.25, of the Company (the "Heller Stock Fund"). The Committee will be permitted to establish, and then to amend or eliminate, rules limiting the frequency with which Participants may elect into or out of the Heller Stock Fund, or limiting the dollar figure or proportion of his or her aggregate or individual Accounts which may be invested by a Participant in the Heller Stock Fund." 2. By substituting the following for Section 8.11 of the Plan: "8.11 Form of Payment. Payments under the Plan will be made in cash or, at the direction of the Participant or Beneficiary entitled to payment, in shares of Class A Common Stock, par value $0.25, of the Company ("Company Stock"), if and to the extent the Accounts to be distributed are invested in Company Stock." IN WITNESS WHEREOF, the undersigned officer of Heller Financial, Inc. has caused the foregoing amendment to be executed this 30th day of April, 1998. HELLER FINANCIAL, INC. By /s/ SIGNATURE ----------------------------------------- Its ------------------------------------- ATTEST By /s/ SIGNATURE ---------------------------------- Its ------------------------------- 2 EX-10.30 14 FORM OF AMENDMENT TO THE ALMEIDA EMPLOYMENT AGRMT EXHIBIT 10.30 AMENDMENT OF LETTER AGREEMENT ----------------------------- This Amendment of Letter Agreement is entered into between Heller Financial, Inc., a Delaware corporation (the "Company"), and Richard J. Almeida (the "Executive"); WITNESSETH THAT: --------------- Whereas, the Company and Executive entered into a Letter Agreement detailing the terms and conditions of Executive's employment as Chief Executive Officer and Chairman of the Board of the Company, effective as of December 31, 1997 (the "Letter Agreement"); and Whereas, a portion of the Company's stock is being sold to the public as part of an initial public offering, and the Company and Executive desire to amend the Letter Agreement to provide additional protection to Executive in connection with any future change in control of the Company; Now, Therefore, it is hereby agreed by and between the parties, for good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, that the Letter Agreement be and it hereby is amended, effective as of May 6, 1998, by adding the following new Paragraphs 11 and 12 to the Letter Agreement, immediately after Paragraph 10 thereof: "11. Payments and Benefits Upon Employment Termination After a Change in Control. If, during the Term of this Agreement and within the period ending on the earlier of two (2) years after a Change in Control (all capitalized terms as defined below) or May 6, 2001, or during the Period Pending a Change in Control, (i) your employment with the Company and its Affiliates is terminated without cause (as defined in Subparagraph 7(c)), or (ii) you voluntarily terminate your employment with Good Reason, the Company will, within 30 days (except as otherwise expressly provided) of your Employment Termination, make the payments and provide the benefits described below. (a) The Company will continue your annual Base Salary (as defined below) for twenty-four (24) months following Employment Termination at the same time and in the same manner as the Company paid salary during employment (including the right to defer such amounts under the Company's non-qualified deferred compensation plan) or, at your election, make a lump sum cash payment to you equal to the present value of two times your Base Salary; and (b) For the year in which Employment Termination occurs, the Company will pay an Annual Incentive Plan bonus calculated as of the end of the Annual Incentive Plan year, based on performance for the entire year, at the applicable Target bonus level for that year. The Company will pay such bonus in a lump sum within 45 days of the end of the year of Employment Termination; and -1- (c) With respect to each Welfare Benefit Plan, for the period beginning on Employment Termination and ending on the earlier of (i) two years following Employment Termination, or (ii) the date you become covered by a welfare benefit plan or program maintained by an entity other than the Company or an Affiliate which provides coverage or benefits at least equal, in all respects, to such Welfare Benefit Plan, you shall continue to participate in such Welfare Benefit Plan on the same basis and at the same cost to you as was the case immediately prior to the Change in Control (or, if more favorable to you, as was the case prior to your Employment Termination), or, if any benefit or coverage cannot be provided under a Welfare Benefit Plan because of applicable law or contractual provisions, you shall be provided with substantially similar benefits and coverage for such period; and (d) The Company will pay you a lump sum amount equal to the present value of the additional benefit that you would have accrued under the Company's qualified and non-qualified retirement plans (as in effect prior to the Change in Control or, if benefits are increased under the plans after the Change in Control, as in effect prior to your Employment Termination) had you continued to receive benefits thereunder through the end of the 24th month following Employment Termination. All benefits under the Company's non-qualified retirement plans will be fully vested (to the extent, if any, not vested upon the Change in Control). The Company will pay such lump sum to you within 45 days of the end of the year of Employment Termination; and (e) The Company will add 24 months to your age and benefit service for purposes of determining your eligibility for and benefits under the Company's retiree medical benefit plan; and (f) You will continue to be eligible for the executive perquisites outlined in the Company's policies in effect at the time of the Change in Control (or, if more favorable to you, as in effect prior to your Employment Termination) through the end of the 24th month following Employment Termination. The Company will bear the cost of such benefits and perquisites, at the same level in effect immediately prior to Employment Termination; and (g) If Employment Termination occurs in 1998, you will be fully vested in all performance shares granted to you under the Company's 1996-1998 LTIP, and vested in two-thirds (2/3) of the performance shares under the 1997-1999 LTIP. If Employment Termination occurs in 1999, you will be fully vested in all performance shares granted to you under the Company's 1997-1999 LTIP. The award paid to you under the 1996-1998 and 1997-1999 LTIPs will be determined under the terms of such -2- LTIP for the applicable cycle, using actual performance for each such cycle, and will be paid to you in a lump sum within 45 days of the end of the year of your Employment Termination. In the event that, under the terms of this Letter Agreement, you could be entitled to both the payments and benefits described in this Paragraph 12 and the payments and benefits provided in Paragraph 7, you shall elect the Paragraph under which payments and benefits are made to you; provided that, in no event shall payments and benefits be paid to you under both Paragraph 7 and this Paragraph. Notwithstanding any provision of this Paragraph to the contrary, any payment or distribution by or on behalf of the Company or any Affiliate to or for the benefit of you (whether paid or payable or distributed or distributable pursuant to the terms of this Letter Agreement or otherwise) as a result of a Change in Control shall not exceed 2.99 times your average "Annualized Includible Compensation for the Base Period," as defined in Code Section 280G(d)(1). 13. Other Definitions. For purposes of Paragraph 12 of this Letter Agreement: (a) "Affiliate" shall mean any entity that is a member of a controlled group of corporations or a group of trades or businesses under common control (each as defined in Code Section 1563), which includes the Company. (b) "Base Salary" shall mean your salary at the greater of the rate in effect on the date of (i) the Change in Control, or (ii) Employment Termination. (c) A "Change in Control" of the Company will be deemed to occur as of the first day that The Fuji Bank, Limited and its subsidiaries shall cease to own, directly or indirectly, at least fifty percent (50%) of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of the Board (the "Company Voting Securities") of the Company and any successor to the Company resulting from a reorganization, merger or consolidation, or sale or other disposition of all or substantially all of the assets of the Company. (d) "Employment Termination" shall mean the effective date of: (i) your voluntary termination of employment with the Company or any Affiliate with Good Reason; or (ii) the termination of your employment by the Company or any Affiliate without cause. (e) "Good Reason" shall exist if, without your express written consent, any of the following events occur: -3- (i) The Company or an Affiliate significantly diminishes your assigned duties and responsibilities from the level or extent at which they existed before a Change in Control including, without limitation, if the Company or Affiliate removes your title(s) or materially diminishes the powers associated with your title(s). For Good Reason to exist, you must deliver written notice to the Company or Affiliate specifying the diminution in assigned duties and responsibilities that you believe constitutes Good Reason, and the Company or Affiliate must fail to reverse the same or to take all reasonable steps to that end within 30 days after receiving the notice; (ii) The Company or an Affiliate materially reduces your Base Salary below the greater of that in effect as of the date of this Agreement and that in effect as of the Change in Control; (iii) The Company or Affiliate requires you to relocate your principal business office or your principal place of residence outside the Chicago, Illinois Standard Metropolitan Statistical Area (the "Geographical Employment Area"), or assigns to you duties that would reasonably require such a relocation; (iv) The Company or an Affiliate requires, or assigns duties to you which would reasonably require, you to spend more than one hundred (100) normal working days away from the Geographical Employment Area during any consecutive twelve- month period; or (v) The Company or an Affiliate fails to continue in effect any cash or stock-based incentive or bonus plan, retirement plan, welfare benefit plan, or other benefit plan, program or arrangement that applied to you on the date of the Change in Control, unless the aggregate value (as computed by an independent employee benefits consultant selected by the Company) of all such compensation, retirement and benefit plans, programs and arrangements provided to you is not materially less than their aggregate value as of the date of the amendment of this Letter Agreement, or, if greater, their aggregate value as of the date of the Change in Control. (f) "Period Pending a Change in Control" shall mean the period after the approval by the Company's stockholders and prior to the effective time of any transaction described in subparagraph 13(c) above. -4- (g) "Welfare Benefit Plan" shall mean each welfare benefit plan maintained or contributed to by the Company or any Affiliate, including, but not limited to a plan that provides health (including medical, dental or both), life, accident or disability benefits or insurance, or similar coverage, in which you were participating at the time of the Change in Control." In Witness Whereof, the parties hereto have executed this Agreement on the day and year first written above. HELLER FINANCIAL, INC. By: ------------------------------------ --------------------------------- Its: RICHARD J. ALMEIDA -------------------------------- -5- EX-10.31 15 FORM OF AMENDMENT TO THE WOLFERT EMPLOYMENT AGRMT EXHIBIT 10.31 Amendment of Letter Agreement ----------------------------- This Amendment of Letter Agreement is entered into between Heller Financial, Inc., a Delaware corporation (the "Company"), and Frederick E. Wolfert (the "Executive"); Witnesseth That: --------------- Whereas, the Company and Executive entered into a Letter Agreement detailing the terms and conditions of Executive's employment as Chief Executive Officer and Chairman of the Board of the Company, effective as of December 31, 1997 (the "Letter Agreement"); and Whereas, a portion of the Company's stock is being sold to the public as part of an initial public offering, and the Company and Executive desire to amend the Letter Agreement to provide additional protection to Executive in connection with any future change in control of the Company; Now, Therefore, it is hereby agreed by and between the parties, for good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, that the Letter Agreement be and it hereby is amended, effective as of May 6, 1998, by adding the following new Paragraphs 16 and 17 to the Letter Agreement, immediately after Paragraph 15 thereof: "16. Payments and Benefits Upon Employment Termination After a Change in Control. If, during the Term of this Agreement and within the period ending on the earlier of two (2) years after a Change in Control (all capitalized terms as defined below) or May 6, 2001, or during the Period Pending a Change in Control, (i) your employment with the Company and its Affiliates is terminated without cause (as defined in Subparagraph 12(c)), or (ii) you voluntarily terminate your employment with Good Reason, the Company will, within 30 days (except as otherwise expressly provided) of your Employment Termination, make the payments and provide the benefits described below. (a) The Company will continue your annual Base Salary (as defined below) for twenty-four (24) months following Employment Termination at the same time and in the same manner as the Company paid salary during employment (including the right to defer such amounts under the Company's non-qualified deferred compensation plan) or, at your election, make a lump sum cash payment to you equal to the present value of two times your Base Salary; and (b) For the year in which Employment Termination occurs, the Company will pay an Annual Incentive Plan bonus calculated as of the end of the Annual Incentive Plan year, based on performance for the entire year, at the applicable Target bonus level for that year. The Company will pay such bonus in a lump sum within 45 days of the end of the year of Employment Termination; and -1- (c) With respect to each Welfare Benefit Plan, for the period beginning on Employment Termination and ending on the earlier of (i) two years following Employment Termination, or (ii) the date you become covered by a welfare benefit plan or program maintained by an entity other than the Company or an Affiliate which provides coverage or benefits at least equal, in all respects, to such Welfare Benefit Plan, you shall continue to participate in such Welfare Benefit Plan on the same basis and at the same cost to you as was the case immediately prior to the Change in Control (or, if more favorable to you, as was the case prior to your Employment Termination), or, if any benefit or coverage cannot be provided under a Welfare Benefit Plan because of applicable law or contractual provisions, you shall be provided with substantially similar benefits and coverage for such period; and (d) The Company will pay you a lump sum amount equal to the present value of the additional benefit that you would have accrued under the Company's qualified and non-qualified retirement plans (as in effect prior to the Change in Control or, if benefits are increased under the plans after the Change in Control, as in effect prior to your Employment Termination) had you continued to receive benefits thereunder through the end of the 24th month following Employment Termination. All benefits under the Company's non-qualified retirement plans will be fully vested (to the extent, if any, not vested upon the Change in Control). The Company will pay such lump sum to you within 45 days of the end of the year of Employment Termination; and (e) The Company will add 24 months to your age and benefit service for purposes of determining your eligibility for and benefits under the Company's retiree medical benefit plan; and (f) You will continue to be eligible for the executive perquisites outlined in the Company's policies in effect at the time of the Change in Control (or, if more favorable to you, as in effect prior to your Employment Termination) through the end of the 24th month following Employment Termination. The Company will bear the cost of such benefits and perquisites, at the same level in effect immediately prior to Employment Termination; and (g) If Employment Termination occurs in 1998, you will be fully vested in all performance shares granted to you under the Company's 1996-1998 LTIP, and vested in two-thirds (2/3) of the performance shares under the 1997-1999 LTIP. If Employment Termination occurs in 1999, you will be fully vested in all performance shares granted to you under the Company's 1997-1999 LTIP. The award paid to you under the 1996-1998 and 1997-1999 LTIPs will be determined under the terms of such -2- LTIP for the applicable cycle, using actual performance for each such cycle, and will be paid to you in a lump sum within 45 days of the end of the year of your Employment Termination. In the event that, under the terms of this Letter Agreement, you could be entitled to both the payments and benefits described in this Paragraph 16 and the payments and benefits provided in Paragraph 12, you shall elect the Paragraph under which payments and benefits are made to you; provided that, in no event shall payments and benefits be paid to you under both Paragraph 12 and this Paragraph. Notwithstanding any provision of this Subparagraph 16 to the contrary, any payment or distribution by or on behalf of the Company or any Affiliate to or for the benefit of you (whether paid or payable or distributed or distributable pursuant to the terms of this Letter Agreement or otherwise) as a result of a Change in Control shall not exceed 2.99 times your average "Annualized Includible Compensation for the Base Period," as defined in Code Section 280G(d)(1). 17. Other Definitions. For purposes of Paragraph 16 of this Letter Agreement: (a) "Affiliate" shall mean any entity that is a member of a controlled group of corporations or a group of trades or businesses under common control (each as defined in Code Section 1563), which includes the Company. (b) "Base Salary" shall mean your salary at the greater of the rate in effect on the date of (i) the Change in Control, or (ii) Employment Termination. (c) A "Change in Control" of the Company will be deemed to occur as of the first day that The Fuji Bank, Limited and its subsidiaries shall cease to own, directly or indirectly, at least fifty percent (50%) of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of the Board (the "Company Voting Securities") of the Company and any successor to the Company resulting from a reorganization, merger or consolidation, or sale or other disposition of all or substantially all of the assets of the Company. (d) "Employment Termination" shall mean the effective date of: (i) your voluntary termination of employment with the Company or any Affiliate with Good Reason; or (ii) the termination of your employment by the Company or any Affiliate without cause. (e) "Good Reason" shall exist if, without your express written consent, any of the following events occur: -3- (i) The Company or an Affiliate significantly diminishes your assigned duties and responsibilities from the level or extent at which they existed before a Change in Control including, without limitation, if the Company or Affiliate removes your title(s) or materially diminishes the powers associated with your title(s). For Good Reason to exist, you must deliver written notice to the Company or Affiliate specifying the diminution in assigned duties and responsibilities that you believe constitutes Good Reason, and the Company or Affiliate must fail to reverse the same or to take all reasonable steps to that end within 30 days after receiving the notice; (ii) The Company or an Affiliate materially reduces your Base Salary below the greater of that in effect as of the date of this Agreement and that in effect as of the Change in Control; (iii) The Company or Affiliate requires you to relocate your principal business office or your principal place of residence outside the Chicago, Illinois Standard Metropolitan Statistical Area (the "Geographical Employment Area"), or assigns to you duties that would reasonably require such a relocation; (iv) The Company or an Affiliate requires, or assigns duties to you which would reasonably require, you to spend more than one hundred (100) normal working days away from the Geographical Employment Area during any consecutive twelve- month period; or (v) The Company or an Affiliate fails to continue in effect any cash or stock-based incentive or bonus plan, retirement plan, welfare benefit plan, or other benefit plan, program or arrangement that applied to you on the date of the Change in Control, unless the aggregate value (as computed by an independent employee benefits consultant selected by the Company) of all such compensation, retirement and benefit plans, programs and arrangements provided to you is not materially less than their aggregate value as of the date of the amendment of this Letter Agreement, or, if greater, their aggregate value as of the date of the Change in Control. (f) "Period Pending a Change in Control" shall mean the period after the approval by the Company's stockholders and prior to the effective time of any transaction described in subparagraph 16(c) above. -4- (g) "Welfare Benefit Plan" shall mean each welfare benefit plan maintained or contributed to by the Company or any Affiliate, including, but not limited to a plan that provides health (including medical, dental or both), life, accident or disability benefits or insurance, or similar coverage, in which you were participating at the time of the Change in Control." In Witness Whereof, the parties hereto have executed this Agreement on the day and year first written above. Heller Financial, Inc. By: --------------------------------- --------------------------------- Its: Frederick E. Wolfert ----------------------------- -5- EX-10.32 16 FORM OF CHANGE IN CONTROL AGREEMENT EXHIBIT 10.32 Change in Control Agreement --------------------------- This Change in Control Agreement is entered into between Heller Financial, Inc., a Delaware corporation (the "Company"), and_____________(the "Executive"); Witnesseth That: --------------- Whereas, a portion of the Company's stock is being sold to the public as part of an initial public offering; and Whereas, Executive is employed by the Company, and the Company desires to provide protection to Executive in connection with any future change in control of the Company; Now, Therefore, it is hereby agreed by and between the parties, for good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, as follows: 1. Effective Date and Term. This Agreement is effective May 6, 1998 (the "Effective Date"). This Agreement will terminate on May 6, 2001. 2. Payments and Benefits Upon Employment Termination After a Change in Control. If, during the Term of this Agreement and within the period ending on the earlier of two (2) years after a Change in Control (all capitalized terms as defined below) or May 6, 2001, or during the Period Pending a Change in Control, (i) the Executive's employment with the Company and its Affiliates is terminated without Cause, or (ii) Executive voluntarily terminates such employment with Good Reason, the Company will, within 30 days (except as otherwise expressly provided) of Executive's Employment Termination, make the payments and provide the benefits described below. (a) Salary Continuation. The Company will continue Executive's annual Base Salary (as defined below) for twenty-four (24) months following Employment Termination at the same time and in the same manner as the Company paid salary during employment (including the right to defer such amounts under the Company's non-qualified deferred compensation plan) or, at Executive's election, make a lump sum cash payment to Executive equal to the present value of two times Executive's Base Salary; and (b) Annual Incentive Bonus. For the year in which Employment Termination occurs, the Company will pay an Annual Incentive Plan bonus calculated as of the end of the Annual Incentive Plan year, based on performance for the entire year, at the applicable Target bonus level for that year. The Company will pay such bonus in a lump sum within 45 days of the end of the year of Employment Termination; and (c) Welfare Benefit Plans. With respect to each Welfare Benefit Plan, for the period beginning on Employment Termination and ending on the earlier of (i) two years -1- following Employment Termination, or (ii) the date Executive becomes covered by a welfare benefit plan or program maintained by an entity other than the Company or an Affiliate which provides coverage or benefits at least equal, in all respects, to such Welfare Benefit Plan, Executive shall continue to participate in such Welfare Benefit Plan on the same basis and at the same cost to Executive as was the case immediately prior to the Change in Control (or, if more favorable to Executive, as was the case at any time prior to the Employment Termination), or, if any benefit or coverage cannot be provided under a Welfare Benefit Plan because of applicable law or contractual provisions, Executive shall be provided with substantially similar benefits and coverage for such period. Immediately following the expiration of the continuation period required by the preceding sentence, Executive shall be entitled to continued group health benefit plan coverage (so-called "COBRA coverage") in accordance with Section 4980B of the Internal Revenue Code of 1986, as amended (the "Code"), it being intended that COBRA coverage shall be consecutive to the benefits and coverage provided for in the preceding sentence; and (d) Retirement Plan Benefits. The Company will pay Executive a lump sum amount equal to the present value of the additional benefit that Executive would have accrued under the Company's qualified and non- qualified retirement plans (as in effect prior to the Change in Control or, if benefits are increased under the plans after the Change in Control, prior to the Employment Termination) had he or she continued to receive benefits thereunder through the end of the 24th month following Employment Termination. All benefits under the Company's non-qualified retirement plans will be fully vested (to the extent, if any, not vested upon the Change in Control). The Company will pay such lump sum to Executive within 45 days of the end of the year of Employment Termination; and (e) Retiree Medical Benefits. The Company will add 24 months to Executive's age and benefit service for purposes of determining Executive's eligibility for and benefits under the Company's retiree medical benefit plan; and (f) Perquisites. Executive will continue to be eligible for the executive perquisites outlined in the Company's policies in effect at the time of the Change in Control (or, if more favorable to the Executive, as in effect prior to the Employment Termination) through the end of the 24th month following Employment Termination. The Company will bear the cost of such benefits and perks, at the same level in effect immediately prior to Employment Termination; and (g) Long Term Incentive Plans. If Employment Termination occurs in 1998, Executive will be fully vested in all performance shares granted to Executive under the Company's 1996-1998 LTIP, and vested in two-thirds (2/3) of the performance shares under the 1997-1999 LTIP. If Employment Termination occurs in 1999, Executive will be fully vested in all performance shares granted to Executive under the Company's 1997-1999 LTIP. The award paid to Executive under the 1996-1998 -2- and 1997-1999 LTIPs will be determined under the terms of such LTIP for the applicable cycle, using actual performance for each such cycle, and will be paid to Executive in a lump sum within 45 days of the end of the year of Executive's Employment Termination. 3. Change in Control. A "Change in Control" of the Company will be deemed to occur as of the first day that The Fuji Bank, Limited and its subsidiaries shall cease to own, directly or indirectly, at least fifty percent (50%) of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of the Board (the "Company Voting Securities") of the Company or any successor to the Company resulting from a reorganization, merger or consolidation, or sale or other disposition of all or substantially all of the assets of the Company. 4. Other Definitions. For purposes of this Agreement: (a) "Affiliate" shall mean any entity that is a member of a controlled group of corporations or a group of trades or businesses under common control (each as defined in Code Section 1563), which includes the Company. (b) "Base Salary" shall mean Executive's salary at the greater of the rate in effect on the date of (i) the Change in Control, or (ii) Employment Termination. (c) "Board" or "Board of Directors" shall mean the Company's Board of Directors. (d) "Employment Termination" shall mean the effective date of: (i) Executive's voluntary termination of employment with the Company or any Affiliate with Good Reason; or (ii) the termination of Executive's employment by the Company or any Affiliate without Cause. (e) "Cause" shall mean: (i) Executive's fraud or criminal misconduct; or (ii) the material and willful breach by Executive of his or her responsibilities or willful failure to comply with reasonable directives or policies of the Board, but only if the Company has given Executive written notice specifying the breach or failure to comply, demanding that Executive remedy the breach or failure to comply and giving Executive an opportunity to be heard in connection with the breach or failure to comply, and Executive either failed to remedy the alleged breach or failed to comply within 30 days after receipt of the written notice or failed to take all reasonable steps to that end during the 30 days after Executive received the notice. (f) "Good Reason" shall exist if, without Executive's express written consent, any of the following events occur: (i) The Company or an Affiliate significantly diminishes Executive's assigned duties and responsibilities from the level or extent at which they existed -3- before a Change in Control including, without limitation, if the Company or Affiliate removes Executive's title(s) or materially diminishes the powers associated with Executive's title(s). For Good Reason to exist, Executive must deliver written notice to the Company or Affiliate specifying the diminution in assigned duties and responsibilities that he or she believes constitutes Good Reason, and the Company or Affiliate must fail to reverse the same or to take all reasonable steps to that end within 30 days after receiving the notice; (ii) The Company or an Affiliate materially reduces Executive's Base Salary below the greater of that in effect as of the date of this Agreement and that in effect as of the Change in Control; (iii) The Company or Affiliate requires Executive to relocate his or her principal business office or his or her principal place of residence outside the Standard Metropolitan Statistical Area where Executive was located on the date of a Change in Control (the "Geographical Employment Area"), or assigns to Executive duties that would reasonably require such a relocation; (iv) The Company or an Affiliate requires Executive to, or assigns duties to Executive which would reasonably require Executive to, spend more than one hundred (100) normal working days away from the Geographical Employment Area during any consecutive twelve- month period; or (v) The Company or an Affiliate fails to continue in effect any cash or stock-based incentive or bonus plan, retirement plan, welfare benefit plan, or other benefit plan, program or arrangement that applied to Executive on the date of the Change in Control, unless the aggregate value (as computed by an independent employee benefits consultant selected by the Company) of all such compensation, retirement and benefit plans, programs and arrangements provided to Executive is not materially less than their aggregate value as of the date of this Agreement, or, if greater, their aggregate value as of the date of the Change in Control. (g) "Period Pending a Change in Control" shall mean the period after the approval by the Company's stockholders and prior to the effective time of any transaction described in paragraph 3(c) or (d) above. (h) "Welfare Benefit Plan" shall mean each welfare benefit plan maintained or contributed to by the Company or any Affiliate, including, but not limited to a plan that provides health (including medical, dental or both), life, accident or disability benefits or insurance, or similar coverage, in which Executive was participating at the time of the Change in Control. -4- 6. Limitation on Company Payments. Notwithstanding any provision of this Agreement to the contrary, any payment or distribution by or on behalf of the Company or any Affiliate to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) as a result of a Change in Control shall not exceed 2.99 times Executive's average "Annualized Includible Compensation for the Base Period," as defined in Code Section 280G(d)(1). 7. Executive's Death. If Executive dies during the term of this Agreement and after a Change in Control and Employment Termination, but before the complete payment of any amount or benefit required under this Agreement, the Company will pay such amount or benefit to Executive's spouse, if living, or to Executive's estate. 8. Mitigation and Set-Off. Executive shall not be required to mitigate damages by seeking other employment or otherwise, except as provided in Section 2(c). The Company's obligations under this Agreement shall not be reduced in any way by reason of any compensation or benefits received (or foregone) by Executive from sources other than the Company after Executive's Employment Termination, or any amounts that might have been received by Executive in other employment had Executive sought such other employment, except as provided in Section 2(c). Executive's entitlement to benefits and coverage under this Agreement shall continue after, and shall not be affected by, Executive's obtaining other employment after the Employment Termination. 9. Arbitration and Expenses. The Company and Executive agree that any dispute or controversy arising under or in connection with this Agreement shall be submitted to and determined by arbitration in Chicago, Illinois, in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and the parties agree to be bound by the decision in any such arbitration proceeding. The Company shall pay to Executive all out-of-pocket expenses, including attorneys' fees, incurred by Executive in the event Executive successfully enforces any provision of this Agreement in any action, arbitration or lawsuit. If Executive loses such an action, arbitration or lawsuit, the Company shall not pay Executive any out-of- pocket expenses so incurred. 10. Assignment; Successors. This Agreement may not be assigned by the Company without the written consent of Executive but the obligations of the Company under this Agreement shall be the binding legal obligations of any successor to the Company by merger, consolidation or otherwise, and in the event of any business combination or transaction that results in the transfer of substantially all of the assets or business of the Company, the Company will cause the transferee to assume the obligations of the Company under this Agreement. This Agreement may not be assigned by Executive during Executive's life, and upon Executive's death will inure to the benefit of Executive's heirs, legatees and legal representatives of Executive's estate. 11. Interpretation. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Delaware, without regard to the conflict of law -5- principles thereof. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. 12. Withholding. The Company may withhold from any payment that it is required to make under this Agreement amounts sufficient to satisfy applicable withholding requirements under any federal, state or local law. 13. Amendment or Termination. The Company and Executive may amend this Agreement at any time by written agreement. 14. Indemnification. Following Employment Termination, the Company will: (i) indemnify and hold harmless Executive for all costs, liability and expenses (including reasonable attorneys' fees) for all acts and omissions of Executive that relate to Executive's employment with the Company, to the maximum extent permitted by law; and (ii) continue Executive's coverage under the directors' and officers' liability coverage maintained by the Company, as in effect from time to time, to the same extent as other current or former senior executive officers and directors of the Company until the end of the second policy year that begins after the Employment Termination. 15. Financing. Cash payments under this Agreement (not including any payments made from the Qualified Plan) are general obligations of the Company, and Executive shall have only an unsecured right to payment thereof out of the general assets of the Company. Notwithstanding the foregoing, the Company may, in its sole discretion by agreement with one or more trustees to be selected by the Company, create a trust on such terms as the Company shall determine to make payments to Executive in accordance with the terms of this Agreement. 16. Severability. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect. In Witness Whereof, the parties hereto have executed this Agreement on the day and year first written above. Heller Financial, Inc. By: --------------------------------- ---------------------------------- Its: Executive ----------------------------- -6- EX-10.34 17 1998 EMPLOYEE STOCK PURCHASE PLAN Exhibit 10.34 Heller Financial, Inc. 1998 Employee Stock Purchase Plan --------------------------------- The Heller Financial, Inc. 1998 Employee Stock Purchase Plan provides Eligible Employees (as defined below) of Heller Financial, Inc., a Delaware corporation (the "Company"), and its Subsidiaries with an opportunity to purchase shares of Common Stock of the Company on the terms and conditions set forth below. 1. Definitions. (a) "Business Day" - any day the New York Stock Exchange is open for business. (b) "Code" - the Internal Revenue Code of 1986, as amended. (c) "Common Stock" - the Company's Class A Common Stock, par value $0.25 per share. (d) "Compensation" - as to a Participant, the portion of the Participant's "Compensation" that is base pay and is used to determine the profit sharing allocation in the Savings and Profit Sharing Plan, paid to the Participant during a given payroll period. (e) "Eligible Employee" - an employee who is eligible to participate in the Plan pursuant to Section 3. (f) "Fair Market Value" - as of any given day: (i) the average of the high and low trading prices of the Common Stock on the national securities exchange on which the Common Stock is listed (if the Common Stock is so listed) or on the NASDAQ National Market System (if the Common Stock is regularly quoted on the NASDAQ National Market System); (ii) if not so listed or regularly quoted, the mean between the closing bid and asked prices of publicly traded Common Stock in the over-the- counter market; and (iii) if such bid and asked prices are not available, as reported by any nationally recognized quotation service selected by the Committee or as determined by the Committee. Notwithstanding the foregoing, as to any Common Stock awarded under this Plan in connection with the Company's initial public offering, "Fair Market Value" will be the initial public offering price of the Common Stock. (g) "Grant Date" - each January 1, April 1, July 1 and October 1; except that the May 1, 1998 effective date of the Plan will be a Grant Date. (h) "Option" - an irrevocable option to purchase shares of Common Stock under the Plan, pursuant to the terms and conditions of the Plan. (i) "Participant" - an Eligible Employee who is participating in the Plan pursuant to Section 4. -1- (j) "Plan" - this Heller Financial, Inc. 1998 Employee Stock Purchase Plan, as amended from time to time. (k) "Plan Account" - an account maintained by the Company or its designated recordkeeper for each Participant, to which the Participant's payroll deductions are credited, against which funds used to purchase shares of Common Stock are charged and to which shares of Common Stock purchased are credited. (l) "Plan Administrator" - the Heller Employee Benefits Committee, or such other person or persons, including a committee, as the Board of Directors (or the Compensation Committee of Board of Directors) of the Company may appoint to administer the Plan. The Board of Directors (or the Compensation Committee of Board of Directors) of the Company may at any time remove or replace the Plan Administrator. (m) "Purchase Date" - except as provided in Section 15, each March 31, June 30, September 30 and December 31. (n) "Purchase Price" - unless the Plan Administrator determines before a Grant Date that a higher price that complies with Code Section 423 will apply, the Purchase Price of the shares of Common Stock that are to be sold under the Plan on the Purchase Date next following that Grant Date will be 85% of the Fair Market Value of Common Stock on the Purchase Date next following the Grant Date. (o) "Savings and Profit Sharing Plan" - the Heller Financial, Inc. Savings and Profit Sharing Plan, as amended from time to time. (p) "Subsidiary" - any corporation, other than the Company, in an unbroken chain of corporations beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. Subsidiary status as to a particular Option grant will be determined at the time the Option is granted. A "domestic Subsidiary" is any Subsidiary organized under the laws of the United States of America. A "foreign Subsidiary" is a Subsidiary organized outside the laws of the United States of America. 2. Stock Subject to the Plan. Subject to Section 12, the aggregate number of shares of Common Stock that may be sold under the Plan is 1,500,000. The Company will make open-market purchases to provide shares of Common Stock for purchase under the Plan. If sufficient shares are not available through open market purchases, the Company will sell Treasury shares. 3. Eligible Employees. An "Eligible Employee" means at any time each, active common-law employee of the Company or any domestic Subsidiary, and each active common-law employee of a foreign Subsidiary to which the Plan is extended by the Compensation Committee of the Board of Directors of the Company, except: -2- (a) an employee who has been employed for fewer than six months by the Company and the Subsidiaries; or (b) an employee whose customary employment is for less than five months in any calendar year. 4. Participation in the Plan. (a) An Eligible Employee may participate in the Plan by completing and filing with the Company or its designated recordkeeper an election form that authorizes payroll deductions from the Eligible Employee's Compensation. Deductions will be made in accordance with the Eligible Employee's election, will begin on the first Grant Date after the election form has been filed, and will continue until the Eligible Employee terminates participation in the Plan or the Plan is terminated by the Company. An Eligible Employee may participate in the Plan only through payroll deductions. Other contributions will not be accepted. (b) Notwithstanding the foregoing, an Eligible Employee will not be granted an Option on any Grant Date if, immediately after the Option is granted, he or she owns stock possessing 5% or more of the total combined voting power or value of all classes of stock of the Company or any Subsidiary. For purposes of this paragraph, the rules of Code Section 424(d) will apply to determine the Eligible Employee's stock ownership, and stock that an employee may purchase under outstanding options will be treated as stock owned by the employee. 5. Payroll Deductions. Each payroll period, the Company will make payroll deductions from the Compensation paid to each Participant in the percentage elected by the Participant in his or her election form. Deduction elections must be made in whole percentages of Compensation from 1 to 10%. No Eligible Employee will be granted an Option under this Plan if, as a result, during any calendar year the Option remained outstanding, he or she would first be able to exercise options under Section 423 Plans for stock with a Fair Market Value of more than $25,000 in the aggregate (determined as of each Grant Date). For purposes of the foregoing sentence, "Section 423 Plans" means this Plan and all other plans of the Company and its Subsidiaries that are intended to qualify under Code Section 423. 6. Changes in Payroll Deductions. Subject to the minimum and maximum deduction limits set forth above, a Participant may change the amount of his or her payroll deductions as of the next Grant Date by filing a new election form with the Company or its designated recordkeeper at least fifteen (15) Business Days before the next Grant Date. The new election form will be effective until revoked in writing. 7. Termination of Participation in Plan. At any time and for any reason, a Participant may voluntarily terminate his or her participation in the Plan by delivering a written notice of the termination to the Company or its designated recordkeeper. The Company will cease making Plan payroll deductions from the Participant's Compensation within fifteen (15) days after it receives the notice. A Participant's participation in the Plan will end when he or she ceases -3- for any reason to be employed by the Company or any Subsidiary. If an active employee of the Company or any Subsidiary terminates his or her Plan participation, any payroll deductions credited to his or her Plan Account will be used to buy shares of Common Stock on the next Purchase Date. Any payroll deductions credited to the Plan Account of a former Participant who is no longer employed by the Company or any of its Subsidiaries, but not yet invested in Options, will be paid to the former Participant in cash as soon as practicable following his or her termination of employment. An Eligible Employee who has voluntarily terminated his or her participation in the Plan may rejoin the Plan by filing a new election form in accordance with Section 6. 8. Purchase of Shares. (a) On each Grant Date, each Participant will be deemed to have been granted an Option. (b) On each Purchase Date, each Participant will be deemed, without any further action, to have purchased a number of whole or fractional shares (calculated to the fourth decimal place) of Common Stock determined by dividing the Purchase Price into the balance in the Participant's Plan Account on the Purchase Date. Any amount remaining in the Participant's Plan Account will be carried forward to the next Purchase Date unless the Plan Account is closed. (c) As soon as practicable after each Purchase Date, individual statements showing the number of shares of Common Stock purchased on that Purchase Date on behalf of each Participant will be delivered to each Participant. (d) Upon request, a Participant may receive a stock certificate for whole shares of Common Stock that are held in his or her Plan Account. Notwithstanding the preceding sentence, if the Participant's employment with the Company and all Subsidiaries terminates, he or she will be issued a stock certificate for whole shares of Common Stock in his or her Plan Account as soon as administratively feasible after the termination. The Participant may elect whether the stock certificate will be issued in his or her name, or in his or her name and the name of another person as joint tenants with right of survivorship or as tenants in common. A cash payment will be made for any fraction of a share in the Participant's account, if necessary to close the account. 9. Rights as a Stockholder. As of the Purchase Date, a Participant will be treated as record owner of shares purchased for him or her under the Plan. 10. Rights Not Transferable. Rights under the Plan are not transferable by a Participant other than by will or the laws of descent and distribution, and are exercisable during the Participant's lifetime only by the Participant or by the Participant's guardian or legal representative. No rights or payroll deductions of a Participant will be subject to execution, attachment, levy, garnishment or similar process. -4- 11. Application of Funds. All funds of Participants received or held by the Company under the Plan before purchase of shares of Common Stock will be held by the Company without liability for interest or other increase. 12. Adjustments in Case of Changes Affecting Shares. If there is a subdivision or consolidation of outstanding shares of Common Stock of the Company, or if a stock dividend is paid, the number of shares approved for the Plan will be increased or decreased proportionately, and any other adjustment deemed equitable by the Plan Administrator will be made. If there is any other change affecting the Common Stock, an adjustment deemed equitable by the Plan Administrator will be made, to give appropriate effect to the event. 13. Administration of the Plan. The Plan Administrator will administer the Plan. The Plan Administrator has authority to make rules and regulations for Plan administration, and full authority and discretion and authority to interpret the Plan's terms and make decisions under it. The Plan Administrator's interpretations and decisions regarding the Plan and its rules and regulations will be final and conclusive. It is intended that the Plan at all times meet the requirements of Code Section 423, and the Plan Administrator will, to the extent possible, interpret the provision of the Plan so as to carry out that intent. 14. Amendments to the Plan. At any time or from time to time, the Plan Administrator may amend or modify the Plan. Notwithstanding the foregoing, other than as provided in Section 12 or 15, the Plan may not be amended to increase or decrease the number of shares authorized for purchase under the Plan, to decrease the Purchase Price, or, except as needed to conform the Plan to the requirements of the Code, to alter the Plan in any way that would cause it to fail to meet the requirements of Code Section 423, or that would retroactively and adversely affect the interests of Participants. 15. Termination of Plan. The Plan will terminate on the earlier of: (a) the date the as of which the Board of Directors terminates it; and (b) the date no more shares remain to be purchased under the Plan. The Board of Directors of the Company may terminate the Plan as of any date, and the date of termination will be deemed a Purchase Date. If on that Purchase Date Participants in the aggregate have Options to purchase more shares of Common Stock than are available for purchase under the Plan, each Participant will be eligible to purchase a reduced number of shares of Common Stock on a pro rata basis, and any payroll deductions remaining in his or her Plan Account after share purchases will be returned to the Participant, all as provided by rules and regulations adopted by the Plan Administrator. 16. Costs. The Company will pay all costs and expenses incurred in administering the Plan. Any costs or expenses of selling shares and certificating shares of Common Stock acquired under the Plan will be borne by the holder of the shares. -5- 17. Governmental Regulations. The Company's obligation to sell and deliver its Common Stock under the Plan is subject to any governmental approvals required in connection with the authorization, issuance or sale of such stock. 18. Applicable Law. This Plan will be interpreted under the laws of the United States of America and, to the extent not inconsistent therewith, by the laws of the State of Delaware. This Plan is not to be subject to the Employee Retirement Income Security Act of 1974, as amended, but is intended to comply with Section 423 of the Code. Any provisions required to be set forth in this Plan by Code Section 423 are hereby incorporated by reference. 19. Effect on Employment. The provisions of this Plan will not affect the right of the Company or any Subsidiary or any Participant to terminate the Participant's employment with the Company or any Subsidiary. Nothing in this Plan will be deemed to create a contract for the employment of any person. 20. Withholding. The Company reserves the right to withhold from stock or cash distributed to a Participant any amounts it is required by law to withhold. 21. Sale of Company. If there is a proposed sale of all or substantially all of the assets of the Company or a merger of the Company with or into another corporation, the Company will require that each outstanding Option be assumed or an equivalent right to purchase stock of the successor or purchaser corporation be substituted by the successor or purchaser corporation, unless the Plan is terminated. 22. Effective Date. The Plan will become effective May 1, 1998. Notwithstanding the foregoing or any other provision of this Plan, the Plan will not become effective unless the stockholders of Company approve it within twelve months after the date the Board of Directors of the Company adopts it. -6- EX-23.1 18 CONSENT OF ARTHUR ANDERSEN Exhibit 23.1 [LETTERHEAD OF ARTHUR ANDERSEN] CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report included in this Amendment No. 3 to this registration statement and to the incorporation by reference in this Amendment No. 3 to this registration statement of our report dated January 23, 1998 (except with respect to the matters discussed in Note 20, as to which the date is February 24, 1998) included in Heller Financial, Inc.'s Form 10-K/A for the year ended December 31, 1997 and to all references to our firm included in this Amendment No. 3 to this registration statement. /s/ Arthur Andersen LLP Chicago, Illinois April 28, 1998 -----END PRIVACY-ENHANCED MESSAGE-----