10-Q 1 h02q2.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 June 30, 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 period's presentation and adjusted to conform to changes effected by the filing of form 10Q/A for the second 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 7), have been restated to be consistent with 2002 reporting. Goodwill amortization expense for the quarter and six months ended June 30, 2001, was $5 million ($4 million after tax) and $10 million ($7 million after tax), respectively. The effect on earnings of excluding such goodwill amortization expense from the second quarter and first six months of 2001 follows:

Under SFAS 142, Heller was required to test all existing goodwill for impairment as of January 1, 2002, on a "reporting unit" basis. A reporting unit is the operating segment unless, at 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. 5 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 is no impairment of goodwill as of June 30, 2002. The following table presents goodwill balances relating to our acquisitions, by operating segment: June 30 December 31 2002 2001 ---- ---- (in millions) Mid-Market Financing Goodwill.................................. $ 198 $ 261 Accumulated goodwill amortization......... 26 38 -------- --------- Net goodwill, Mid-Market Financing........ $ 172 $ 223 -------- --------- Specialized Financing Goodwill.................................. $ 236 $ 236 Accumulated goodwill amortization......... 23 23 -------- --------- Net goodwill, Specialized Financing....... $ 213 $ 213 -------- --------- Consolidated net goodwill ............... $ 385 $ 436 ======== ========= (3) Discontinued Operations 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. This par amount has been included in the Debt Securities line in the balance sheet, net of a $224 million discount. The preferred shares pay quarterly, cumulative dividends at an annual fixed rate of 6.20%, are non-voting and are mandatorily redeemable after 21 years (redemption period). Heller has accounted for the 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 was recorded in connection with the transfer. The difference between the preferred stock series A par value and the carryover basis book value of the transferred assets has been recorded as a discount on the preferred shares, and will be accreted directly to equity over the redemption period with no future income statement effect. 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. 6 (4) 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: June 30, December 31, 2002 2001 ---- ---- (In millions) Nonearning receivables ................... $ 691 $ 408 Nonearning repossessed assets ............ 27 23 -------------- ------------- Total nonearning assets ................ $ 718 $ 431 ============== ============= Loan Modifications-- At June 30, 2002 and December 31, 2001, we did not have any loans that were considered troubled debt restructures. At June 30, 2002 there were no loans that were restructured and returned to earning status. Allowance for Losses-- The changes in the allowance for losses of receivables and repossessed assets were as follows for the six months ended June 30, 2002 and the year ended December 31, 2001: June 30, December 31, 2002 2001 ----------- ------------- (In millions) Balance at the beginning of the period ............ $ 442 $ 342 Provision for losses .............................. 145 297 Writedowns ........................................ (59) (225) Recoveries ........................................ 1 31 Other ............................................. (4) (3) Net change resulting from discontinued operations . (31) - ---------- ----------- Balance at the end of the period .................. $ 494 $ 442 ========== =========== (5) Senior Debt - Notes and Debentures We issued and retired the following notes and debentures during the six months ended June 30, 2002 (excluding unamortized premium and discount): Principal Amount -------------- (In millions) Issuances: Fixed rate notes with interest rates ranging from 3.66% to 6.38% due on various dates ranging from 6/20/2004 to 10/20/2005 ................................................. $ 21 ------ $ 21 ------ Retirements: Variable rate notes due on various dates ranging from 1/22/2002 to 6/24/2002 ..................................... $ (1,003) Fixed rate notes with interest rates ranging from 3.23% to 8.00% due on various dates ranging from 2/11/2002 to 6/30/2002 ..................................... $ (193) ----- $ (1,196) ===== 7 At June 30, 2002, we had total committed credit and available asset sale facilities totaling $6 million. This amount was fully available for use at June 30, 2002. We had approximately $460 million in available liquidity support from banks at June 30, 2002, of which $185 million was unused at June 30, 2002. (6) 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. Six Months Ended (In millions) June 30, 2002 June 30, 2001 ----------------- ----------------- Net earnings ........................... $ 81 $ 118 Investing securities ................... 25 (2) Currency translation adjustments ....... (45) (26) Derivatives qualifying as hedges ....... 3 (2) Cumulative effect on share owner's equity of adopting SFAS 133 ........ (1) (4) ----------------- ----------------- Total .................................. $ 63 $ 84 ================= ================= Three Months Ended (In millions) June 30, 2002 June 30, 2001 ----------------- ----------------- Net earnings ........................... $ 56 $ 68 Investing securities ................... 6 13 Currency translation adjustments ....... (55) 6 Derivatives qualifying as hedges ....... 2 - Cumulative effect on share owner's equity of adopting SFAS 133 ....... (1) - ----------------- ----------------- Total .................................. $ 15 $ 80 ================= ================= (7) Operating Segments Revenues and net earnings before accounting changes of the Company, by operating segment, for the six months ended June 30, 2002 and June 30, 2001, along with total assets, by operating segment, as of June 30, 2002 and December 31, 2001, are summarized and discussed below. Amounts for the first six months of 2001 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. 8

(8) 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. 9 Item 2. Management's Discussion and Analysis of Results of Operations. Overview Net earnings before cumulative effects of changes in accounting principle for the six months ended June 30, 2002 was $63 million, a $30 million (32%) decrease compared to net earnings before accounting changes of $93 million for the first six months of 2001. Excluding the effect of the prior year goodwill amortization in the amount of $7 million after tax, net earnings before accounting changes decreased 37%. 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. The results for the six months ended June 30, 2002 included a decrease in revenues as a result of 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 new business volume has decreased since the purchase date. The 3-month LIBOR rate was 3.791% at June 30, 2001, compared to a 3-month LIBOR rate of 1.860% at June 30, 2002. These reductions in revenue were partially offset during the period 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 $159 million (22%) to $575 million for the first six months of 2002, compared with $734 million for the first six months of 2001. This decrease primarily resulted from the decrease in market interest rates during the period from the second quarter of 2001 through the first six 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 $347 million at June 30, 2001 to $718 million at June 30, 2002, primarily as a result of several bankruptcies in Mid-Market and overall poor economic conditions during the period, also contributed to the decrease in interest revenue. Interest expense on borrowings decreased to $257 million (41%), compared with $434 for the first six months of 2001. The decrease reflected the effects of the significant decrease in interest rates over the period from the second quarter of 2001 through the first six months of 2002, lower cost of funds since the GE Capital merger, and a decrease in the amount of total senior debt outstanding from $15.6 billion at June 30, 2001 to $9.5 billion at June 30, 2002. Fees and other income was $76 million for the first six months of 2002, a 48% decrease from $146 million for the first six months of 2001. The decrease primarily related to a reduction in participation fees and other fee income in Specialized Financing in the first six months of 2002, as transactional volume has decreased as a result of the GE Capital merger. The first six months 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 with no counterpart in 2002. The first six 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 six months of 2002. 10 Operating and administrative expenses were $146 million for the first six months of 2002, a 23% decrease from $189 million for the first six 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 $145 million for the first six months of 2002, compared with $114 million for the first six 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 period 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 tax, 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 $40 million for the first six months of 2002 (an effective tax rate of 38%), compared with $36 million for the first six months of 2001 (an effective tax rate of 28%). The higher effective tax rate primarily reflects 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 are 7% for state income taxes and 35% for income from foreign operations. Small Business Finance charges were $12 million for the first six months of 2001 with no corresponding expense in the first six months 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 30% and net earnings increased 65% for the first six months of 2002 compared with the first six months of 2001. Revenues decreased primarily as a result of significantly lower market interest rates and reduced asset gains. Events contributing to the decrease were one-time 2001 transactions 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 six months of 2002. The increase in net earnings was primarily the result of one-time provisions in the amount of $18 million, net of income tax, for loan losses in 2001 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 28% and net earnings decreased 65% for the first six months of 2002 compared with the first six 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 also factored into the decrease, as there were significant loan participation transactions in the first six months of 2001, for which there was no counterpart in the first six months of 2002. The decrease in net earnings primarily relates to loan loss provisions in the amount of $31 million, net of income taxes, made during the period, which management has concluded are probable and inherent in the portfolio. 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 six months of 2002, also contributed to the decrease. 11 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 to $13.2 billion at June 30, 2002, from $16.1 billion at the end of 2001. The decrease primarily relates to the sale of HHF, which had financing receivables of approximately $2.4 billion at the date of the transaction. The payoff of a conduit during the six months ended June 30, 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 $2.0 billion, and origination volume of $1.4 billion represented the renewal of receivables, rather than new business generation. The related allowance for losses at June 30, 2002, amounted to $494 million ($442 million at the end of 2001) and represents 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 whose terms have been restructured to a below-market yield. Nonearning receivables at June 30, 2002 totaled $718 million, of which $27 million were repossessed assets, compared to $431 million at December 31, 2001, of which $23 million were repossessed assets. The increase during the six months ended June 30, 2002 was primarily the result of several bankruptcies in Mid-Market Financing, particularly in the Telecom industry, along with an overall decline in economic conditions during the period. No loans were troubled debt restructures and no assets were returned to earning status during the six months ended June 30, 2002. Forward Looking Statements This document includes 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. 12 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. 13 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) 14 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 June 30, 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; 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 June 30, 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; 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) (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