10-Q 1 h02q1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM 10-Q -------------------------- |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------ ---------- -------------------------- Commission file number 1-6157 -------------------------- Heller Financial, Inc. -------------------------- (Exact name of registrant as specified in its charter) Delaware 36-1208070 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 201 High Ridge Road, Stamford, Connecticut 06927 (Address of principal executive offices) (Zip Code) (203) 316-7500 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No At August 14, 2002, 100 shares of voting Class A Common Stock, par value of $0.25 per share, were outstanding. Aggregate market value of the outstanding common equity held by non-affiliates of the registrant at August 14: None. THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED DISCLOSURE FORMAT PERMITTED THEREBY. TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION Item 1. Financial Statements. HELLER FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (in millions)

The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these statements. 1 HELLER FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (in millions, except for information on shares)

The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these statements. 2 HELLER FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (in millions)

The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these statements. 3 HELLER FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 4 HELLER FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited) (1) Basis of Presentation These consolidated condensed financial statements should be read in conjunction with the financial statements and notes included in the annual report on Form 10-K of Heller Financial, Inc. (including its consolidated subsidiaries, Heller or the Company, which may be referred to as we, us or our) for the year ended December 31, 2001. All significant transactions among the parent and consolidated affiliates have been eliminated. Certain prior year amounts have been reclassified to conform to the current year's presentation and adjusted to conform to changes effected by the filing of form 10Q/A for the first quarter of 2001. The consolidated condensed quarterly financial statements are unaudited. These statements include all adjustments (consisting of normal recurring accruals) considered necessary by management to present a fair statement of the results of operations, financial position and cash flows. The results reported in these consolidated condensed financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. (2) Accounting Developments Statement of Financial Accounting Standards No. 133 At January 1, 2001, the Company adopted SFAS 133, Accounting for Derivative Instruments and Hedging Activities, as amended. Under SFAS 133, all derivative instruments are recognized in the balance sheet at their fair values. The cumulative effect of adopting this standard were one-time after tax reductions of net earnings of $4 million in the first quarter of 2001. Statement of Financial Accounting Standards No. 142 The Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards (SFAS) 142, "Goodwill and Other Intangible Assets", generally became effective on January 1, 2002. Under SFAS 142, goodwill is no longer amortized but is tested for impairment using a fair value methodology. Heller ceased amortizing goodwill effective January 1, 2002. Simultaneously, to maintain a consistent base for its measurement of performance, management revised previously reported segment information to correspond to the earnings measurements by which businesses will be evaluated. In accordance with the requirements of SFAS 131, Reporting Segments of a Business Enterprise, previously reported segment results (presented under the heading Operating Segments in Note 6), have been restated to be consistent with 2002 reporting. Goodwill amortization expense for the three months ended March 31, 2001, was $5 million ($3 million after tax). The effect on earnings of excluding such goodwill amortization expense from the first three months of 2001 follows:

5 Under SFAS 142, Heller was required to test all existing goodwill for impairment beginning January 1, 2002, on a "reporting unit" basis. A reporting unit is the operating segment unless, at businesses one level below that operating segment (the "component" level), discrete financial information is prepared and regularly reviewed by management, in which case such component is the reporting unit. SFAS 142 requires that two or more component-level reporting units with similar economic characteristics be combined into a single reporting unit. A fair value approach is used to test goodwill for impairment. An impairment charge is recognized for the amount, if any, by which the carrying amount of goodwill exceeds its implied fair value. Fair values of reporting units and the related implied fair values of their respective goodwill were established using discounted cash flows. When available and appropriate, comparative market multiples were used to corroborate results of the discounted cash flows. An analysis performed by the Company determined there was no impairment of goodwill as of March 31, 2002. The following table presents goodwill balances relating to our acquisitions, by operating segment: March 31 December 31 2002 2001 ---- ---- (in millions) Mid-Market Financing Goodwill................................... $ 261 $ 261 Accumulated goodwill amortization.......... 38 38 -------- ------- Net goodwill, Mid-Market Financing......... $ 223 $ 223 -------- ------- Specialized Financing Goodwill................................... $ 236 $ 236 Accumulated goodwill amortization.......... 23 23 -------- ------- Net goodwill, Specialized Financing........ $ 213 $ 213 -------- ------- Consolidated net goodwill $ 436 $ 436 ======== ======= (3) Nonearning Assets We do not recognize interest and fee income on impaired receivables or repossessed assets, both of which are classified as nonearning, as set forth in the following table: March 31, December 31, 2002 2001 ---------- -------- (in millions) Nonearning receivables...................... $ 572 $ 408 Nonearning repossessed assets............... 19 23 --------- -------- Total nonearning assets................... $ 591 $ 431 ========= ======== Loan Modifications-- At March 31, 2002 and December 31, 2001, we did not have any loans that were considered troubled debt restructures. At March 31, 2002 there were no loans that were restructured and returned to earning status. 6 Allowance for Losses-- The changes in the allowance for losses of receivables and repossessed assets were as follows for the three months ended March 31, 2002 and the year ended December 31, 2001: March 31, December 31, 2002 2001 --------- ----------- (in millions) Balance at the beginning of the period....... $ 442 $ 342 Provision for losses..................... 71 297 Writedowns............................... (21) (225) Recoveries............................... 2 31 Other.................................... 2 (3) --------- -------- Balance at the end of the period............. $ 496 $ 442 ========== ========= (4) Senior Debt - Notes and Debentures We issued and retired the following notes and debentures during the three months ended March 31, 2002 (excluding unamortized premium and discount):

At March 31, 2002, we had total committed credit and available asset sale facilities totaling $137 million. This amount was fully available for use at March 31, 2002. We had approximately $206 million in available liquidity support from banks at March 31, 2002. (5) Stockholder's Equity A summary of increases/(decreases) in stockholder's equity that do not result directly from transactions with share owners, net of income taxes, is provided below.

7 (6) Operating Segments Revenues and net earnings before accounting changes of the Company, by operating segment, for the three months ended March 31, 2002 and March 31, 2001 along with total assets, by operating segment, as of March 31, 2001 and December 31, 2001, are summarized and discussed below. First quarter 2001 amounts have been reclassified to conform to the 2002 presentation, which reflects changes, effective as of January 1, 2002, in the Corporation's internal organization, the effects of SFAS 142 on prior year net earnings, and also to conform to changes effected by the filing of form 10Q/A for the first quarter of 2001.

(7) Small Business Finance Charge During the first quarter of 2001, in connection with the decision to discontinue the origination of SBA loans through the Small Business Finance unit, the Company incurred a one time pre-tax charge of approximately $12 million (approximately $8 million after-tax). This amount primarily relates to severance benefits and facility-related costs. (8) Subsequent Event On May 22, 2002, Heller International Group (HIG), a wholly-owned subsidiary of Heller Financial, Inc., transferred all of the outstanding common stock of Heller Holding France S.A. (HHF), the French holding company of Factofrance Heller S.A. and Heller Factoring Espanola, S.A., to GE Capital European Investments, Inc. In exchange for the common stock of HHF, GE Capital European Investments issued to HIG 6,710 shares of Series A preferred stock with a par value of $100,000 per share. These preferred shares pay quarterly, cumulative dividends at an annual fixed rate of 6.20%, are non-voting and are mandatorily redeemable after 21 years. Heller has accounted for this exchange of shares between entities under common control using the carryover basis of the transferred net assets which were approximately $447 million as of May 22, 2002. No gain or loss will be recorded in connection with the transfer. The total HHF assets and liabilities transferred approximated $2.5 billion and $2.0 billion, respectively. Operating revenues and pre-tax income for the transferred HHF entities amounted to $150 million and $65 million, respectively, for the year ended December 31, 2001. 8 Item 2. Management's Discussion and Analysis of Results of Operations. Overview Net earnings for the three months ended March 31, 2002 was $25 million, a $21 million (46%) decrease from net earnings of $46 million for the first three months of 2001. Excluding the effect of the prior year goodwill amortization in the amount of $3 million after tax, net earnings before accounting changes decreased by 52%. For a discussion of the cumulative effects of changes in accounting principle, refer to footnote 2 of the financial statements included herein. The decrease relates primarily to $31 million, net of income taxes, of loan loss provisions in Specialized Financing that were a result of an increase in reserves that management has concluded are probable and inherent in the portfolio, and a $10 million, net of income taxes, loss on debt securities, partially offset by additional provisions made in the first quarter of 2001 in the amount of $18 million, net of income taxes, largely relating to SBA loans as a result of the discontinuation of the Small Business Finance unit. The results for the three months ended March 31, 2002 also included a decrease in revenues as the result of sharp decreases in interest rates on the variable rate financing receivables portfolio, as well as decreases in participation fees and other fee income since the GE Capital merger, as overall business volume has decreased since the purchase date. The 3-month LIBOR rate was 4.877% at March 31, 2001, compared to a 3-month LIBOR rate of 2.031% at March 31, 2002. These reductions in revenue were offset during the quarter by a corresponding decrease in interest expense due to lower market interest rates, and reduced operating expenses since the GE Capital merger resulting from a reduction in headcount. On May 22, 2002, Heller International Group (HIG), a wholly-owned subsidiary of Heller Financial, Inc., transferred all of the outstanding common stock of Heller Holding France S.A. (HHF), the French holding company of Factofrance Heller S.A. and Heller Factoring Espanola, S.A., to an affiliated entity, in exchange for preferred stock. The total HHF assets, liabilities, and goodwill transferred approximated $2.5 billion, $2.0 billion, and $51 million, respectively. Operating revenues and pre-tax income for the transferred HHF entities amounted to $150 million and $65 million, respectively, for the year ended December 31, 2001 Operating Results Interest revenues decreased $94 million (23%) to $309 million for the first three months of 2002, compared with $403 million for the first three months of 2001. This decrease primarily resulted from a decrease in market interest rates during the period from the first quarter of 2001 through the first three months of 2002. The impact of this decrease in interest rates has been significant on the portfolio, which is heavily based on variable rates. An increase in nonearning assets from $315 million at March 31, 2001 to $591 million at March 31, 2002, primarily as a result of several bankruptcies in Mid-Market and overall poor economic conditions, also contributed to the decrease in interest revenue. Interest expense on borrowings decreased to $137 million (45%), compared with $249 million for the first three months of 2001. The decrease reflected the effects of a significant decrease in interest rates over the period from the first quarter of 2001 through the first three months of 2002, lower cost of funds since the GE Capital merger, and a decrease in the amount of total senior debt outstanding from $15.7 billion at March 31, 2001 to $10.3 billion at March 31, 2002. 9 Fees and other income was $40 million for the first three months of 2002, a 60% decrease from $99 million for the first three months of 2001. The decrease primarily related to a reduction in participation fees and other fee income in Specialized Financing in the first quarter of 2002, as transactional volume has decreased as a result of the GE Capital merger. In addition, a plan of sale was approved in the first quarter of 2002 to sell debt securities with an unrealized loss of $10 million, net of income tax. Since we did not expect the fair value of the securities to recover prior to the sale, the writedown was recognized in earnings in the period in which the decision to sell was made, not the period in which the sale occurred. The first quarter of 2001 included approximately $23 million of income from participation fees, exit fees and other types of fees and gains typically earned on transactions relating to loan participations. The first three months of 2001 also included $8 million in gains from exercised early buy-out options in a leasing transaction in Specialized Financing, and gains from loan sales transactions in the amount of $6 million, both with no counterpart in the first three months of 2002. Operating and administrative expenses were $100 million for the first three months of 2002, a 10% decrease from $111 million for the first three months of 2001. The decrease primarily reflected the decrease in salaries and wages expense and related employee-driven expenses as a result of the reduction in headcount since the GE Capital merger. Provision for losses was $71 million for the first three months of 2002, compared with $60 million for the first three months of 2001. The increase primarily relates to loan loss provisions in the amount of $31 million, net of income taxes, made in Specialized Finance during the quarter as a result of an increase in reserves for loan losses that management has concluded are probable and inherent in the portfolio. The increase was partially offset by one-time additional provisions made in the first quarter of 2001 in the amount of $18 million, net of income taxes, relating to SBA loans and other Mid-Market loans, largely as the result of the discontinuation of the Small Business Finance unit. Income tax provision was $16 million for the first three months of 2002 (an effective tax rate of 39%), compared with $20 million for the first three months of 2001 (an effective tax rate of 29%). The higher effective tax rate primarily reflected increased state income tax rates and increased rates of tax on non-US operations resulting from the GE Capital merger. Prior to the merger, the company had an effective tax rate of 2% for state income taxes and had no income tax liability on income earned from foreign operations. Subsequent to the merger, the effective tax rates were 7% for state income taxes and 35% for income from foreign operations. Small Business Finance charges were $12 million for the first three months of 2001 with no corresponding expense in the first quarter of 2002. The 2001 expense related to a one-time charge of approximately $12 million (approximately $8 million after-tax) in connection with the decision to discontinue the origination of SBA loans through our Small Business Finance unit. This charge was primarily related to employee severance and facility related-costs. Operating Segments Mid-Market Financing revenues decreased 29% and net earnings increased 117% for the first three months of 2002 compared with the first three months of 2001. Revenues decreased primarily as a result of significantly lower market interest rates and reduced asset gains. Other events contributing to the decrease were transactions during the first quarter of 2001 that resulted in gains from loan sales of $6 million in Commercial Equipment Financing and gains from sales of stock of $18.9 million in Commercial Finance, with no counterpart in the first quarter of 2002. The increase in net earnings was primarily the result of abnormally high provisions for loan losses in 2001 which included a one-time $18 million, net of income tax, provision for SBA loans as the result of the discontinuation of the Small Business Finance unit, and lower cost of funds since the GE Capital merger. Specialized Financing revenues decreased 39% and net earnings decreased 136% for the first three months of 2002 compared with the first three months of 2001. Revenues and net earnings decreased primarily as a result of the heavily variable rate portfolio being impacted by significantly lower market interest rates. Decreased participation income in the Real Estate unit also factored into the decrease, as there were significant loan participation transactions in the first quarter of 2001, for which there was no counterpart in the first quarter of 2002. Net earnings also decreased as a result of loan loss provisions in the amount of $31 million, net of income taxes, made during the quarter as a result of increases in reserves that management has concluded are probable and inherent in the portfolio. In addition, a plan of sale was approved in the first quarter of 2002 to sell securities with an unrealized loss of $10 million, net of income tax. Since we did not expect the fair value of the securities to recover prior to the sale, the writedown was recognized in earnings in the period in which the decision to sell was made, not the period in which the sale occurred. Gains of $8 million from the exercising of early buy-out options in 2001, relating to lease agreements in the Structured Finance Group, for which there was no counterpart in the first three months of 2002, also contributed to the decrease. 10 Portfolio Quality Receivables are the financing businesses' largest asset and their primary source of revenues. The portfolio of financing receivables, before allowance for losses, decreased slightly to $15.9 billion at March 31, 2002, from $16.1 billion at the end of 2001. The payoff of a conduit during the three months ended March 31, 2002 resulted in an increase in financing receivables of approximately $972 million. This was offset by the run-off status of the portfolio, as principal payments were $1.1 billion, and origination volume of $1.1 billion represented the renewal of receivables, rather than new business generation. The related allowance for losses at March 31, 2002, amounted to $496 million (up from $442 million at the end of 2001) and represented management's best estimate of probable losses inherent in the portfolio. "Nonearning" receivables are those that are 90 days or more delinquent (or for which collection has otherwise become doubtful) and "reduced-earning" receivables are commercial receivables with terms that have been restructured to a below-market yield. Nonearning receivables at March 31, 2002 totaled $591 million, of which $19 million were repossessed assets, compared to $431 million at December 31, 2001, of which $23 million were repossessed assets. The increase was primarily the result of poor economic conditions during the period, including several bankruptcies in Mid-Market Financing, including a significant amount related to the Telecom industry. No loans were troubled debt restructures and no assets were returned to earning status during the quarter ended March 31, 2002. Forward Looking Statements This document may include certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from those expressed in, or implied by, these forward-looking statements due to changes in global economic business, competitive markets and regulatory factors. 11 PART II--OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. a. Exhibits. Exhibit 12. Computation of ratio of earnings to fixed charges and computation of ratio of earnings to combined fixed charges and preferred stock dividends. Exhibit 99.1 CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 99.2 CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. b. Reports on Form 8-K. Date of Report Item Description -------------------- ----- ---------------------------- January 25, 2002 4 A report disclosing changes in registrant's certifying accountant. 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HELLER FINANCIAL, INC. ---------------------- (Registrant) Date: August 14 , 2002 By: /s/ J. Gordon Smith -------------------------------------------- J. Gordon Smith Chief Executive Officer and Chief Financial Officer (Principal Financial Officer) Date: August 14 , 2002 By: /s/ Julie A. Giglio -------------------------------------------- Julie A. Giglio Chief Accounting Officer and Controller (Principal Accounting Officer) 13 Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Heller Financial, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, J. Gordon Smith, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 other than the filing deadlines contained therein; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ J. Gordon Smith -------------------------- J. Gordon Smith Chief Executive Officer August 14, 2002 Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Heller Financial, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, J. Gordon Smith, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 other than the filing deadlines contained therein; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ J. Gordon Smith ------------------------- J. Gordon Smith Chief Financial Officer August 14, 2002 EXHIBIT 12 HELLER FINANCIAL, INC. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (unaudited) (dollars in millions)

For purposes of computing the ratio of earnings to combined fixed charges and preferred stock dividends, "earnings" includes earnings before income taxes and fixed charges. "Combined fixed charges and preferred stock dividends" includes interest on all indebtedness, one-third of annual rentals (approximate portion representing interest) and preferred stock dividends on a pre-tax basis.

HELLER FINANCIAL INC 10-Q