10-K 1 FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549-1004 --------------- Form 10-K --------------- (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1994 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to --------------- Commission file number 1-1861 The CIT Group Holdings, Inc. (Exact name of registrant as specified in its charter) Delaware 13-2994534 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1211 Avenue of the Americas, New York, New York 10036 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (212) 536-1950 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------- ------------------------ 8 3/4% Notes Due April 15, 1998...................... New York Stock Exchange 5 7/8% Notes Due October 15, 2008.................... New York Stock Exchange --------------- Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] State the aggregate market value of the voting stock held by non-affiliates of the Registrant. None of the voting stock of the Registrant is held by non-affiliates of the Registrant. 60% of the voting stock of the Registrant is owned by The Dai-Ichi Kangyo Bank, Limited and 40% by MHC Holdings (Delaware) Inc., a wholly-owned subsidiary of Chemical Banking Corporation. Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date. March 1, 1995 -- Common Stock -- 1,000 Shares List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) any annual report to security holders; (2) any proxy or information statement; and (3) any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. None ================================================================================ TABLE OF CONTENTS Form 10-K Item No. Name of Item Page --------- ------------ ---- Part I Item 1. Business........................................................ 1 General...................................................... 1 Business and Services........................................ 1 Industry Concentration....................................... 3 Competition.................................................. 3 Regulation................................................... 3 Item 2. Properties...................................................... 4 Item 3. Legal Proceedings............................................... 4 Item 4. Submission of Matters to a Vote of Security Holders............. 4 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.............................. 5 Item 6. Selected Financial Data......................................... 6 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 12 Item 8. Financial Statements and Supplementary Data..................... 28 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......................... 53 Part III Item 10. Directors and Executive Officers of the Registrant.............. 54 Item 11. Executive Compensation.......................................... 56 Long-Term Incentive Plan..................................... 57 Defined Benefit Plans........................................ 57 Employment Agreements........................................ 59 Termination and Change-in-Control Arrangements............... 60 Item 12. Security Ownership of Certain Beneficial Owners and Management.. 61 Item 13. Certain Relationships and Related Transactions.................. 62 Part IV Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.. 63 PART I Item 1. Business GENERAL The CIT Group Holdings, Inc. (the "Corporation"), a Delaware corporation, is a successor to a company founded in St. Louis, Missouri on February 11, 1908. It has its principal executive offices at 1211 Avenue of the Americas, New York, New York 10036, and its telephone number is (212) 536-1950. The Corporation, operating directly or through its subsidiaries primarily in the United States, engages in financial services activities through a nationwide distribution network. The Corporation provides financing primarily on a secured basis to commercial borrowers, ranging from middle-market to larger companies, and to a lesser extent to consumers. While these secured lending activities reduce the risk of losses from extending credit, the Corporation's results of operations can also be affected by other factors, including general economic conditions, competitive conditions, the level and volatility of interest rates, concentrations of credit risk, and government regulation and supervision. The Corporation does not finance the development or construction of commercial real estate. The Corporation has eight strategic business units, seven of which offer corporate financing, dealer and manufacturer financing, and factoring products and services to clients, and an eighth which offers consumer first and second mortgage financing and home equity lines of credit. The Corporation had 2,689 employees at December 31, 1994, up from 2,424 employees at December 31, 1993. The Dai-Ichi Kangyo Bank, Limited ("DKB") owns sixty percent (60%) of the issued and outstanding shares of common stock of the Corporation, which it purchased from Manufacturers Hanover Corporation ("MHC") at year-end 1989. The remaining forty percent (40%) common stock interest in the Corporation is owned by Chemical Banking Corporation ("CBC") through a subsidiary MHC Holdings (Delaware) Inc. ("MHC Holdings"), which CBC acquired as part of the merger between MHC and CBC on December 31, 1991. In accordance with a stockholders agreement among DKB, CBC, as successor to MHC, and the Corporation (the "Stockholders Agreement"), the Corporation amended its Certificate of Incorporation and its By-Laws in conformity therewith. Pursuant to the Stockholders Agreement, immediately after MHC sold the sixty percent (60%) interest in the Corporation to DKB, the stockholders elected a new Board of Directors comprised of the President and Chief Executive Officer and the Vice Chairman of the Corporation, six nominees designated by DKB, and two nominees designated by MHC. The Stockholders Agreement also contains provisions for the management of the Corporation, majority voting by DKB on the Corporation's Executive Committee, consent of MHC Holdings with respect to major corporate and business changes, and restrictions with respect to the transfer of the stock of the Corporation to third parties. BUSINESS AND SERVICES Corporate Finance Group The Corporation's Corporate Finance Group is comprised of Business Credit, Capital Equipment Financing and Credit Finance. The CIT Group/Business Credit offers revolving and term loans secured by accounts receivable, inventories and fixed assets to medium and larger-sized companies. Such loans are used by clients primarily for acquisitions and refinancings. It also offers specialty financing for companies in the paper, printing and chemical industries and debtor-in-possession and workout financing for turnaround situations. The CIT Group/Business Credit sells participation interests in such loans to other lenders and will occasionally purchase participation interests in such loans originated by other lenders. Business is developed through direct calling efforts and through other sources originated by new business development officers. The CIT Group/Business Credit is headquartered in New York City, with sales and customer service offices in New York, Chicago, Dallas, Los Angeles, Atlanta and Charlotte. 1 The CIT Group/Capital Equipment Financing specializes in customized secured financing and leasing, including single investor leases, the debt and equity portions of leveraged leases, and operating leases for major capital equipment such as aircraft, rail cars, maritime shipping, and containers and chassis, for its own account and for syndications. Such business is developed directly with large companies and through third parties. The CIT Group/Capital Equipment Financing also provides secured financing and leasing products to middle-market and larger companies seeking medium and longer term financings. Such transactions are developed through direct calling efforts and financial intermediaries. Financing products include direct secured loans and leases, sale and leaseback arrangements, operating leases, and project financings. Two business groups within The CIT Group/Capital Equipment Financing augment its marketing efforts and provide services relating to its areas of expertise. The first group, The CIT Group/Capital Investments, acts as an agent, broker, and advisor in financing and leasing transactions. The CIT Group/Capital Investments is a registered broker-dealer and a member of the National Association of Securities Dealers, Inc. The second group, The CIT Group/Asset Management, provides asset management services to financial institutions and certain non-financial institutions for equipment financing transactions and portfolios. The CIT Group/Capital Equipment Financing is headquartered in New York City, with sales offices in twelve cities, including New York, Chicago and Los Angeles. The CIT Group/Credit Finance offers revolving and term loans to small and medium-sized companies secured by accounts receivable, inventories, and fixed assets. Such loans are used by clients for working capital and in refinancings, acquisitions, and leveraged buyouts. The CIT Group/Credit Finance also offers financing for reorganizations, restructurings, and Chapter 11 situations. Business is developed through direct calling efforts and through other sources developed by new business development officers. The CIT Group/Credit Finance is headquartered in New York City, with sales and customer service offices in New York, Chicago and Los Angeles and loan production in seven other cities. Dealer and Manufacturer Financing Group The Corporation's Dealer and Manufacturer Financing Group is comprised of Industrial Financing and Sales Financing. The CIT Group/Industrial Financing offers secured equipment financing and leasing products, including direct secured loans, leases, secured lines of credit, sale and leaseback arrangements, vendor financing for manufacturers, wholesale and retail financing for dealers/distributors, acquisition of chattel paper and other installment receivables, and acquisition of portfolios originated by others. It has a nationwide network of local offices and business aircraft, intermediary and national accounts financing units. The CIT Group/Industrial Financing is headquartered in Livingston, New Jersey, with sales offices in fourteen cities, including Berwyn, Pennsylvania, Tempe, Arizona and Atlanta, Georgia, which also serve as regional and customer service offices. The CIT Group/Sales Financing, working through dealers and manufacturers, provides retail secured financing on a nationwide basis for the purchase of recreational vehicles, recreational boats and manufactured housing. The CIT Group/Sales Financing also purchases portfolios of these assets from banks, savings and loans, investment banks and others and provides servicing for portfolios owned by other financial institutions and securitization trusts. The CIT Group/Sales Financing is headquartered in Livingston, New Jersey with an asset service center in Oklahoma City, Oklahoma, and covers the United States from five regional business centers located in Atlanta, Boston, Kansas City, Sacramento and Seattle. Consumer Finance In December 1992, The CIT Group/Consumer Finance, a newly formed business unit, began offering loans secured primarily by first or second mortgages on residential real estate. The CIT Group/Consumer Finance generates business through brokers and direct marketing efforts. It also acquires "home equity" portfolios originated by others. In early 1994, The CIT Group/Consumer Finance began offering home equity lines of credit to consumers. This business unit is headquartered in Livingston, New Jersey with 33 sales offices serving 24 states, two of which purchase mortgage loans from third parties. Administrative support is provided by the Sales Financing asset service center located in Oklahoma City, Oklahoma. 2 Factoring The CIT Group/Commercial Services offers a full range of factoring services providing for the purchase of accounts receivable, including credit protection, bookkeeping, and collection activities. Financing is also provided in the form of revolving and term loans, and letter of credit support. The CIT Group/Commercial Services is headquartered in New York City, with full service offices in New York, Los Angeles, Dallas and Charlotte and sales offices in Miami and Hong Kong. Bookkeeping and collection functions are located in a service center in Danville, Virginia. On February 28, 1994, the Corporation acquired, for cash, Barclays Commercial Corporation ("BCC"), a company of The Barclays Group. BCC had total assets of approximately $700.0 million at December 31, 1993 and total factoring volume of approximately $5.00 billion for the year then ended. The business and acquired assets of BCC were transferred to The CIT Group/Commercial Services, Inc., a wholly-owned subsidiary of the Corporation. BCC is engaged in the same lines of business as The CIT Group/Commercial Services, with BCC adding a significant geographical presence in the Southeastern United States. Equity Investments The CIT Group/Equity Investments and its subsidiary The CIT Group/Venture Capital originate and participate in purchasing private equity and equity-related securities, and arrange transaction financing and merger and acquisition transactions. These units also invest in emerging growth opportunities in selected industries, including the life sciences, information technology, communications and consumer products. Business is developed through direct solicitation, or through referrals from investment banking firms, financial intermediaries, or the Corporation's other business units. The CIT Group/Venture Capital is a federal licensee under the Small Business Investment Act of 1958. The CIT Group/Equity Investments and The CIT Group/Venture Capital are headquartered in Livingston, New Jersey. Multi-National Marketing Supplementing the Corporation's marketing efforts, the Corporation's Multi-National Marketing Group promotes the services of the Corporation's various business units to the U.S. subsidiaries of foreign corporations in need of asset-based financing. Business is developed through referrals from DKB and through direct calling efforts. The Multi-National Marketing Group is located in New York City. INDUSTRY CONCENTRATION With the exception of the airline industry, which accounts for $1.90 billion, or 12.1%, of total financing and leasing assets (before the reserve for credit losses) as of December 31, 1994, the portfolio of the Corporation was diversified with no other industry group accounting for more than 8.5% of the Corporation's financing and leasing assets. See the "Industry Composition" and "Commercial Airlines" sections of "Financing and Leasing Assets Concentrations" in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. COMPETITION The business in which the Corporation engages is highly competitive, with business developed primarily on the basis of customizing transaction structure, client service and relationships, and payment terms. The Corporation is subject to competition from many financial institutions, including finance companies, banks, leasing companies and investment banks. The Corporation's Commercial Services unit is the largest factoring operation in the United States. The interest rates charged by the Corporation for the various classes of financing and leasing assets vary depending upon the credit quality of the borrower, the amount and maturity of the loan, the costs of servicing, the income tax consequences of the transaction, the cost of borrowing to the Corporation, and, to a lesser degree, state usury laws and other governmental regulations, when applicable. The Corporation's finance receivables have both variable rates and fixed rates of interest. Variable rate loans reprice in accordance with various agreed upon indices, usually a published reference or prime interest rate. REGULATION Both DKB and CBC are bank holding companies within the meaning of the Bank Holding Company Act of 1956 (the "Act"), and each is registered as such with the Federal Reserve Board. As a result, the Corporation is subject to certain provisions of the Act. In general, the Act limits the activities in which a bank 3 holding company and its subsidiaries may engage to those of banking or managing or controlling banks or performing services for their subsidiaries and to continuing activities which the Federal Reserve Board has determined to be "so closely related to banking or managing or controlling banks as to be a proper incident thereto." The Corporation's current principal business activities constitute permissible activities for a subsidiary of a bank holding company. The operations of the Corporation and its subsidiaries are subject, in certain instances, to supervision and regulation by governmental authorities and may be subject to various laws and judicial and administrative decisions imposing various requirements and restrictions, including among other things, regulating credit granting activities, establishing maximum interest rates and finance charges, regulating customers' insurance coverages, requiring disclosures to customers, governing secured transactions, and setting collection, repossession, and claims handling procedures and other trade practices. In most states the consumer sales finance and loan business and the consumer second mortgage and home equity line of credit businesses are subject to licensing or regulation. In some states the industrial finance business is subject to similar licensing or regulation. The consumer second mortgage, home equity line of credit, sales finance, and loan businesses, including those conducted by the Corporation, are also subject to a number of Federal statutes, including the Federal Consumer Credit Protection Act, which requires, among other things, disclosure of the finance charge in terms of an annual percentage rate, as well as the total dollar cost. In the judgment of management, existing statutes and regulations have not had a materially adverse effect on the business conducted by the Corporation and its subsidiaries. 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, earnings, or otherwise, of the Corporation and its subsidiaries. Item 2. Properties. The operations of the Corporation and its subsidiaries are generally conducted in leased office space located in numerous cities and towns throughout the United States. Such leased office space is suitable and adequate for the needs of the Corporation. The Corporation utilizes, or plans to utilize in the foreseeable future, substantially all of its leased office space. For a summary of the Corporation's past rental expense and future minimum rentals, see Item 8. Financial Statements and Supplementary Data, "Note 12--Lease Commitments." Item 3. Legal Proceedings. Various claims and actions against the Corporation and its subsidiaries arise from time to time in the normal course of business. A number of these actions, some of which purport to be class actions, are now pending. While no prediction can be made as to the ultimate outcome of any particular action, management believes that meritorious defenses are generally available and the aggregate liability, if any, likely to result therefrom will not materially affect the consolidated financial condition of the Corporation. Item 4. Submission of Matters to a Vote of Security Holders. On April 14, 1994, DKB and MHC Holdings, by unanimous written consent, elected the following ten persons to the Board of Directors, to serve for a period of one year or until the next annual meeting of shareholders: Messrs. Hisao Kobayashi (Chairman) Albert R. Gamper, Jr. Michio Murata Joseph A. Pollicino Paul N. Roth Tomoaki Tanaka Peter J. Tobin Toshiji Tokiwa Keiji Torii William H. Turner Subsequently, on August 15, 1994, Mr. Tomoaki Tanaka resigned from the Board and the stockholders, by unanimous written consent, elected Mr. Hideo Kitahara for the balance of Mr. Tanaka's term as Director. 4 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The outstanding common stock of the Corporation is owned 60% by DKB and 40% by MHC Holdings. There is no public trading market for the Corporation's common stock. DKB, MHC Holdings and the Corporation operate under a policy requiring the payment of dividends by the Corporation equal to and not exceeding 50% of net operating earnings on a quarterly basis. Such dividends are paid to DKB and MHC Holdings based upon their respective stock ownership in the Corporation. The Corporation intends to continue to operate under the fifty-percent dividend policy set forth in the preceding paragraph. Below is a listing of the dividends paid during the past two years: Dividends Paid 1994 1993 -------------- ------ ------ Amounts in Thousands Regular Dividends First Quarter .................. $ 24,596 $21,931 Second Quarter ................. 24,880 23,221 Third Quarter .................. 26,440 23,722 Fourth Quarter ................. 24,420 22,290 -------- ------- Total ...................... $100,336 $91,164 ======== ======= Stockholders' equity at December 31, 1994 was $1.79 billion. Under the most restrictive provisions of agreements relating to outstanding debt, the Corporation may not, without the consent of the holders of such debt, permit stockholders' equity to be less than $300.0 million. 5 Item 6. Selected Financial Data. The following table sets forth selected consolidated financial information regarding the Corporation's results of operations, which has been extracted from the Corporation's consolidated financial statements for the five years ended December 31, 1994. Prior period amounts, principally fees and other income and depreciation on operating lease equipment have been reclassified to conform to the current presentation. This information should be read in conjunction with Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data.
Years Ended December 31, ------------------------------------------------------------------------------ 1994 1993 1992 1991 1990 ------------------------------------------- ----------- ------------ Dollar Amounts in Thousands Finance income .................................. $ 1,263,846 $ 1,111,853 $ 1,091,562 $ 1,196,417 $ 1,106,000 Interest expense ................................ 613,957 508,006 552,017 709,373 711,645 ----------- ----------- ----------- ----------- ----------- Net finance income ............................ 649,889 603,847 539,545 487,044 394,355 Fees and other income .......................... 174,365 133,805 113,762 115,890 115,675 ----------- ----------- ----------- ----------- ----------- Operating Revenue ............................. 824,254 737,652 653,307 602,934 510,030 ----------- ----------- ----------- ----------- ----------- Salaries and employee benefits .................. 185,868 152,139 137,914 127,060 113,612 General operating expenses ...................... 152,068 130,043 123,721 119,273 101,615 ----------- ----------- ----------- ----------- ----------- Salaries and general operating expenses ..................................... 337,936 282,182 261,635 246,333 215,227 ----------- ----------- ----------- ----------- ----------- Net credit losses ............................... 84,152 94,408 98,284 95,169 88,610 Provision for finance receivables increase ......................... 12,789 10,466 4,891 1,883 9,489 ----------- ----------- ----------- ----------- ----------- Total provision for credit losses ............... 96,941 104,874 103,175 97,052 98,099 ----------- ----------- ----------- ----------- ----------- Depreciation on operating lease equipment .............................. 64,308 39,799 16,645 8,064 -- ----------- ----------- ----------- ----------- ----------- Operating expenses .............................. 499,185 426,855 381,455 351,449 313,326 ----------- ----------- ----------- ----------- ----------- Income before provision for income taxes, extraordinary item and cumulative effect of a change in accounting principle ......................... 325,069 310,797 271,852 251,485 196,704 Provision for income taxes ...................... 123,941 128,489 105,311 100,032 76,995 ----------- ----------- ----------- ----------- ----------- Income before extraordinary item and cumulative effect of a change in accounting principle ...................... 201,128 182,308 166,541 151,453 119,709 Extraordinary item - loss on early extinguishment of debt, net of income tax benefit ........................... -- -- (4,241) (1,325) (5,937) Cumulative effect of a change in accounting for income taxes .................. -- -- -- -- 20,350 ----------- ----------- ----------- ----------- ----------- Net income ...................................... $ 201,128 $ 182,308 $ 162,300 $ 150,128 $ 134,122 =========== =========== =========== =========== =========== Ratio of earnings to fixed charges .............. 1.52 1.60 1.49 1.35 1.27
6 Statistical Data The following table presents the components of net income as a percentage of average financing and leasing assets ("AEA").
Years Ended December 31, -------------------------------------------------------------------- 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- Dollar Amounts in Thousands Finance income (a) ................................. 9.19% 8.93% 9.40% 10.46% 11.03% Interest expense (a) ............................... 4.42 4.00 4.67 6.06 6.98 ---- ---- ---- ----- ----- Net finance income ............................... 4.77 4.93 4.73 4.40 4.05 Fees and other income .............................. 1.28 1.09 1.00 1.05 1.19 ---- ---- ---- ----- ----- Operating Revenue ................................ 6.05 6.02 5.73 5.45 5.24 ---- ---- ---- ----- ----- Salaries and employee benefits ..................... 1.36 1.24 1.21 1.15 1.17 General operating expenses ......................... 1.12 1.06 1.09 1.08 1.04 ---- ---- ---- ----- ----- Salaries and general operating expenses ..................................... 2.48 2.30 2.30 2.23 2.21 ---- ---- ---- ----- ----- Net credit losses (b) .............................. 0.61 0.77 0.84 0.82 0.86 Provision for finance receivables increase ........................................ 0.09 0.09 0.04 0.02 0.10 ---- ---- ---- ----- ----- Total provision for credit losses ............... 0.71 0.86 0.90 0.88 1.01 ---- ---- ---- ----- ----- Depreciation on operating lease equipment ....................................... 0.47 0.32 0.15 0.07 -- ---- ---- ---- ----- ----- Income before provision for income taxes, extraordinary item and cumulative effect of a change in accounting principle ........................ 2.39 2.54 2.38 2.27 2.02 Provision for income taxes ......................... 0.91 1.05 0.92 0.90 0.79 ---- ---- ---- ----- ----- Income before extraordinary item and cumulative effect of a change in accounting principle ......................... 1.48 1.49 1.46 1.37 1.23 Extraordinary item - loss on early extinguishment of debt, net of income tax benefit .............................. -- -- (0.04) (0.01) (0.06) Cumulative effect of a change in accounting for income taxes ..................... -- -- -- -- 0.21 ---- ---- ---- ----- ----- Net income ......................................... 1.48% 1.49% 1.42% 1.36% 1.38% ==== ==== ==== ===== ===== Average financing and leasing assets (c) ...................................... $13,630,256 $12,262,902 $11,401,683 $11,062,581 $ 9,744,127 Average finance receivables ........................ $13,819,916 $12,266,125 $11,675,622 $11,540,085 $10,349,202 Number of employees ................................ 2,689 2,424 2,355 2,346 2,309
------------- (a) Excludes interest income and interest expense relating to short-term interest-bearing deposits. (b) Percentage to average finance receivables. (c) Average financing and leasing assets is calculated using finance receivables net of credit balances of factoring clients, operating lease equipment, and investments included in other assets in the Consolidated Balance Sheets. 7 The following table sets forth selected consolidated financial information regarding the Corporation's financial position, which has been extracted from the Corporation's consolidated financial statements for the five years ended December 31, 1994. This information should be read in conjunction with Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data.
At December 31, -------------------------------------------------------------------------------- 1994 1993 1992 1991 1990 ------------ ------------ ------------ ------------ ------------ Dollar Amounts in Thousands Finance receivables ........................... $ 14,794,363 $ 12,624,094 $ 11,771,495 $ 11,521,600 $ 11,021,591 Reserve for credit losses ..................... (192,421) (169,378) (158,483) (155,107) (144,037) Net finance receivables ....................... 14,601,942 12,454,716 11,613,012 11,366,493 10,877,554 Operating lease equipment ..................... 867,914 751,901 462,757 148,030 -- Total assets ................................. 15,963,490 13,728,481 13,028,428 12,202,227 11,373,863 Capitalization: Commercial paper ........................... 5,660,194 6,516,139 6,173,465 5,476,517 4,551,663 Variable rate notes ........................ 3,812,500 1,686,500 1,477,830 1,305,030 1,349,000 Fixed rate notes ........................... 2,623,150 2,392,500 2,479,011 2,408,234 2,675,464 Subordinated fixed rate notes .............. 300,000 200,000 200,000 353,901 262,551 Stockholders' equity ....................... 1,793,027 1,692,235 1,601,091 1,519,784 1,444,705 Dividends paid-regular ........................ 100,336 91,164 80,993 75,049 67,000 Dividends paid-special ........................ -- -- 150,000 -- -- Ratio of total debt to stockholders' equity (excluding short-term interest-bearing deposits) ................. 6.91-1 6.38-1 6.07-1 6.06-1 5.95-1
8 Reserve for Credit Losses The reserve for credit losses is established and periodically reviewed for adequacy based on the nature and characteristics of the obligors, economic conditions and trends, charge-off experience, delinquencies and value of underlying collateral and guarantees (including recourse to dealers and manufacturers). It is management's judgement that the reserve for credit losses is adequate to provide for potential credit losses. The finance receivables are reviewed periodically to determine the probability of loss on individual finance receivables. Charge-offs are taken after considering such factors as the obligor's financial condition and the value of underlying collateral and guarantees. Because the reserve for credit losses is intended to provide for future events, which by their nature are uncertain, changes in economic conditions or other discrete events adversely affecting specific obligors or industries may necessitate additions to the reserve for credit losses. The following table sets forth information as of the dates shown concerning the reserve for credit losses.
1994 1993 1992 1991 1990 --------- --------- --------- --------- --------- Dollar Amounts in Thousands Balance, January 1 ................................. $ 169,378 $ 158,483 $ 155,107 $ 144,037 $ 133,629 --------- --------- --------- --------- --------- Finance receivables charged-off .................... (95,433) (105,613) (110,199) (105,699) (104,345) Recoveries on finance receivables previously charged-off .......................... 11,281 11,205 11,915 10,530 15,735 --------- --------- --------- --------- --------- Net credit losses ............................... (84,152) (94,408) (98,284) (95,169) (88,610) --------- --------- --------- --------- --------- Provision for credit losses ........................ 96,941 104,874 103,175 97,052 98,099 Portfolio acquisitions (dispositions), net ......... 10,254 429 (1,515) 9,187 919 --------- --------- --------- --------- --------- Net addition to reserve for credit losses........ 107,195 105,303 101,660 106,239 99,018 --------- --------- --------- --------- --------- Balance, December 31 ............................... $ 192,421 $ 169,378 $ 158,483 $ 155,107 $ 144,037 ========= ========= ========= ========= ========= Reserve for credit losses as a percentage of: Finance receivables ............................. 1.30% 1.34% 1.35% 1.35% 1.31% ========= ========= ========= ========= ========= Finance receivables past due 60 or more days .................................... 108.8% 78.4% 47.2% 44.2% 50.5% ========= ========= ========= ========= ========= Finance receivables on nonaccrual status ....................................... 174.6% 121.0% 67.7% 81.3% 87.1% ========= ========= ========= ========= =========
9 Analysis of Past Due Finance Receivables and Net Credit Losses The following table sets forth information as of the dates shown concerning finance receivables (net of unearned finance income), past due finance receivables (including those on nonaccrual status) and net credit losses incurred. This information should be read in conjunction with the discussion of "Past Due and Nonaccrual Finance Receivables and Assets Received in Satisfaction of Loans" in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Balance Past Due % to 60 Days or More Average Finance ------------------- Net Finance Receivables Amount Percent Credit Losses Receivables ------------ ------- ------- ------------- ----------- Dollar Amounts in Thousands December 31, 1994 Capital Equipment Financing ...................... $ 4,493,531 $ -- -- $ 11,500 0.26% Business Credit .................................. 1,442,049 79,705 5.53% 26,471 1.95 Credit Finance ................................... 719,642 3,327 0.46 3,250 0.46 Industrial Financing ............................. 4,269,693 56,755 1.33 18,528 0.46 Sales Financing .................................. 1,402,443 9,006 0.64 9,294 0.68 Consumer Finance ................................. 570,772 1,143 0.20 68 0.02 Commercial Services .............................. 1,896,233 26,963 1.42 15,041 0.85 ----------- --------- ----- --------- ----- Total ........................................ $14,794,363 $ 176,899 1.20% $ 84,152 0.61% =========== ========= ===== ========= ===== December 31, 1993 Capital Equipment Financing ...................... $ 4,394,528 $ 18,437 0.42% $ 15,909 0.36% Business Credit .................................. 1,282,133 36,868 2.88 22,827 1.70 Credit Finance ................................... 645,642 805 0.12 1,950 0.32 Industrial Financing ............................. 3,880,991 96,158 2.48 16,152 0.48 Sales Financing .................................. 1,307,544 16,307 1.25 11,377 0.80 Consumer Finance ................................. 131,321 27 0.02 60 0.11 Commercial Services .............................. 981,935 47,545 4.84 26,133 2.29 ----------- --------- ----- --------- ----- Total ........................................ $12,624,094 $ 216,147 1.71% $ 94,408 0.77% =========== ========= ===== ========= ===== December 31, 1992 Capital Equipment Financing ...................... $ 4,429,089 $ 99,742 2.25% $ 32,399 0.74% Business Credit .................................. 1,281,283 32,420 2.53 13,246 1.00 Credit Finance ................................... 545,023 -- -- -- -- Industrial Financing ............................. 3,094,102 125,270 4.05 16,546 0.56 Sales Financing .................................. 1,411,812 17,745 1.26 12,621 0.91 Consumer Finance(a) .............................. -- -- -- -- -- Commercial Services .............................. 1,010,186 60,633 6.00 23,472 2.14 ----------- --------- ----- --------- ----- Total ........................................ $11,771,495 $ 335,810 2.85% $ 98,284 0.84% =========== ========= ===== ========= ===== December 31, 1991 Capital Equipment Financing ...................... $ 4,389,954 $ 72,901 1.66% $ 31,962 0.71% Business Credit .................................. 1,194,929 54,465 4.56 11,486 0.95 Credit Finance(b) ................................ 493,845 119 0.02 -- -- Industrial Financing ............................. 2,989,982 178,790 5.98 21,127 0.73 Sales Financing .................................. 1,424,991 21,594 1.52 17,932 1.24 Commercial Services .............................. 1,027,899 23,227 2.26 12,662 1.18 ----------- --------- ----- --------- ----- Total .......................................... $11,521,600 $ 351,096 3.05% $ 95,169 0.82% =========== ========= ===== ========= ===== December 31, 1990 Capital Equipment Financing ...................... $ 4,534,043 $ 98,894 2.18% $ 35,266 0.78% Business Credit .................................. 1,243,415 7,389 0.59 16,991 1.45 Industrial Financing ............................. 2,835,241 137,826 4.86 9,426 0.35 Sales Financing .................................. 1,417,805 24,485 1.73 16,173 1.38 Commercial Services .............................. 991,087 16,823 1.70 10,754 0.97 ----------- --------- ----- --------- ----- Total .......................................... $11,021,591 $ 285,417 2.59% $ 88,610 0.86% =========== ========= ===== ========= =====
--------------- (a) Started de novo in December 1992. (b) Acquired February 1991. 10 Nonaccrual Finance Receivables The Corporation has nonaccrual finance receivables on which it has ceased to recognize finance income. Except for Sales Financing and Consumer Finance accounts, which are subject to automatic charge-off procedures, the accrual of finance income is suspended and an account is placed on nonaccrual status either when a payment is contractually delinquent for 90 days or more and collateral is insufficient to cover both the outstanding principal and accrued finance income or immediately if, in the opinion of management, full collection of all principal and income is doubtful.The following table sets forth information, as of the dates shown, concerning the carrying value of nonaccrual finance receivables. This information should be read in conjunction with the discussion of "Past Due and Nonaccrual Finance receivables and Assets Received in Satisfaction of Loans" in Item 7. Managment's Disscussion of Financial of Condition and Results of Operations.
December 31, ---------------------------------------------------------------------------- 1994 1993 1992 1991 1990 -------- -------- -------- -------- -------- Dollar Amounts in Thousands Nonacrual finance receivables................... $110,232 $139,941 $234,195 $190,732 $165,460 Nonaccrual finance receivables as a percentage of finance receivables............. 0.75% 1.11% 1.99% 1.66% 1.50%
11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 1994 vs. 1993 Highlights Net income for the year ended December 31, 1994 was a record $201.1 million, an increase of $18.8 million (10.3%) from the $182.3 million earned in 1993. The fourth consecutive year of record earnings reflects improved finance income, increased factoring commissions and a lower provision for credit losses, offset, in part, by increased operating expenses, including those of Barclays Commercial Corporation (BCC) which was acquired in February 1994, and expanded activity in Consumer Finance. Total financing and leasing assets, which include finance receivables and operating lease equipment, increased to a record $15.66 billion at December 31, 1994, a $2.29 billion (17.1%) improvement, compared to $13.38 billion at December 31, 1993. All operating units experienced year-over-year growth. Particularly noteworthy was Commercial Services which added $914.3 million of finance receivables, including the BCC acquisition involving over $700 million of factored receivables. Net Finance Income A comparison of 1994 and 1993 finance income and interest expense is set forth below. The 1993 finance income amount has been restated to exclude fees and other income and depreciation on operating lease equipment in order to conform to the 1994 presentation.
Years Ended December 31, Increase -------------------------- --------------------- 1994 1993 Amount Percent --------- --------- -------- ------- Dollar Amounts in Millions Finance income ......................... $ 1,263.8 $ 1,111.8 $ 152.0 13.7% Interest expense ....................... 613.9 508.0 105.9 20.9% --------- --------- -------- ---- Net finance income ..................... $ 649.9 $ 603.8 $ 46.1 7.6% ========= ========= ======== ==== Average financing & leasing assets (AEA) $13,630.3 $12,262.9 $1,367.4 11.2% ========= ========= ======== ==== Net finance income as a percent of AEA . 4.77% 4.93% ========= =========
The increase of $152.0 million in finance income reflects earnings on the $1.37 billion growth in AEA and the effect of rising market interest rates, which enabled finance income, as a percentage of AEA, to improve to 9.19% in 1994 from 8.93% in 1993. These factors also impacted interest expense, which totaled $613.9 million in 1994, an increase of $105.9 million (20.9%), compared with $508.0 million in 1993. Net finance income totaled $649.9 million, an increase of $46.1 million (7.6%) from 1993. However, the increased interest expense and more aggressive competition in transaction pricing and structuring, particularly from banks, resulted in a decline in net finance income as a percentage of AEA to 4.77% compared with 4.93% in 1993. For an analysis of interest rates paid on the Corporation's debt refer to "Interest Rate Risk Management" in the Asset/Liability Management section. Fees and Other Income Fees and other income totaled $174.4 million in 1994, an increase of $40.6 million (30.3%), compared with $133.8 million in 1993. The improvement is principally attributable to higher factoring commissions, reflecting additional factored receivable volume from the acquisition of BCC and record new client signings in 1994. Salaries and General Operating Expenses Salaries and general operating expenses totaled $337.9 million in 1994, a $55.7 million (19.8%) increase, compared to $282.2 million in 1993. This increase includes a $33.7 million (22.2%) rise in salaries and employee benefits, which totaled $185.9 million in 1994, compared with $152.1 million in 1993, and an additional $22.1 million (16.9%) of general operating expenses, 12 which totaled $152.1 million in 1994, compared with $130.0 million in 1993. Employee headcount increased to 2,689 at December 31, 1994 from 2,424 in 1993. These increases are largely attributable to the BCC acquisition and expanded Consumer Finance activity. Since the BCC acquisition, Commercial Services has had an integration plan in place designed to maintain business momentum, provide uninterrupted levels of quality services, and generate economies of scale. Significant progress has been made in integrating operating systems, eliminating duplicate functions and consolidating offices and departments. This process is expected to be substantially complete by year-end 1995. Salaries and other employee benefits in 1994 also included the effect of improvements to employee sales and incentive compensation plans. The Corporation manages expenditures using a comprehensive budgetary process. Expenses are monitored closely by operating unit management and are reviewed monthly with senior management of the Corporation. To ensure overall project cost control, a review and approval procedure is in place for all major capital expenditures, such as purchases of computer equipment, including a post-implementation analysis of the realization of projected benefits. Income Taxes The provision for Federal and state and local income taxes totaled $123.9 million in 1994 compared with $128.5 million in 1993. The effective income tax rate was 38.1% compared to 41.3% in 1993. The 1993 amounts reflect additional provisions to the Corporation's current and deferred taxes to record the impact of a 1% increase in the statutory Federal corporate income tax rate provided for in the Revenue Reconciliation Act of 1993. Provision and Reserve for Credit Losses A continued recovery in certain sectors of the U.S. economy contributed to an improvement of $10.3 million (10.9%) in net credit losses for 1994. As a percentage of average finance receivables, net credit losses fell to 0.61% in 1994 from 0.77% in 1993. Information concerning the provision and reserve for credit losses is summarized in the following table. Years ended December 31, ------------------------ 1994 1993 ---------- ---------- Dollar Amounts in Thousands Net credit losses .................................... $ 84,152 $ 94,408 Provision for finance receivables increase ........... 12,789 10,466 --------- -------- Total provision for credit losses .................... $ 96,941 $104,874 ========= ======== Net credit losses as a percentage of average finance receivables ................................ 0.61% 0.77% ======== ======== Reserve for credit losses ............................ $192,421 $169,378 ======== ======== Reserve for credit losses as a percentage of: Finance receivables ................................ 1.30% 1.34% ======== ======== Finance receivables past due 60 or more days ....... 108.8% 78.4% ======== ======== Nonaccrual finance receivables ..................... 174.6% 121.0% ======== ======== The reserve for credit losses is maintained at an amount considered adequate by management to provide for potential credit losses, based on periodic evaluation of the overall risk characteristics of the finance receivables portfolio. The decrease in the reserve for credit losses as a percentage of finance receivables reflects the growth in home equity lending in Consumer Finance, for which a lower percentage reserve for credit losses is recorded than the overall portfolio, and a reduction in nonaccrual and past due finance receivables. In evaluating the adequacy of the reserve for credit losses, management considers such factors as the nature and characteristics of the obligors, economic conditions and trends, charge-off experience, delinquencies, and value of underlying collateral and guarantees (including recourse to dealers and manufacturers). 13 Financing and Leasing Assets Financing and leasing assets (finance receivables plus operating lease equipment) increased $2.29 billion (17.1%) in 1994 to $15.66 billion as presented in the following table.
December 31, Increase ------------------------- ---------------------------- 1994 1993 Amount Percent ---------- ---------- ----------- ------- Dollar Amounts in Millions Finance Receivables Capital Equipment Financing ............. $ 4,493.5 $ 4,394.5 $ 99.0 2.3% Business Credit ......................... 1,442.1 1,282.1 160.0 12.5 Credit Finance .......................... 719.6 645.7 73.9 11.5 Commercial Services ..................... 1,896.2 981.9 914.3 93.1 Industrial Financing .................... 4,269.7 3,881.0 388.7 10.0 Sales Financing ......................... 1,402.5 1,307.6 94.9 7.3 Consumer Finance ........................ 570.8 131.3 439.5 334.7 ---------- ---------- ---------- ----- Total Finance Receivables ............ 14,794.4 12,624.1 2,170.3 17.2 ---------- ---------- ---------- ----- Operating Lease Equipment Capital Equipment Financing ............. 648.7 565.7 83.0 14.7 Industrial Financing .................... 219.2 186.2 33.0 17.7 ---------- --------- --------- ----- Total Operating Lease Equipment ....... 867.9 751.9 116.0 15.4 ---------- --------- --------- ----- Total Financing and Leasing Assets .... $15,662.3 $13,376.0 $ 2,286.3 17.1% ========= ========= ========= =====
The following table presents the annual volume of financing and leasing assets funded, including purchases of existing finance receivable portfolios.
Years Ended December 31, Increase ------------------------ ------------------------- 1994 1993 Amount Percent -------- ------- ------- ------- Dollar Amounts in Millions Funding Volume Capital Equipment Financing ................. $ 1,149 $ 1,029 $ 120 11.7% Business Credit(a) .......................... 423 451 (28) (6.2) Credit Finance(a) ........................... 197 176 21 11.9 Industrial Financing ........................ 2,156 2,319 (163) (7.0) Sales Financing ............................. 681 622 59 9.5 Consumer Finance ............................ 481 154 327 212.3 -------- ------- ------- ----- $ 5,087 $ 4,751 $ 336 7.1% ======== ======= ======= ===== Factored Volume(b) Commercial Services ......................... $ 12,853 $ 7,667 $ 5,186 67.6% ======== ======= ======= =====
--------------- (a) Represents initial borrowings under new lines of credit (b) Represents factored accounts receivable The changes in the preceding tables are discussed below for each business unit. - Capital Equipment Financing--Customized secured equipment financing and leasing for major capital equipment. Finance receivables rose modestly to $4.49 billion, reflecting improved new business funding volume offset, in part, by higher than usual prepayments and finance receivable sales for credit risk management purposes. The growth in operating lease equipment resulted from the purchase of additional equipment for lease, principally railcars and commercial and business aircraft, and the leasing of a commercial aircraft included in assets received in satisfaction of loans at December 31, 1993. - Business Credit--Revolving and term loans, including debtor-in-possession and workout financing, to medium and larger-sized companies secured by accounts receivable, inventory and fixed assets. Finance receivables totaled $1.44 billion at December 31, 1994. New business volume and additional borrowings under existing credit arrangements, coupled with a return to more historical customer paydown levels, contributed to the 12.5% growth in finance receivables. 14 - Credit Finance--Revolving and term loans, including restructurings, for small and medium-sized companies secured by accounts receivable, inventory and fixed assets. Finance receivables continued to grow, rising 11.5% in 1994 to $719.6 million, largely due to record new business volume with various middle-market manufacturing companies. - Commercial Services--Factoring of accounts receivable, including credit protection, bookkeeping and collection activities and revolving and term loans. Finance receivables totaled $1.90 billion at December 31, 1994. The increase of $914.3 million from 1993 reflects the acquisition of BCC, which added over $700 million of factored receivables, and record new client signings in 1994. - Industrial Financing--Secured equipment financing and leasing for medium-sized companies, including dealer and manufacturer financing. Finance receivables rose 10.0% in 1994 to $4.27 billion reflecting another year of record new business originations. Operating lease equipment increased 17.7% to $219.2 million principally due to the purchase of tractors, trailers, business aircraft and other equipment for lease. - Sales Financing--Retail secured financing of recreational vehicles, recreational boats, and manufactured housing through dealers and manufacturers. The increase in finance receivables is the result of improved volume in manufactured housing, partially offset by finance receivable sales and securitizations of $162 million in 1994 and the reclassification of an additional $69 million of manufactured housing finance receivables to assets held for sale in December 1994. In addition to its own portfolio of $1.4 billion, Sales Financing also provides servicing for portfolios owned by other financial institutions and securitization trusts which totaled $498.1 million at December 31, 1994 ($415.0 million in 1993). - Consumer Finance--Loans secured by first or second mortgages on residential real estate, and home equity lines of credit generated through brokers and direct marketing. Finance receivables rose sharply to $570.8 million, reflecting the full year effect and continued development, in 1994, of the marketing offices added late in 1993. This portfolio is expected to approach $1.0 billion by the end of 1995. Financing and Leasing Assets Composition Financing and leasing assets are principally composed of loans and direct financing and leveraged leases with commercial customers located in the United States and operating lease equipment, largely commercial aircraft, placed with lessees both domestically and internationally. Geographic Composition The following table presents financing and leasing assets by customer location. Amounts for 1993 have been restated to include operating lease equipment and conform to the 1994 presentation.
At December 31, 1994 At December 31, 1993 -------------------- --------------------- Amount Percent Amount Percent ---------- ------- --------- ------- Dollar Amounts in Millions United States Northeast ............................................ $ 3,856.6 24.6% $ 3,503.5 26.2% West ................................................. 3,362.9 21.5% 2,621.3 19.6% Midwest .............................................. 2,907.0 18.6% 2,633.4 19.7% Southeast ............................................ 2,318.7 14.8% 1,804.9 13.5% Southwest ............................................ 2,095.3 13.4% 1,756.8 13.1% Foreign (principally commercial aircraft) .............. 1,121.8 7.1% 1,056.1 7.9% ---------- ----- --------- ----- Total .............................................. $ 15,662.3 100.0% $13,376.0 100.0% ========== ===== ========= =====
15 Industry Composition The following table presents financing and leasing assets by industry. Amounts for 1993 have been restated to include operating lease equipment and conform to the 1994 presentation.
At December 31, 1994 At December 31, 1993 ----------------------- ------------------------ Amount Percent Amount Percent -------- ------- -------- ------- Dollar Amounts in Millions Commercial airlines(a) ...................... $1,899.3 12.1% $1,894.9 14.2% Construction (non-real estate)(b) ........... 1,337.4 8.5% 1,215.6 9.1% Recreational vehicles ....................... 898.0 5.7% 872.0 6.5% Manufacturers Steel & metal products .................... 485.6 3.1% 424.3 3.2% Textile & mill products ................... 470.1 3.0% 358.3 2.7% Industrial machinery & equipment .......... 455.5 2.9% 434.4 3.2% Transportation equipment .................. 469.6 3.0% 470.3 3.5% Printing & paper products ................. 400.2 2.6% 274.9 2.0% Apparel ................................... 328.0 2.1% 284.9 2.1% Food and kindred products ................. 283.6 1.8% 239.3 1.8% Electronic equipment ...................... 276.3 1.8% 239.6 1.8% Other ..................................... 885.7 5.7% 660.8 4.9% Retailers Apparel ................................... 807.1 5.2% 482.4 3.6% General merchandise ....................... 423.0 2.7% 248.3 1.9% Other ..................................... 361.4 2.3% 113.4 0.8% Transportation (c) .......................... 744.9 4.7% 655.4 4.9% Printing & publishing ....................... 560.1 3.6% 611.7 4.6% Home equity ................................. 570.8 3.6% 131.3 1.0% Shipping(d) ................................. 536.6 3.4% 419.5 3.1% Wholesaling ................................. 528.8 3.4% 528.5 4.0% Manufactured housing ........................ 458.3 2.9% 399.5 3.0% Mining, oil & gas extraction ................ 300.1 1.9% 227.2 1.7% Electrical generation ....................... 243.1 1.6% 243.9 1.8% Service businesses .......................... 217.4 1.4% 223.0 1.7% Financial institutions ...................... 183.2 1.2% 186.9 1.4% Equipment leasing & rental .................. 130.3 0.8% 197.8 1.5% Others (none greater than 1.1% of Total) .... 1,407.9 9.0% 1,337.9 10.0% --------- ----- --------- ----- $15,662.3 100.0% $13,376.0 100.0% ========= ===== ========= =====
-------------- (a) Refer to the Commercial Airlines section of "Financing and Leasing Assets Concentrations" for a discussion on the Commercial Airlines portfolio. (b) The construction portfolio is geographically dispersed throughout the United States and included approximately 6,900 general contractor and equipment dealer obligors at December 31, 1994. (c) Transportation included rail, bus, over-the-road trucking, and business aircraft industries and consisted of approximately 700 obligors at December 31, 1994. The portfolio was widely dispersed throughout the United States. (d) At December 31, 1994, the shipping industry portfolio was widely dispersed and included approximately 50 obligors financing cruise and freight-carrying ships, intermodal equipment, barges, tugboats, containers and chassis. 16 Financing and Leasing Assets Concentrations Commercial Airlines Commercial airline finance receivables of $1.42 billion and operating lease equipment of $482.3 million totaled $1.90 billion (12.1% of total financing and leasing assets before the reserve for credit losses) at December 31, 1994 compared with $1.89 billion (14.2%) in 1993. The portfolio is secured by commercial aircraft and related equipment. Management continues to monitor the growth in this portfolio relative to total financing and leasing assets. The following table presents information about the commercial airline industry portfolio. At December 31, ------------------------ 1994 1993 --------- -------- Dollar Amounts in Millions Finance receivables Amount outstanding(a) .......................... $1,417.0 $1,437.3 Number of obligors ............................. 46 43 -------- -------- Operating lease equipment Net carrying value ............................. $ 482.3 $ 457.6 Number of obligors ............................. 21 21 -------- -------- Total ....................................... $1,899.3 $1,894.9 -------- -------- Number of obligors(b) .......................... 62 58 -------- -------- Number of aircraft(c) .......................... 282 276 -------- -------- -------------- (a) Includes accrued rents on operating leases of $1.1 million and $1.0 million at December 31, 1994 and December 31, 1993, respectively, which are classified as finance receivables in the Consolidated Balance Sheets. (b) Certain obligors have both finance receivable and operating lease transactions. (c) Regulations established by the Federal Aviation Administration (the "FAA") limit the maximum permitted noise an aircraft may make. A Stage III aircraft meets a more restrictive noise level requirement than a Stage II aircraft. The FAA has issued rules which phase out the use of Stage II aircraft in the United States through the year 2000. The International Civil Aviation Organization has issued similar requirements for Europe. At year-end 1994, the portfolio consisted of 224 Stage III aircraft (79%) and 58 Stage II aircraft (21%) versus 214 Stage III aircraft (78%) and 62 Stage II aircraft (22%) at year-end 1993. No obligor included in the Corporation's commercial airline portfolio was subject to bankruptcy proceedings at December 31, 1994. However, as of March 6, 1994, the Corporation has agreed to terms on a restructuring of its outstanding loan and lease transactions with Trans World Airlines, Inc., which has publicly announced that it may seek bankruptcy protection if a major debt reduction plan is not approved. Management does not believe this restructuring will have a significant effect on the Corporation's 1995 consolidated financial position or results of operations. Foreign Outstandings Financing and leasing assets to foreign obligors, primarily to the commercial airline industry, are all U. S. dollar denominated and totaled $1.12 billion at December 31, 1994, consisting of $920.3 million in finance receivables and $201.5 million in operating lease equipment. The largest exposures at December 31, 1994 were to England, $177.2 million (1.11% of total assets) and Mexico, $140.0 million (.88%). The Mexican exposure is principally operating and direct financing leases of commercial and business aircraft all of which were current at December 31, 1994. The remaining foreign exposure is geographically dispersed with no individual country representing more than .75% of total assets. At December 31, 1993, financing and leasing assets to foreign obligors totaled $1.05 billion, consisting of $846.6 million in finance receivables and $204.5 million in operating lease equipment. Outstandings totaled $167.4 million (1.22% of total assets) to obligors in Mexico and $128.0 million (.93%) to obligors in England. Obligors in no other country had aggregate outstandings exceeding .75% of total assets. 17 Highly Leveraged Transactions The Securities and Exchange Commission has suggested that registrants may be required to disclose the nature and extent of their involvement with high yield or highly leveraged transactions and non-investment grade loans. The Corporation uses the following criteria to classifly a buyout financing or recapitalization which equals or exceeds $20 million as a highly leveraged transaction (HLT): - The transaction at least doubles the borrower's liabilities and results in a leverage ratio (as defined) higher than 50%, or - The transaction results in a leverage ratio higher than 75%, or - The transaction is designated as an HLT by a syndication agent. A transaction originally reported as an HLT can be removed from this classification ("delisted") if the leveraged company has demonstrated the ability to operate successfully as a highly leveraged entity for at least two years after the original financing and meets one of the following criteria: - The original financing has been repaid using cash flow from operations, planned asset sales, or a capital infusion, or - The debt has been serviced without undue reliance on unplanned asset sales, and certain leverage ratios (related to the original criteria under which the financing qualified as an HLT) have been maintained. The Corporation, primarily through Business Credit, originates and participates in HLTs, which totaled $436.1 million (2.8% of financing and leasing assets before the reserve for credit losses) at December 31, 1994, down from $476.6 million (3.6%) at December 31, 1993. The decline in HLT outstandings during 1994 was primarily due to delisting companies that met the aforementioned delisting criteria, partially offset by new HLT fundings. The Corporation's HLT outstandings are generally secured by collateral, as distinguished from HLTs that rely primarily on cash flow from operations. Unfunded commitments to lend in secured HLT situations were $202.1 million at December 31, 1994, compared with $123.1 million at year-end 1993. At December 31, 1994, the HLT portfolio consisted of 32 obligors in 12 different industry groups, with 36.5% of the outstandings located in the Southeast region of the United States and 33.1% in the West. Four accounts totaling $57.7 million were classified as nonaccrual at December 31, 1994, compared with three accounts totaling $34.7 million at year-end 1993. Credit Risk Management Financing and leasing assets are monitored for credit and collateral risk both during the credit granting process and periodically after the advancement of funds. Each business unit is responsible for developing and implementing a formal credit management process in accordance with formal uniform guidelines established by the Executive Credit Committee of the Corporation (ECC). These guidelines set forth risk acceptance criteria for: (1) selected target markets and products; (2) the creditworthiness of borrowers, including credit history, financial condition, adequacy of cash flow and quality of management; and (3) the type and value of underlying collateral and guarantees (including recourse to dealers and manufacturers). Compliance with established credit management processes at each business unit is reviewed by an internal credit audit group within the Corporation's internal audit department. Credit audits examine adherence with established credit policies and procedures, and test for inappropriate credit practices, including whether potential problem accounts are being detected on a timely basis. As economic and market conditions change, credit risk management practices are reviewed and modified, if necessary, to minimize the risk of credit loss. Periodically, financing and leasing assets are evaluated based upon credit criteria developed under the Corporation's uniform credit grading system and the use of a comprehensive exposure reporting system that analyzes the financing and leasing assets portfolio by obligor, by industry, geographic location, and collateral type. The status of obligors with higher (riskier) credit grades is individually reviewed with the ECC by each operating unit. Concentrations are monitored and limits are changed by management as conditions warrant to minimize the risk of credit loss. 18 Past Due and Nonaccrual Finance Receivables and Assets Received in Satisfaction of Loans Finance receivables past due 60 days or more improved to $176.9 million (1.20% of finance receivables before the reserve for credit losses) at December 31, 1994, from $216.1 million (1.71%) at December 31, 1993, reflecting a continued recovery in certain sectors of the economy. Excluding finance receivables in Industrial Financing that have recourse to dealers or manufacturers, the percentage of finance receivables past due 60 or more days was 1.03% at year-end 1994 compared to 1.47% at year-end 1993. Finance receivables on nonaccrual status, included in past due finance receivables, declined to $110.2 million (0.75% of finance receivables before the reserve for credit losses) at December 31, 1994, from $139.9 million (1.11%) at December 31, 1993. The decrease from December 31, 1993 includes final settlement with a manufacturer on nonaccrual since 1992. The balance of assets received in satisfaction of loans was relatively unchanged from 1993 at $86.5 million. The December 31, 1994 balance includes two commercial aircraft which are the subject of litigation with the subordinated debt holders wherein the Corporation, as senior debt holder, is foreclosing on the aircraft. An anticipated satisfactory conclusion of the litigation would enable the Corporation to proceed with the foreclosure. These foreclosures were offset by the sale of assets and the placing of a commercial aircraft on operating lease that were included in the 1993 balance. The following table presents the assets received in satisfaction of loans including in-substance foreclosures. At December 31, ------------------- 1994 1993 ------- ------- Amounts in Thousands Commercial aircraft .................................... $36,000 $17,235 Retail merchandise, property and accounts receivable(a) ....................................... 32,353 29,214 Property and equipment ................................. 8,592 13,480 Other transportation(b) ................................ 6,172 15,255 Other .................................................. 3,408 11,773 ------- ------- Total ................................................ $86,525 $86,957 ======= ======= -------------- (a) Retail merchandise, property and accounts receivable includes an equity interest in a building supply retailer. (b) Other transportation includes buses and recreational vehicles in 1994, and business aircraft, trailers, and recreational vehicles in 1993. Asset/Liability Management Management strives to optimize net finance income while managing interest rate and liquidity risk under formal policies established and monitored by the Capital Committee, which is comprised of members of senior management, including the Chief Executive Officer, the Vice Chairman, the Chief Financial Officer, and senior representatives of DKB and CBC. Four of the members of the Capital Committee are also members of the Corporation's Board of Directors. The Capital Committee establishes and regularly reviews interest sensitivity, funding, liquidity, and asset-pricing guidelines used to determine short-term and long-term funding strategies, including the use of off-balance sheet derivative financial instruments. Derivative (hedge) positions are managed conservatively and in such a way that the exposure to interest rate, credit or foreign exchange risk is in accordance with the overall operating goals established by the Capital Committee. There is an approved, diversified list of creditworthy counterparties, each of whom has specific market value exposure limits. The Executive Credit Committee approves each counterparty and its related market value exposure limit annually or more frequently if any changes are recommended. Market values are calculated periodically for each swap contract, summarized by counterparty risk and reported to the Capital Committee. For additional information regarding the Corporation's derivative portfolio, refer to "Note 6--Derivative Financial Instruments" in Item 8. Financial Statements and Supplementary Data. Interest Rate Risk Management Changes in the level of market interest rates or in the relationships between short-term and long-term market interest rates or different interest rate indices create risks that can potentially affect net finance income by impacting differently on the interest rates charged on interest-earning assets and the interest rates paid on interest-bearing liabilities. The Corporation's 19 degree of interest rate sensitivity is continuously monitored by measuring the repricing characteristics of interest-sensitive assets and liabilities. These characteristics include the dollar amounts, maturity, and estimated prepayments of interest-sensitive assets and liabilities, the contractual interest rate, and the prime rate or other market based repricing indices. The potential effect of market interest rate fluctuations is simulated through computer modeling, incorporating not only the current degree of interest rate sensitivity, but also the effects of various repricing and interest rate scenarios. The Capital Committee actively manages interest rate risk by changing the proportion of fixed and floating rate debt and by utilizing interest rate swaps and caps to modify the repricing characteristics of existing interest-bearing liabilities. Issuing new debt or hedging the interest rate on existing debt through the use of interest rate swaps and caps are both tools in managing interest rate risk. The decision to use one or the other or a combination of both is driven by the relationship between the relative interest rate costs and effectiveness of the alternatives, and the liquidity needs of the Corporation. The Corporation also periodically enters into structured financings (involving the issuance of debt and an interest rate swap with corresponding notional principal amount and maturity) that not only improve liquidity and reduce interest rate risk, but result in a lower overall funding cost than could be achieved by issuing debt alone. For example, in order to fund LIBOR based assets, a medium-term variable rate note based upon the 91 day Treasury Bill rate can be issued and coupled with an interest rate swap exchanging the 91 day Treasury Bill rate for a LIBOR rate creating, in effect, a lower cost LIBOR based medium-term obligation which also reduces the interest rate risk of funding LIBOR based assets with commercial paper or Treasury Bill rate based debt. A comparative analysis of the weighted average interest rates paid on the Corporation's debt, before and after the effect of hedging activity is shown in the following table.
Years Ended December 31, --------------------------------------------------------- 1994 1993 1992 ---------------- --------------- ---------------- Before After Before After Before After ------ ----- ------ ----- ------ ----- Variable rate debt ...................... 4.46% 4.41% 3.36% 3.36% 4.05% 4.12% Fixed rate debt ......................... 7.24% 6.70% 7.44% 7.37% 8.44% 7.66% Composite interest rate ................. 5.07% 5.32% 4.49% 4.85% 5.24% 5.66%
Interest rate swaps with notional principal amounts of $5.46 billion at December 31, 1994, $3.69 billion at December 31, 1993 and $4.61 billion at December 31, 1992 were designated as hedges against outstanding debt and were principally used to effectively convert the interest rate on variable rate debt to a fixed rate, which sets the Corporation's fixed rate term debt borrowing cost over the life of the swap and reduces the Corporation's exposure to rising interest rates. The increases in the composite interest rates after the effect of hedging activity reflect the greater proportion of debt effectively paying fixed interest rates. This hedging activity increased interest expense by $27.3 million in 1994, $36.4 million in 1993 and $38.7 million in 1992. The preceding analysis does not take into account any actions the Corporation could have taken to reduce interest rate risk in the absence of hedging activity, such as issuing more fixed rate debt which would also tend to increase interest expense. As such, the weighted average interest rates before the effect of hedging activity do not reflect the true interest expense that would have been incurred had the Corporation chosen to manage interest rate risk without the use of derivatives. Interest rate swaps are further discussed in "Note 6--Derivative Financial Instruments" in Item 8. Financial Statements and Supplementary Data. Liquidity Risk The Capital Committee manages liquidity risk by monitoring the relative maturities of assets and liabilities and by borrowing funds, primarily in the United States money and capital markets. Such cash is used to fund asset growth (including the bulk purchase of receivables and the acquisition of other finance-related businesses) and to meet debt obligations and other commitments on a timely and cost-effective basis. The primary source of funding is commercial paper borrowings, augmented by proceeds from the sales of medium-term notes and other debt securities. Liquidity Commercial paper outstanding decreased $855.9 million to $5.66 billion at December 31, 1994, and represented 45.7% of total debt outstanding, while variable rate notes rose to $3.81 billion at December 31, 1994 (30.8% of total debt), an increase of $2.13 billion from December 31, 1993. These changes 20 reflect the issuance of prime interest rate based term debt to fund prime interest rate based assets in 1994, as opposed to the use of commercial paper hedged by interest rate corridors (hedging instruments comprised of the purchase of caps on the commercial paper interest rate in conjunction with the sale of an equivalent amount of interest rate caps on the prime interest rate). Of the $1.15 billion of interest rate corridors held at December 31, 1993, $650.0 million expired in 1994; the remaining $500.0 million, which were due to expire in 1995, were terminated. At December 31, 1994, fixed rate debt totaled $2.92 billion (23.6% of total debt outstanding). Commercial paper borrowings are supported by a variety of bank credit facilities. At December 31, 1994, credit lines with 74 banks totaled $4.68 billion and support the current commercial paper position as well as growth in the foreseeable future. Credit line coverage increased to 82.7% of operating commercial paper outstanding (commercial paper outstanding less interest-bearing deposits) at year-end 1994, up from 68.9% in 1993. No borrowings have been made under credit lines since 1970. Capitalization The following table presents information regarding the Corporation's capital structure. At December 31, ------------------------------- 1994 1993 ------------ ------------ Dollar Amounts in Thousands Commercial paper .................... $ 5,660,194 $ 6,516,139 Variable rate notes ................. 3,812,500 1,686,500 Fixed rate notes .................... 2,923,150 2,592,500 ------------ ------------ Total debt .......................... $ 12,395,844 $ 10,795,139 Stockholders' equity ................ 1,793,027 1,692,235 ------------ ------------ Total capitalization ................ $ 14,188,871 $ 12,487,374 ============ ============ Debt-to-equity ratio ................ 6.91 to 1 6.38 to 1 ============ ============ Dividend policy requires the payment of quarterly dividends equal to and not exceeding 50% of net operating earnings. During 1994, regular cash dividends of $100.3 million were paid to DKB and MHC Holdings (a subsidiary of Chemical Banking Corporation) based upon their respective 60% and 40% stock ownership. During the year, $3.06 billion of variable rate notes and $930.2 million of fixed rate notes were issued with individual terms ranging from one to ten years. Repayments of term debt during 1994 totaled $1.53 billion. At December 31, 1994, $2.96 billion of registered but unissued debt securities remained available under shelf registration statements. The Corporation's commercial paper, publicly issued variable rate and fixed rate senior debt, and senior subordinated long-term notes and debentures are rated by Moody's Investors Service, Duff & Phelps Credit Rating Company and Standard and Poor's Corporation. Recently Issued Accounting Pronouncements Accounting by Creditors for Impairment of a Loan The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"), in May 1993 and amended it with Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures" ("SFAS 118"), issued in October 1994. SFAS 114 and SFAS 118 require that the value of an impaired loan be measured based upon: (1) the present value of expected future cash flows discounted at the loan's effective interest rate or, (2) at the fair value of the collateral, if the loan is collateral dependent. SFAS 114 and SFAS 118 are effective for fiscal years beginning after December 15, 1994. In general, the Corporation's loans are collateral dependent and, when impaired, are usually carried at the lower of book value or the fair value of the collateral. Therefore, the Corporation believes that SFAS 114 and SFAS 118 will not have a significant impact on its consolidated financial position or results of operations. 21 1993 vs. 1992 Highlights Net income for the year ended December 31, 1993 was $182.3 million, an increase of $20.0 million (12.3%) from the $162.3 million earned in 1992, representing the third consecutive year of record earnings. Excluding $4.2 million of after-tax extraordinary charges related to the early redemption of long-term debt in 1992 (none of which were incurred in 1993), net income increased $15.8 million (9.5%) in 1993. The 1993 earnings reflect strong finance receivables growth, improved fee income, and higher gains on asset sales, partially offset by the effect of the 1% increase in the statutory Federal corporate income tax rate, Consumer Finance start-up costs and normal operating expense increases. Total financing and leasing assets, which include finance receivables and operating lease equipment, totaled $13.38 billion at December 31, 1993, a $1.14 billion (9.3%) increase, compared with $12.23 billion at December 31, 1992. This growth was primarily due to excellent new business volume, particularly with middle-market companies, complemented by purchases of portfolios of financing and leasing assets. Net Finance Income A comparison of 1993 and 1992 finance income and interest expense is set forth below. Finance income has been restated to exclude fees and other income and depreciation on operating lease equipment in order to conform to the 1994 presentation.
Years Ended December 31, Increase ------------------------ ----------------- 1993 1992 Amount Percent -------- -------- ------ ------- Dollar Amounts in Millions Finance income ......................... $ 1,111.8 $ 1,091.5 $ 20.3 1.9% Interest expense ....................... 508.0 552.0 (44.0) (8.0) -------- -------- ------ ------- Net finance income ..................... $ 603.8 $ 539.5 $ 64.3 11.9% ========= ======== ====== ======= Average financing & leasing assets (AEA) $12,262.9 $11,401.7 $861.2 7.6% ========= ======== ====== ======= Net finance income as a percent of AEA . 4.93% 4.73% ========= ========
Net finance income was $603.8 million in 1993, up $64.3 million (11.9%) from $539.5 million in 1992. Finance income in 1993 totaled $1.11 billion, essentially unchanged from $1.09 billion earned in 1992 as interest rates charged on finance receivables trended down in 1993, in line with a decline in market interest rates. However, such decreased revenues were more than offset by revenues generated from the incremental growth in AEA. The decline in market interest rates is also reflected in a decrease of $44.0 million (8.0%) in interest expense to $508.0 million in 1993, compared with $552.0 million in 1992. Fees and Other Income Fees and other income totaled $133.8 million in 1993, a $20.0 million (17.6%) increase compared with $113.8 million in 1992. The 1993 increase was principally attributable to higher gains on asset sales, which included a $15.3 million gain on a securitization of manufactured housing finance receivables, additional fee income and improved factoring commissions. Salaries and General Operating Expenses Salaries and general operating expenses totaled $282.2 million in 1993, a $20.5 million (7.9%) increase, compared with $261.6 million in 1992. Salaries and employee benefits, included therein, were $152.1 million for 1993, $14.2 million (10.3%) above the $137.9 million reported in 1992. General operating expenses were $130.0 million in 1993, up $6.3 million (5.1%), compared with $123.7 million in 1992. The increases are primarily attributable to start-up costs for Consumer Finance, which amounted to $14.2 million in 1993. In addition to Consumer Finance related expenses, the increase in salaries and employee benefits also reflects improvements to employee incentive compensation and benefit plans and the adoption, in 1993, of Statement of Financial Accounting Standards No. 106, "Employer's Accounting for 22 Postretirement Benefits Other Than Pensions". Employee headcount was 2,424 at December 31, 1993 versus 2,355 in 1992. However, excluding personnel hired for Consumer Finance, headcount declined by more than 25 during 1993 in spite of the excellent growth in financing and leasing assets. Income Taxes The provision for Federal and state and local income taxes was $128.5 million in 1993, up $23.2 million (22.0%), compared to $105.3 million in 1992. The effective income tax rate was 41.3%, compared to 38.7% in 1992. These increases reflect additional provisions to the Corporation's current and deferred taxes, to record the impact of the 1% increase in the statutory Federal corporate income tax rate provided for in the Revenue Reconciliation Act of 1993. The following table presents data on the impact of the tax rate change on the provision for income taxes.
Year Ended December 31, 1993 ------------------------------------------------- Provision at 1% Rate Total Former Rates Increase Provision ------------ -------- --------- Dollar Amounts in Millions Federal tax provision on 1993 earnings ....................... $ 92.8 $ 2.6 $ 95.4 Adjustments to deferred Federal tax liabilities ................................................ -- 8.2 8.2 State and local tax provision on 1993 earnings ................................................... 24.9 -- 24.9 ------ ----- ------ Total provision for income taxes ............................. $117.7 $10.8 $128.5 ====== ===== ====== Effective tax rate ........................................... 37.9% 3.4% 41.3% ====== ===== ======
Provision and Reserve for Credit Losses A recovery, during 1993, in certain sectors of the economy contributed to a modest decrease of $3.9 million (3.9%) in net credit losses for 1993 and an improvement in net credit losses as a percentage of average finance receivables to .77% in 1993, compared with .84% in 1992. Information concerning the provision and reserve for credit losses is summarized in the following table. Years ended December 31, ---------------------------- 1993 1992 ---- ---- Dollar Amounts in Thousands Net credit losses ................................ $ 94,408 $ 98,284 Provision for finance receivables increase ....... 10,466 4,891 -------- -------- Total provision for credit losses ................ $104,874 $103,175 ======== ======== Net credit losses as a percentage of average finance receivables ........................... 0.77% 0.84% ======== ======== Reserve for credit losses ........................ $169,378 $158,483 ======== ======== Reserve for credit losses as a percentage of: Finance receivables ........................... 1.34% 1.35% ======== ======== Finance receivables past due 60 or more days .. 78.4% 47.2% ======== ======== Nonaccrual finance receivables ................ 121.0% 67.7% ======== ======== 23 Financing and Leasing Assets Financing and leasing assets (finance receivables plus operating lease equipment) increased $1.14 billion (9.3%) to $13.38 billion as presented in the following table. December 31 Increase -------------------- ------------------ 1993 1992 Amount Percent ---- ---- ------ ------- Dollar Amounts in Millions Finance Receivables Capital Equipment Financing ...... $ 4,394.5 $ 4,429.1 $ (34.6) (0.8)% Business Credit .................. 1,282.1 1,281.3 0.8 0.1 Credit Finance ................... 645.7 545.0 100.7 18.5 Commercial Services .............. 981.9 1,010.2 (28.3) (2.8) Industrial Financing ............. 3,881.0 3,094.1 786.9 25.4 Sales Financing .................. 1,307.6 1,411.8 (104.2) (7.4) Consumer Finance ................. 131.3 -- 131.3 -- --------- --------- -------- ------ Total Finance Receivables ...... 12,624.1 11,771.5 852.6 7.2 --------- --------- -------- ------ Operating Lease Equipment Capital Equipment Financing ...... 565.7 384.3 181.4 47.2 Industrial Financing ............. 186.2 78.5 107.7 137.2 --------- --------- -------- ------ Total Operating Lease Equipment 751.9 462.8 289.1 62.5 --------- --------- -------- ------ Total Financing and Leasing Assets $13,376.0 $12,234.3 $1,141.7 9.3 % ========= ========= ======== ====== The following table presents the annual volume of financing and leasing assets funded, including purchases of existing finance receivable portfolios. Years Ended December 31, Increase ------------------------ ------------------ 1993 1992 Amount Percent ---- ---- ------ ------- Dollar Amounts in Millions Funding Volume Capital Equipment Financing ... $1,029 $1,013 $ 16 1.6% Business Credit(a) ............ 451 356 95 26.7 Credit Finance(a) ............. 176 156 20 12.8 Industrial Financing .......... 2,319 1,528 791 51.8 Sales Financing ............... 622 500 122 24.4 Consumer Finance(b) ........... 154 -- 154 -- ------ ------ ------ ---- $4,751 $3,553 $1,198 33.7% ====== ====== ====== ==== Factored Volume(c) Commercial Services ........... $7,667 $7,382 $ 285 3.9% ====== ====== ====== ==== ------------- (a) Represents initial borrowings under new lines of credit. (b) Started de novo in December 1992. (c) Represents factored accounts receivable. 24 The changes in the preceding tables are discussed below for each business unit. - Capital Equipment Financing--Customized secured equipment financing and leasing for major capital equipment. Finance receivables were $4.39 billion at December 31, 1993 compared with $4.43 billion in 1992, a decrease of $34.6 million (0.8%). The small decrease was due to weakness in certain sectors of the market for equipment financing with larger corporations and the repossession of approximately $85 million of finance receivables (principally, oil refinery assets totaling $66.0 million that were subsequently placed on lease and were included in operating lease equipment at December 1993). The 1993 increase of $181.4 million in operating lease equipment also reflects the leasing of two commercial aircraft. - Business Credit--Revolving and term loans, including debtor-in-possession and workout financing, to medium and larger-sized companies secured by accounts receivable, inventory and fixed assets. Finance receivables of $1.28 billion at December 31, 1993 were basically unchanged from 1992, reflecting $451.1 million in new business volume which was mostly offset by customer paydowns. - Credit Finance--Revolving and term loans, including restructurings, for small and medium-sized companies secured by accounts receivable, inventory and fixed assets. Finance receivables increased $100.6 million during 1993 to $645.6 million, compared with $545.0 million in 1992. The 18.5% growth was largely due to new business volume with various middle-market manufacturing companies. - Commercial Services--Factoring of accounts receivables, including credit protection, bookkeeping and collection activities and revolving and term loans. Finance receivables, which experienced a modest decline of $28.3 million (2.8%) during 1993, totaled $981.9 million at December 31, 1993, compared with $1.01 billion at year-end 1992. Factoring volume for 1993 rose to $7.67 billion (up 3.9%) from $7.38 billion in 1992. - Industrial Financing--Secured equipment financing and leasing for medium-sized companies, including dealer and manufacturer financing. Finance receivables grew $786.9 million (25.4%) to $3.88 billion in 1993, compared with $3.09 billion in 1992, as strong volume with middle-market clients was complemented by purchases of financing and leasing assets portfolios totaling approximately $320 million in 1993. Operating lease equipment grew $107.7 million (137.2%) in 1993 to $186.2 million, reflecting the purchase of business aircraft and over-the-road trucking equipment for lease to several industry groups. - Sales Financing--Retail secured financing of recreational vehicles, recreational boats, and manufactured housing through dealers and manufacturers. Finance receivables were $1.31 billion in 1993, compared to $1.41 billion in 1992, a $104.3 million (7.4%) decrease in spite of excellent volume, due to a $155 million securitization of manufactured housing finance receivables in the third quarter of 1993 and a $150 million securitization of recreational vehicle finance receivables in January 1994. The latter were held for sale and, thus, reclassified from finance receivables to other assets in the Consolidated Balance Sheet at December 31, 1993. Additionally, Sales Financing was providing servicing for portfolios owned by other financial institutions and securitization trusts with total outstandings of $415.0 million at December 31, 1993 ($338.0 million in 1992) which were not included in finance receivables. - Consumer Finance--Loans secured by first or second mortgages on residential real estate, generated primarily through brokers and direct marketing. Finance receivables in this de novo operation, which opened in December 1992, reached $131.3 million at December 31, 1993, reflecting new business volume of $154 million during the first year of operation. Financing and Leasing Assets Composition Financing and leasing assets are principally composed of loans and direct financing and leveraged leases with commercial customers located throughout the United States and operating lease equipment, largely commercial aircraft, placed with lessees both domestically and internationally. The portfolio composition did not change significantly from year-end 1992. 25 Financing and Leasing Assets Concentrations Commercial Airlines Commercial airline finance receivables of $1.44 billion and operating lease equipment of $457.6 million totaled $1.89 billion (14.2% of total financing and leasing assets before the reserve for credit losses) at December 31, 1993 compared to $1.95 billion (16.0%) in 1992. The portfolio is secured by commercial aircraft and related equipment. The following table presents information about the commercial airline industry portfolio. At December 31, ----------------------------- 1993 1992 -------- --------- Dollar Amounts in Millions Finance receivables Amount outstanding(a).................... $1,437.3 $1,594.3 Number of obligors....................... 43 47 -------- --------- Operating lease equipment Net carrying value....................... $ 457.6 $ 359.3 Number of obligors....................... 21 17 -------- --------- Total.................................. $1,894.9 $1,953.6 -------- --------- Number of obligors(b).................... 58 57 -------- --------- Number of aircraft(c).................... 276 304 -------- --------- ------------ (a) Includes accrued rents on operating leases of $1.0 million and $1.5 million at December 31, 1993 and December 31, 1992, respectively, which are classified as finance receivables in the Consolidated Balance Sheets. (b) Certain obligors have both finance receivable and operating lease transactions. (c) Regulations established by the Federal Aviation Administration (the "FAA") limit the maximum permitted noise an aircraft may make. A Stage III aircraft meets a more restrictive noise level requirement than a Stage II aircraft. The FAA has issued rules which phase out the use of Stage II aircraft in the United States through the year 2000. The International Civil Aviation Organization has issued similar requirements for Europe. At year-end 1993, the portfolio consisted of 214 Stage III aircraft (78%) and 62 Stage II aircraft (22%) versus 231 Stage III aircraft (80%) and 73 Stage II aircraft (20%) at year-end 1992. The following table presents data on commercial airline obligors (included in the preceding table) that are subject to proceedings under Chapter 11 of the Bankruptcy Reform Act of 1978, as amended. At December 31, ----------------------------- 1993 1992 -------- --------- Dollar Amounts in Millions Finance receivables Amount outstanding(a).................... $ 3.4 $111.0 Number of obligors....................... 1 3 -------- --------- Operating lease equipment Net carrying value....................... $ 60.8 $ 87.0 Number of obligors....................... 1 2 -------- --------- Total.................................. $ 64.2 $198.0 -------- --------- Number of obligors(b).................... 1 3 -------- --------- Number of aircraft....................... 5 32 -------- --------- ------------- (a) Includes accrued rents on operating leases of $0.3 million and $ 0.5 million at December 31, 1993 and December 31, 1992 respectively. (b) Certain obligors have both finance receivable and operating lease transactions. The declines from year-end 1992 reflected in the table above are primarily the result of the emergence of Continental Airlines, Inc. and Trans World Airlines, Inc. from Chapter 11 bankruptcy proceedings during 1993. In February 1993, the Corporation took title to a Boeing 757-200 from America West which was re-leased to another airline in July 1993 after completion of maintenance inspections required under FAA regulations. At December 31, 1993, the airline under Chapter 11 bankruptcy protection was current on all remaining contractual obligations owed to the Corporation. 26 Foreign Outstandings Financing and leasing assets to foreign obligors, primarily to the commercial airline industry, were all U.S. dollar denominated and totaled $1.05 billion at December 31, 1993, consisting of $846.6 million in finance receivables and $204.5 million in operating lease equipment. The largest exposures at December 31, 1993 were to Mexico, $167.4 million (1.22% of total assets) and England, $128.0 million (.93% of total assets). The remaining foreign exposure was geographically dispersed with no individual country representing more than .75% of total assets. At December 31, 1992, financing and leasing assets to foreign obligors totaled $951.2 million, consisting of $810.6 million in finance receivables and $140.6 million in operating lease equipment. Outstandings to obligors in England totaled $135.7 million, representing 1.04% of total assets. No other foreign obligor had aggregate outstandings exceeding .86% of total assets. Highly Leveraged Transactions HLTs totaled $476.6 million (3.6% of financing and leasing assets before the reserve for credit losses) at December 31, 1993, down from $493.7 million (4.0%) at December 31, 1992. The decline in HLT outstandings during 1993 was primarily due to delisting companies, with approximately $138 million of finance receivables owed to the Corporation at year-end 1992, that met delisting criteria, partially offset by new HLT fundings. The Corporation's HLT outstandings are generally secured by collateral, as distinguished from HLTs that rely primarily on cash flow from operations. At December 31, 1993, the HLT portfolio consisted of 28 obligors in 13 different industry groups, with approximately 31.9% of the outstandings located in the Northeast region of the United States and 30.5% in the Southeast. Three accounts totaling $34.7 million were classified as nonaccrual at December 31, 1993 compared to $14.8 million (two accounts) at year-end 1992. Unfunded commitments to lend in secured HLT situations were $123.1 million at December 31, 1993 compared to $78.4 million at year-end 1992. Past Due and Nonaccrual Finance Receivables and Assets Received in Satisfaction of Loans Finance receivables past due 60 days or more declined to $216.1 million (1.71% of finance receivables before the reserve for credit losses) at December 31, 1993, from $335.8 million (2.85%) at December 31, 1992. Excluding finance receivables in Industrial Financing that have dealer or manufacturer recourse provisions, the percentage of finance receivables past due 60 or more days was 1.47% at year-end 1993 compared to 2.57% at year-end 1992. Finance receivables on nonaccrual status, included in past due finance receivables, declined to $139.9 million (1.11% of finance receivables before the reserve for credit losses) at December 31, 1993, from $234.2 million (1.99%) at December 31, 1992 due principally to the return to earning status of the oil refinery assets discussed in the Financing and Leasing Assets section. At year-end 1993, nonaccrual finance receivables were principally related to manufacturing companies, including a manufacturer placed on nonaccrual status in 1992. The following table presents assets received in satisfaction of loans including in-substance foreclosures. At December 31, ----------------------- 1993 1992 ------ ------- Amounts in Thousands Retail merchandise, property and accounts receivable(a) ................... $29,214 $37,262 Commercial aircraft ............................ 17,235 -- Other transportation(b) ........................ 15,255 28,034 Property and equipment ......................... 13,480 14,203 Other .......................................... 11,773 14,281 ------- ------- Total ........................................ $86,957 $93,780 ======= ======= ------------- (a) Retail merchandise, property and accounts receivable includes the assets of a bankrupt building supply retailer. (b) Other transportation includes business aircraft, trailers, and recreational vehicles 27 Item 8. Financial Statements and Supplementary Data. INDEPENDENT AUDITORS' REPORT The Board of Directors The CIT Group Holdings, Inc.: We have audited the accompanying consolidated balance sheets of The CIT Group Holdings, Inc. and subsidiaries as of December 31, 1994 and 1993, 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 Dec ember 31, 1994. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated 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 from material misstatement. An audit includes examining, on a test basis, evide nce 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 b asis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The CIT Group Holdings, Inc. and subsidiaries at December 31, 1994 and 1993, and the results of their operations and cash flows for each of the years in the th ree-year period ended December 31, 1994 in conformity with generally accepted accounting principles. As discussed in Note 11 to the consolidated financial statements, the Corporation adopted the provisions of Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," in 1993. KPMG PEAT MARWICK LLP Short Hills, New Jersey January 17, 1995 28 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, ------------------------ 1994 1993 ------ ------ Assets (Amounts in Thousands) Financing and leasing assets Capital Equipment Financing .................. $ 4,493,531 $ 4,394,528 Business Credit .............................. 1,442,049 1,282,133 Credit Finance ............................... 719,642 645,642 ------------ ------------ Corporate Finance .......................... 6,655,222 6,322,303 Commercial Services .......................... 1,896,233 981,935 Industrial Financing ......................... 4,269,693 3,880,991 Sales Financing .............................. 1,402,443 1,307,544 ------------ ------------ Dealer and Manufacturer Financing .......... 5,672,136 5,188,535 Consumer Finance ............................. 570,772 131,321 ------------ ------------ Finance receivables (Note 2) ............... 14,794,363 12,624,094 Reserve for credit losses (Note 3) ........... (192,421) (169,378) ------------ ------------ Net finance receivables .................... 14,601,942 12,454,716 Operating lease equipment (Note 4) ........... 867,914 751,901 ------------ ------------ Net financing and leasing assets ........... 15,469,856 13,206,617 Cash and cash equivalents .................... 6,558 101,554 Other assets ................................. 487,076 420,310 ------------ ------------ Total assets ............................... $ 15,963,490 $ 13,728,481 ============ ============ Liabilities and Stockholders' Equity Debt (Notes 5 and 6) Commercial paper ............................. $ 5,660,194 $ 6,516,139 Variable rate notes .......................... 3,812,500 1,686,500 Fixed rate notes ............................. 2,623,150 2,392,500 Subordinated fixed rate notes ................ 300,000 200,000 ------------ ------------ Total debt ................................. 12,395,844 10,795,139 Credit balances of factoring clients ......... 993,394 521,728 Accrued liabilities and payables ............. 354,714 324,520 Deferred Federal income taxes ................ 426,511 394,859 ------------ ------------ Total liabilities .......................... 14,170,463 12,036,246 Stockholders' equity (Notes 7 and 17) Common stock - authorized, issued and outstanding - 1,000 shares .................. 250,000 250,000 Paid-in capital .............................. 408,320 408,320 Retained earnings ............................ 1,134,707 1,033,915 ------------ ------------ Total stockholders' equity ................. 1,793,027 1,692,235 ------------ ------------ Total liabilities and stockholders' equity . $15,963,490 $13,728,481 ============ ============ See accompanying notes to consolidated financial statements. 29
THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, ----------------------------------------- 1994 1993 1992 ---- ---- ---- Amounts in Thousands Finance income ..................................... $ 1,263,846 $ 1,111,853 $ 1,091,562 Interest expense ................................... 613,957 508,006 552,017 ------------ ------------ ------------ Net finance income ............................ 649,889 603,847 539,545 Fees and other income (Note 8) ..................... 174,365 133,805 113,762 ------------ ------------ ------------ Operating revenue ............................. 824,254 737,652 653,307 ------------ ------------ ------------ Salaries and general operating expenses (Note 9) ... 337,936 282,182 261,635 Provision for credit losses (Note 3) ............... 96,941 104,874 103,175 Depreciation on operating lease equipment .......... 64,308 39,799 16,645 ------------ ------------ ------------ Operating expenses ............................ 499,185 426,855 381,455 ------------ ------------ ------------ Income before provision for income taxes and extraordinary item .......................... 325,069 310,797 271,852 Provision for income taxes (Note 10) ............... 123,941 128,489 105,311 ------------ ------------ ------------ Income before extraordinary item .............. 201,128 182,308 166,541 Extraordinary item - loss on early extinguishment of debt, net of income tax benefit of $2,523 in 1992 -- -- (4,241) ------------ ------------ ------------ Net income .................................... $ 201,128 $ 182,308 $ 162,300 ============ ============ ============
See accompanying notes to consolidated financial statements. 30
THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years Ended December 31, ---------------------------------------- 1994 1993 1992 ------ ------ ------ Amounts in Thousands Common stock Balance, beginning and end of period ........... $ 250,000 $ 250,000 $ 250,000 ----------- ----------- ----------- Paid-in capital Balance, beginning of period ................... 408,320 408,320 258,320 Capital contribution from stockholders (Note 17) -- -- 150,000 ----------- ----------- ----------- Balance, end of period ......................... 408,320 408,320 408,320 ----------- ----------- ----------- Retained earnings Balance, beginning of period ................... 1,033,915 942,771 1,011,464 Net income ..................................... 201,128 182,308 162,300 Dividends paid - regular ....................... (100,336) (91,164) (80,993) - special (Note 17) ........... -- -- (150,000) ----------- ----------- ----------- Balance, end of period ......................... 1,134,707 1,033,915 942,771 ----------- ----------- ----------- Total stockholders' equity (Note 7) .......... $ 1,793,027 $ 1,692,235 $ 1,601,091 =========== =========== ===========
See accompanying notes to consolidated financial statements. 31
THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, -------------------------------------------- 1994 1993 1992 ------------ ------------ ------------- Amounts in Thousands Cash flows from operations Net income .................................................... $ 201,128 $ 182,308 $ 162,300 Adjustments to reconcile net income to net cash flows from operations: Provision for credit losses ................................. 96,941 104,874 103,175 Depreciation and amortization ............................... 75,363 49,728 29,041 Provision for deferred Federal income taxes ................. 27,679 34,861 33,552 Gains on asset sales ........................................ (26,039) (23,945) (13,883) Increase in accrued liabilities and payables ................ 24,245 31,980 20,717 (Increase) decrease in other assets ......................... (375) 817 22,923 Extraordinary item--loss on early extinguishment of debt, net of income tax benefit ................................. -- -- 4,241 Other ....................................................... (17,270) (27,560) (24,879) ------------ ------------ ------------- Net cash flows provided by operations ................... 381,672 353,063 337,187 ------------ ------------ ------------- Cash flows from investing activities Loans extended ................................................ (23,610,917) (20,854,006) (16,810,392) Collections on loans .......................................... 22,393,955 20,081,910 16,521,953 Purchases of equipment to be leased ........................... (1,039,706) (940,938) (1,019,513) Collections on lease receivables .............................. 632,228 486,364 271,723 Acquisition of Barclays Commercial Corporation ................ (435,630) -- -- Purchases of finance receivables portfolios ................... (181,734) (477,436) (112,431) Proceeds from asset sales ..................................... 535,577 215,556 145,490 Proceeds from sales of assets received in satisfaction of loans 40,429 43,029 32,408 Net (increase) decrease in short-term factoring receivables ... (207,370) 90,465 (67,147) Other ......................................................... (47,764) (16,930) (24,561) ------------ ------------ ------------- Net cash flows used for investing activities ............ (1,920,932) (1,371,986) (1,062,470) ------------ ------------ ------------- Cash flows from financing activities Net (decrease) increase in commercial paper ................... (855,945) 342,674 696,948 Proceeds from the issuance of variable and fixed rate notes ... 3,986,200 2,185,000 2,058,000 Repayments of variable rate and fixed rate notes .............. (1,529,550) (2,062,841) (1,968,324) Proceeds from non-recourse leveraged lease debt ............... 47,016 118,531 382,555 Repayments of non-recourse leveraged lease debt ............... (103,121) (71,516) (60,715) Cash dividends paid ........................................... (100,336) (91,164) (230,993) Capital contribution from stockholders ........................ -- -- 150,000 ------------ ------------ ------------- Net cash flows from financing activities ................ 1,444,264 420,684 1,027,471 ------------ ------------ ------------- Net (decrease) increase in cash and cash equivalents .......... (94,996) (598,239) 302,188 Cash and cash equivalents, beginning of year .................. 101,554 699,793 397,605 ------------ ------------ ------------- Cash and cash equivalents, end of year ........................ $ 6,558 $ 101,554 $ 699,793 ============ ============ ============= Supplemental disclosures Interest paid ................................................. $ 616,830 $ 505,317 $ 582,119 Federal and State and local income taxes paid ................. $ 98,882 $ 85,689 $ 61,894 Noncash transfers of finance receivables to other assets ...... $ 117,081 $ 305,038 -- Noncash transfers of finance receivables to assets received in satisfaction of loans ................................. $ 80,525 $ 166,885 $ 124,959 Noncash transfers of assets received in satisfaction of loans to operating lease equipment ................................ $ 17,300 $ 85,173 $ 121,952 Noncash transfers of finance receivables to operating lease equipment ............................................. -- $ 5,960 $ 134,517
See accompanying notes to consolidated financial statements. 32 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1--Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements and accompanying notes include the accounts of The CIT Group Holdings, Inc. and its subsidiaries (the "Corporation"). All significant intercompany transactions have been eliminated. Prior period amounts, principally fees and other income and depreciation on operating lease equipment, have been reclassified to conform to the current presentation. Consolidated Statements of Cash Flows Cash and cash equivalents includes cash and interest-bearing deposits, which generally represent overnight money market investments of excess cash borrowed in the commercial paper market and maintained for liquidity purposes. Cash inflows and outflows from commercial paper borrowings and most factoring receivables are presented on a net basis in the Statements of Cash Flows as their term is generally less than 90 days. Financing and Leasing Assets The Corporation provides funding for a variety of financing arrangements including term loans, direct financing leases (including leveraged leases for which a major portion of the funding is provided by third-party lenders, including The Dai-Ichi Kangyo Bank, Limited ("DKB"), on a nonrecourse basis, with the Corporation providing the balance and acquiring title to the property) and operating leases. The amounts outstanding on loans and direct financing leases are referred to as finance receivables, and when combined with the net book value of operating lease equipment, represent financing and leasing assets. Income Recognition Finance income includes interest on loans, the amortization of income on direct financing leases, and rents on operating leases. Related origination and other nonrefundable fees and direct origination costs are deferred and amortized as an adjustment of finance income over the contractual life of the transactions. Income on finance receivables other than leveraged leases is recognized on an accrual basis commencing in the month of origination using methods that generally approximate the interest method. Leveraged lease income is recognized on a basis calculated to achieve a constant after-tax rate of return for periods in which the Corporation has a positive investment, net of related deferred tax liabilities. Rental income on operating leases is recognized on an accrual basis. Except for Sales Financing and Consumer Finance accounts, which are subject to automatic charge-off procedures, the accrual of finance income is suspended and an account is placed on nonaccrual status either when a payment is contractually delinquent for 90 days or more and collateral is insufficient to cover both the outstanding principal and accrued finance income or immediately if, in the opinion of management, full collection of all principal and income is doubtful. Accrued but uncollected income at the date an account is placed on nonaccrual status is reversed and charged against income to the extent the collateral does not satisfy the principal and accrued income outstanding. Such accrued but uncollected income is immaterial. Subsequent income received is applied to the outstanding principal balance until such time as the account is collected, charged-off on or returned to accrual status. Fees and other income includes factoring commissions, commitment and facility fees, letters of credit and syndication fees, as well as gains and losses realized upon the sale of assets coming off lease, the securitization of finance receivables and the disposition of assets received in satisfaction of loans. Lease Financing Direct financing leases are recorded at the aggregate future minimum lease payments plus estimated residual values less unearned finance income. Operating lease equipment is carried at cost less accumulated depreciation and is depreciated to estimated residual value using the straight-line method over the lease term or projected economic life of the asset. Equipment acquired in satisfaction of loans and subsequently placed on operating lease is recorded at the lower of carrying value or estimated fair value when acquired. Leveraged 33 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) leases are recorded at the aggregate value of future minimum lease payments plus estimated residual value, less amounts due to non-recourse third-party lenders and unearned finance income. In the event of default by the lessee, the third-party lenders have no recourse to the Corporation. Reserve for Credit Losses on Finance Receivables The reserve for credit losses is established and periodically reviewed for adequacy based on the nature and characteristics of the obligors, economic conditions and trends, charge-off experience, delinquencies, and value of underlying collateral and guarantees (including recourse to dealers and manufacturers). It is management's judgment that the reserve for credit losses is adequate to provide for potential credit losses. Charge-off of Finance Receivables Finance receivables are reviewed periodically to determine the probability of loss on individual receivables. Charge-offs are taken after considering such factors as the customer's financial condition and the value of underlying collateral and guarantees (including recourse to dealers and manufacturers). Such charge-offs are deducted from the carrying value of the related finance receivables. To the extent that an unrecovered balance remains due, a final charge-off is taken at the time collection efforts are no longer deemed useful. Automatic charge-offs are taken for Sales Financing and Consumer Finance receivables when no contractual payments are received for 120 days, or at 180 days when partial payments have been received. Other Assets Assets received in satisfaction of loans (including in-substance forclosures) are carried at the lower of carrying value or estimated fair value less selling costs, with write-downs at the time of receipt or in-substance foreclosure charged to the reserve for credit losses. Subsequent write-downs of these assets, which may be required due to a decline in estimated fair market value after receipt, or in-substance foreclosure are reflected in general operating expenses. The excess of the purchase price over the fair market value of assets acquired (goodwill) in connection with an acquisition is amortized on a straight-line basis over a 20 year period. Fixed assets are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed principally using the straight-line method over the estimated useful lives of the related assets. At the time management decides to proceed with a securitization of finance receivables, such finance receivables are considered held for sale and are reclassified to other assets. Derivative Financial Instruments The Corporation enters into interest rate swap and interest rate cap agreements as part of its overall interest rate risk management. These transactions are entered into as hedges against the effects of future interest rate fluctuations and, accordingly, are not carried at fair market value so long as a high degree of correlation is maintained between the derivative instrument and the corresponding asset or liability position being hedged. The Corporation's objectives and strategies regarding the management of interest rate and liquidity risks, including the use of derivative instruments, are discussed in the "Interest Rate Risk Management" section of "Asset/Liability Management" in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The net interest differential, including premiums paid or received, if any, on interest rate swaps and interest rate caps is recognized on an accrual basis as an adjustment to finance income or interest expense to correspond with the hedged asset or liability position, respectively. In the infrequent event that early termination of a derivative instrument occurs, the net proceeds paid or received are deferred and amortized over the shorter of the remaining original contract life of the interest rate swap or interest rate cap or the maturity of the hedged asset or liability position. On occasion, the Corporation will also purchase a forward interest rate agreement or option of very short term (up to 4 months) to hedge the interest rate used to price the anticipated securitization of finance receivables. Such transactions are designated as a hedge against a securitization that is probable 34 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) and for which the significant characteristics and terms have been identified. The finance receivables involved are considered held for sale and reclassified to other assets. The net interest differential on the derivative instrument, including premium paid or received, if any, is recognized as an adjustment to the basis of the corresponding assets at the time of sale. If the anticipated securitization does not occur, the related hedge position is liquidated with any gain or loss recognized at such time, and the related assets are reclassified to finance receivables. The Corporation may occasionally enter into a compound interest rate cap transaction, which, in the Corporation's case, involves the purchase of an interest rate cap based on commercial paper interest rates linked with the sale of an interest rate cap based on the prime rate. The interest rate cap purchased and the interest rate cap sold are transacted concurrently and have a matched notional dollar amount and maturity. Accordingly, the transaction is treated as a hedge unit for accounting purposes and the net interest differential, including any net premium paid or received, is recognized as an adjustment to interest expense. Income Taxes On January 1, 1993, the Corporation adopted, on a prospective basis, Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are determined using enacted tax rates expected to apply in the year in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income at the time of enactment. The adoption of SFAS 109 did not have a significant impact on the Corporation's consolidated results of operations in 1993 due to the prior adoption of Statement of Financial Accounting Standards No. 96, "Accounting for Income Taxes". Federal investment tax credits realized for income tax purposes on lease financing transactions have been deferred for financial statement purposes and are included in deferred Federal income taxes on the Consolidated Balance Sheets. Such credits are amortized as a reduction of the provision for income taxes on an actuarial method over the related lease term. Note 2--Finance Receivables The following table presents an analysis of finance receivables. At December 31, -------------------------------- 1994 1993 ------------- ------------- Amounts in Thousands Loans .................................... $ 12,380,071 $ 10,657,167 Direct financing lease receivables ....... 3,098,352 2,682,635 Leveraged lease receivables .............. 789,166 766,361 ------------- ------------- Gross finance receivables ................ 16,267,589 14,106,163 Unearned finance income .................. (1,473,226) (1,482,069) ------------- ------------- Finance receivables ...................... $ 14,794,363 $ 12,624,094 ============= ============= Leveraged lease receivables in the preceding table exclude the portion of lease receivables offset by related non-recourse debt payable to third-party lenders of $2.22 billion in 1994 and $2.34 billion in 1993 including amounts owed to affiliates of DKB which totaled $525.7 million at year-end 1994 and $535.7 million at year-end 1993. Also excluded from the preceding table are $498.1 million of finance receivables at December 31, 1994 ($415.0 million in 1993) owned by other financial institutions or securitization trusts which are serviced by Sales Financing. Information about concentrations of credit risk is set forth in "Industry Composition" and "Geographic Composition" in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 35 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Contractual maturities of finance receivables at December 31, 1994 and 1993 are set forth in Note 19--Maturity of Finance Receivables. The following table sets forth information regarding finance receivables on nonaccrual status and assets received in satisfaction of loans. At December 31, ----------------------- 1994 1993 --------- -------- Nonaccrual finance receivables ................... $ 110,232 $ 139,941 Assets received in satisfaction of loans ......... 86,525 86,957 --------- --------- Total nonperforming assets ....................... $ 196,757 $ 226,898 ========= ========= Percent to total financing and leasing assets .... 1.26% 1.70% ========= ========= The amount of finance income recognized on year-end nonaccrual finance receivables totaled $6.2 million, $3.9 million and $14.9 million in 1994, 1993 and 1992, respectively. The amount of finance income which would have been recorded under contractual terms for such nonaccrual receivables totaled $20.7 million, $21.2 million, and $30.3 million in 1994, 1993 and 1992, respectively. At December 31, 1994 and 1993, the Corporation had $14.0 million and $15.0 million, respectively, of finance receivables that met the criteria of troubled debt restructurings, which were not included in the preceding table. Finance income recognized on troubled debt restructurings totaled $0.8 million, $0.8 million and $4.1 million in 1994, 1993 and 1992, respectively. Finance income on these restructured receivables would have been $2.1 million, $2.3 million and $5.8 million for 1994, 1993 and 1992, respectively, based on original contractual terms. Note 3--Reserve for Credit Losses The following table presents changes in the reserve for credit losses.
At December 31, -------------------------------------------- 1994 1993 1992 ---------- ---------- ---------- Dollar Amounts in Thousands Balance, January 1 ......................... $ 169,378 $ 158,483 $ 155,107 ---------- ---------- ---------- Finance receivables charged-off ............ (95,433) (105,613) (110,199) Recoveries on finance receivables previously charged-off ............................. 11,281 11,205 11,915 ---------- ---------- ---------- Net credit losses ....................... (84,152) (94,408) (98,284) ---------- ---------- ---------- Provision for credit losses ................ 96,941 104,874 103,175 Portfolio acquisitions (dispositions), net . 10,254 429 (1,515) ---------- ---------- ---------- Net addition to reserve for credit losses .. 107,195 105,303 101,660 ---------- ---------- ---------- Balance, December 31 ....................... $ 192,421 $ 169,378 $ 158,483 ========== ========== ========== Reserve for credit losses as a percentage of finance receivables ..................... 1.30% 1.34% 1.35% ========== ========== ==========
36 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 4--Operating Lease Equipment Capital Equipment Financing and Industrial Financing enter into lease transactions (with estimated residual values in excess of 20% of the original purchase price) which are accounted for as operating leases. In accordance with the policy of reviewing and adjusting the net carrying values of leased assets to the lower of fair market or carrying value, management or outside consultants periodically perform appraisals of operating lease equipment. Based upon such periodic appraisals, the aggregate fair values of operating lease equipment exceeded carrying value at December 31, 1994. The following table provides an analysis of operating lease equipment by equipment type, net of accumulated depreciation of $129.7 million in 1994 and $68.8 million in 1993. At December 31, ----------------------- 1994 1993 --------- --------- Amounts in Thousands Commercial aircraft ................................ $ 482,324 $ 457,637 Business aircraft .................................. 97,770 88,390 Trucks, trailers and buses ......................... 94,309 82,996 Oil refinery ....................................... 83,137 86,240 Railroad and other transportation equipment ........ 69,106 11,560 Construction and mining equipment .................. 18,519 15,715 Manufacturing equipment ............................ 10,788 3,418 Other .............................................. 11,961 5,945 --------- --------- Total ............................................ $ 867,914 $ 751,901 ========= ========= Rental income on operating leases, included in finance income, totaled $97.2 million in 1994, $67.2 million in 1993 and $30.8 million in 1992. The following table presents future minimum lease rentals on noncancellable operating leases as of December 31, 1994. Excluded from this table are variable rentals calculated on the level of asset usage, re-leasing rentals, and expected sales proceeds from remarketing operating lease equipment at lease expiration, all of which are important components of operating lease profitability. Years Ended December 31, Amounts in Thousands 1995 .......................................... $ 101,224 1996 .......................................... 90,344 1997 .......................................... 73,969 1998 .......................................... 57,502 1999 .......................................... 38,455 Thereafter .................................... 61,419 --------- Total .................................... $ 422,913 ========= 37 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 5--Debt The following table presents data on commercial paper borrowings.
1994 1993 1992 --------- ----------- ------------ Dollar Amounts in Thousands At December 31, Borrowings outstanding ................. $5,660,194 $6,516,139 $6,173,465 Weighted average interest rate ......... 5.65% 3.35% 3.41% Weighted average maturity .............. 22 days 55 days 57 days Year ended December 31, Daily average borrowings ............... $6,532,528 $6,080,504 $5,872,844 Maximum amount outstanding ............. $7,207,319 $6,709,415 $6,566,570 Year ended December 31, (excluding amounts related to short-term interest-bearing deposits) Daily average borrowings ............... $6,245,234 $5,533,781 $5,334,547 Maximum amount outstanding ............. $6,818,357 $6,564,609 $5,939,633 Weighted average interest cost ......... 4.31% 3.29% 4.08%
38 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) The following tables present interest rates, contractual maturities and outstanding balances for term debt:
December 31, ------------------------------- Contractual Maturity Rate 1994 1993 -------------------- ------ ---------- ----------- Dollar Amounts in Thousands Fixed rate notes Due January 1, 1994 ........................... -- $ 100,000 Due February 1, 1994 .......................... -- 100,000 Due August 15, 1994 ........................... -- 200,000 Due December 1, 1994 .......................... -- 200,000 Due April 6, 1995 ............................. 5.020% (a) $ 50,000 50,000 Due November 1, 1995 .......................... 5.500 100,000 100,000 Due November 15, 1995 ......................... 5.650 150,000 150,000 Due December 1, 1995 .......................... 5.875 100,000 100,000 Due February 15, 1996 ......................... 8.750 250,000 250,000 Due March 15, 1996 ............................ 4.750 150,000 150,000 Due June 15, 1996 ............................. 8.875 150,000 150,000 Due November 15, 1996 ......................... 7.125 150,000 -- Due December 5, 1996 .......................... 7.625 200,000 -- Due February 15, 1997 ......................... 6.000 (b) 90,000 112,500 Due February 28, 1997 ......................... 5.500 100,000 -- Due March 21, 1997 ............................ 5.750 100,000 -- Due June 25, 1997 ............................. 5.956 (d) 22,950 -- Due July 1, 1997 .............................. 8.750 150,000 150,000 Due September 30, 1997 ........................ 7.000 200,000 -- Due April 1, 1998 ............................. 5.625 100,000 100,000 Due April 15, 1998 ............................ 8.750 150,000 150,000 Due April 30, 1999 ............................ 5.915 (c) 20,000 20,000 Due April 22, 2000 ............................ 6.150 20,000 20,000 Due April 28, 2003 ............................ 6.200 (c) 40,000 40,000 Due May 12, 2003 .............................. 6.295 (c) 30,000 30,000 Due August 30, 2003 ........................... 5.370 (c) 20,000 20,000 Due August 31, 2004 ........................... 6.044 (c) 80,200 -- Due October 15, 2008 .......................... 5.875 200,000 200,000 ----------- ----------- Total fixed rate notes ...................... $ 2,623,150 $ 2,392,500 =========== =========== Subordinated fixed rate notes Due March 15, 2001 9.250% $ 100,000 $ 100,000 Due November 1, 2001 8.375 100,000 100,000 Due March 1, 2004 6.980 100,000 -- ----------- ----------- Total subordinated fixed rate notes $ 300,000 $ 200,000 =========== =========== ------------- (a) Under provisions set forth in the Pricing Supplement dated March 16, 1993, the maturity date was automatically accelerated from 1998 to 1995. (b) Principal on this note is payable in semiannual installments due each February 15 and August 15. (c) These are yen denominated fixed rate debt obligations.Principal and interest payments are fully hedged under cross-currency interest rate swap agreements, with matching maturity dates and payment terms, which effectively convert the debt to variable rate U.S. dollar obligations with a weighted average floating rate of 6.032% at December 31, 1994. (d) Refer to footnote (l) in the following table of variable rate note contractual maturities.
39 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, ----------------------------- Contractual Maturity Rate 1994 1993 -------------------- ------ ---------- ---------- Dollar Amounts in Thousands Variable rate notes Due February 3, 1994 ............ -- $ 100,000 Due March 1, 1994 ............... -- 100,000 Due March 3, 1994 ............... -- 100,000 Due April 1, 1994 ............... -- 25,000 Due April 22, 1994 .............. -- 30,000 Due May 26, 1994 ................ -- 150,000 Due July 26, 1994 ............... -- 100,000 Due August 10, 1994 ............. -- 150,000 Due October 3, 1994 ............. -- 150,000 Due January 4, 1995 ............. 6.000% (a) $ 100,000 -- Due January 24, 1995 ............ 5.800 (b) 150,000 -- Due February 8, 1995 ............ 6.359 (k) 20,000 20,000 Due March 28, 1995 .............. 5.800 (b) 90,000 -- Due June 5, 1995 ................ 4.813 (c) 25,000 25,000 Due June 19, 1995 ............... 5.190 (d) 50,000 50,000 Due August 31, 1995 ............. 6.050 (a) 200,000 200,000 Due September 15, 1995 .......... 6.100 (a) 200,000 200,000 Due September 18, 1995 .......... 5.700 (a) 200,000 -- Due October 3, 1995 ............. 5.700 (a) 100,000 -- Due October 6, 1995 ............. 5.700 (a) 100,000 -- Due October 13, 1995 ............ 5.750 (a) 100,000 -- Due October 27, 1995 ............ 5.750 (a) 200,000 -- Due November 3, 1995 ............ 5.750 (a) 100,000 -- Due November 15, 1995 ........... 5.750 (a) 100,000 -- Due November 22, 1995 ........... 5.790 (a) 300,000 -- Due December 7, 1995 ............ 5.850 (a) 100,000 -- Due December 15, 1995 ........... 5.920 (b) 200,000 200,000 Due December 22, 1995 ........... 5.900 (a) 200,000 -- Due November 14, 1996 ........... 5.140 (d) 150,000 -- Due November 22, 1996 ........... 5.850 (a) 100,000 -- Due February 28, 1997 ........... 6.038 (e) 50,000 -- Due March 17, 1997 .............. 6.475 (f) 56,000 -- Due March 21, 1997 .............. 7.061 (g) 50,000 -- Due April 29, 1997 .............. 5.763 (f) 50,000 -- Due May 2, 1997 ................. 6.730 (h) 150,000 -- Due May 19, 1997 ................ 5.970 (b) 200,000 -- Due June 25, 1997 ............... (l) -- 25,000 Due March 11, 1998 .............. 6.309 (i) 61,500 61,500 Due May 11, 1998 ................ 5.690 (j) 30,000 -- Due January 15, 1999 ............ 5.750 (f) 250,000 -- Due March 29, 1999 .............. 7.510 (g) 55,000 -- Due April 14, 1999 .............. 6.435 (g) 75,000 -- ---------- ---------- Total variable rate notes ..... $3,812,500 $1,686,500 ========== ========== --------------- (a) The interest rate resets daily based on the prime interest rate minus a weighted average of 2.657%. (b) The interest rate resets weekly based upon the 91 day treasury bill rate plus a weighted average of .17%. (c) The interest rate resets quarterly based upon 13.50% minus the 3-month Italian lira LIBOR. (d) The interest rate resets daily based upon the federal funds rate plus a weighted average of .21%.
40 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) ------------- (e) The interest rate resets monthly based on one month LIBOR plus .10%. (f) The interest rate resets quarterly based on three month LIBOR plus a weighted average of .13%. (g) The interest rate resets quarterly based on the 2 year constant maturity Treasury rate less a weighted average of .22%. (h) The interest rate resets weekly based on the 6 month Treasury bill rate plus .20%. (i) The interest rate resets monthly and is equal to the 30-day commercial paper rate plus .15% or at a lower rate under certain circumstances. Repayable quarterly at the option of the holder after nine months' notice to the Corporation. Redeemable at the option of the Corporation on 30 days' notice. (j) The interest rate resets quarterly based on the 91 day Treasury bill rate plus .30%. (k) The interest rate resets monthly and is equal to the 30-day commercial paper rate plus .20%, or at a lower rate under certain circumstances. The maturity date on these notes was accelerated from November 12, 2003 to February 8, 1995, in accordance with the terms of the notes. (l) Subject to the provisions set forth in the Pricing Supplement dated June 18, 1993, the interest rate on this issue was fixed at 5.956% in June 1994. The following table presents the contractual maturities of total debt at December 31, 1994. Certain debt may be repaid at earlier dates as detailed in footnotes (i) and (k) of the preceding table. Commercial Variable rate Fixed rate paper notes notes ---------- ---------- ---------- At December 31, ............. Amounts in Thousands 1995 .................... $5,660,194 $2,535,000 $ 430,000 1996 .................... -- 250,000 930,000 1997 .................... -- 556,000 602,950 1998 .................... -- 91,500 250,000 1999-2008 ............... -- 380,000 710,200 ---------- ---------- ---------- Total ............... $5,660,194 $3,812,500 $2,923,150 ========== ========== ========== After-tax extraordinary losses for premiums and other expenses relating to redemptions of term debt totaled $4.2 million in 1992. In 1994 and 1993, the Corporation did not redeem any term debt. The following table represents information on unsecured lines of credit with 74 banks at December 31, 1994. There have been no borrowings under lines of credit since 1970. Credit Lines Amount Maturity ------------ ------ -------- Amounts in Thousands 364-Day revolving credit facility $1,875,000 June 1995(a) Revolving credit facility ....... 1,250,000 April 1998(b) Revolving credit facility ....... 770,000 September 1997(c) Revolving credit facility ....... 400,000 August 1995/September 1997(d,e) Revolving credit facility ....... 325,000 September 1996(f) 364-day renewable credit facility 55,000 Renewable annually(g) ---------- Total committed credit lines .... $4,675,000 ========== -------------------- (a) The Corporation may, by written notice given no earlier than 60 days prior to the then applicable Termination Date of this Agreement, extend the then applicable Termination Date to a date 364 days after the then applicable Termination Date. This is subject to written consent by two-thirds in principal amount of the participating banks given no earlier than 30 days and no later than 20 days prior to the then applicable Termination Date. (b) The Corporation may, by written notice to the Agent given no later than 60 days prior to the first, second and/or third anniversary date of this Agreement, extend the then applicable Termination Date to a date one year after the then applicable Termination Date. This is subject to written consent from two-thirds in principal amount of the participating banks given no later than 30 days prior to the first or second anniversary date of this Agreement following the request of such extension. In no event shall the Termination Date be later than April 29, 2000. (c) The Corporation may, by written notice to the Agent given no later than 60 days prior to the first and/or second anniversary date of this Agreement, extend the then applicable Termination Date to a date one year after the then applicable Termination Date. This extension is subject to written consent by two-thirds in principal amount of the participating banks given no later than 30 days prior to the first or second anniversary date. In no event will the Termination Date be later than September 27, 1999. (d) The Corporation may, by written notice to the Agent given no earlier than 60 days and no later than 30 days prior to the then applicable Termination Date of this Agreement, extend the then applicable Termination Date to a date 364 days after the then applicable Termination Date. This is subject to written consent by two thirds in principal amount of the participating banks and given no earlier than 30 days and no later than 20 days prior to the then applicable Termination Date. In no event shall the Termination Date be later than September 1, 1999. 41 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) -------------------- (e) The Corporation may, by written notice to the Agent given no later than 60 days prior to the first and second anniversary date of this Agreement, extend the then applicable Termination Date to a date one year after the then applicable Termination Date. This is subject to written consent from two-thirds in principal amount of the participating banks given within 30 days following the request. The Corporation may extend the Termination Date a maximum of two times but in no event will the Termination Date be later than September 1, 1999. (f) The Corporation may, by written notice to the Agent given no later than 60 days prior to the first and second anniversary date, request the participating banks to consider an extension of the then applicable termination date to a date one year after the then applicable Termination Date. This extension is subject to written consent by two-thirds in principal amount of the participating banks given no later than 30 days prior to the first or second anniversary date. The Corporation may extend this facility a maximum of two times, but in no event beyond September 28, 1998. (g) The Corporation may, at any time, but in no event more than twice a year, by written notice to the individual bank, request the individual bank to consider an extension of the then Termination Date to a date on which is not later than 364 days after the date on which the individual bank notifies the Corporation of its decision on such extension request. Credit lines with DKB in the preceding table totaled $245.0 million at December 31, 1994 and $357.0 million at December 31, 1993. Note 6--Derivative Financial Instruments As part of managing the exposure to changes in market interest rates, the Corporation, as an end-user, enters into various interest rate swap and interest rate cap transactions, all of which are traded in over-the-counter (OTC) markets, with other financial institutions acting as principal counterparties, including subsidiaries of DKB and CBC. The Corporation's objectives and strategies regarding the management of interest rate risk, including the use of derivative instruments, are discussed in the Interest Rate Risk Management section of "Asset/Liability Management" in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. In 1994, The Corporation adopted Statement of Financial Accounting Standards No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments", which requires disclosure about amounts, nature and terms of certain financial instruments. The following table presents the notional principal amounts, weighted average interest rates, and contractual maturities by class of interest rate swap at December 31, 1994.
Floating to Fixed to Floating to Fixed Rate Floating Rate Floating Rate Total ---------- ------------- ------------- ----- Dollar Amounts in Thousands Years ending December 31, 1995 ..................... $ 625,000 $ 180,000 $1,140,000 $1,945,000 1996 ..................... 350,000 30,000 -- 380,000 1997 ..................... 1,150,000 53,000 306,000 1,509,000 1998 ..................... 200,000 -- 30,000 230,000 1999-2008 ................ 850,000 420,000 130,000 1,400,000 ---------- ---------- ---------- ---------- $3,175,000 $ 683,000 $1,606,000 $5,464,000 ========== ========== ========== ========== Weighted Average Rate CIT Pays Interest at ... 6.41% 6.19% 6.02% ========== ========== ========== Weighted Average Rate CIT Receives Interest at 5.89% 6.48% 6.00% ========== ========== ==========
42 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table presents the notional principal amounts of interest rate swaps by class and the corresponding hedged liability position.
Notional Amount Interest Rate Swaps in Thousands Comments ------------------- ------------ -------- Floating to fixed rate swaps Hedging commercial paper ............... $2,150,000 Effectively converts the interest rate on an equivalent amount of commercial paper to a fixed rate. Hedging variable rate notes ............ 1,025,000 Effectively converts the interest rate on an equivalent amount of variable rate notes with matched terms to a fixed rate. ---------- Total floating to fixed rate swaps ..... 3,175,000 ---------- Fixed to floating rate swaps Hedging fixed rate notes ............... 683,000 Effectively converts the interest rate on an equivalent amount of fixed rate notes to a variable rate. ---------- Total fixed to floating rate swaps ..... 683,000 ---------- Basis swaps Hedging commercial paper ............... 200,000 Effectively fixes the spread between the rate on an equivalent amount of commercial paper and the prime interest rate. Hedging variable rate debt ............. 1,406,000 Effectively fixes the spread between the rates on an equivalent amount of variable rate notes and various market interest rate indices. ---------- Total basis swaps ...................... 1,606,000 ---------- Total interest rate swaps ................ $5,464,000 ==========
Additionally, there were cross-currency interest rate swaps with a notional principal amount of $190.0 million on which the Corporation was paying interest at a weighted average rate of 6.03% at December 31, 1994 that effectively converted yen denominated fixed rate debt into variable rate U.S. dollar obligations. These swaps have maturities ranging from 1999 to 2004 to correspond with the terms of the debt. (See footnote (c) under the table presenting the contractual maturities of fixed rate notes in Note 5-Debt.) In connection with an anticipated securitization of finance receivables, the Corporation entered into a series of forward interest rate agreements with notional principal amounts of $124.0 million maturing in February 1995 that hedge the interest rate used to price the sale of an equivalent amount of finance receivables from interest rate fluctuations. At December 31, 1993, the Corporation had purchased commercial paper interest rate caps with an outstanding notional principal amount of $1.45 billion which were designated as hedges against an equivalent amount of commercial paper. Included in that amount were caps with a notional principal amount of $1.15 billion which were purchased in conjunction with the sale of an equal amount of prime interest rate caps, creating a compound interest rate cap transaction to hedge the interest rate on commercial paper funding prime interest rate based assets. During 1994, commercial paper interest rate caps with a notional principal amount of $950.0 million and prime interest rate caps with a notional principal amount of $650.0 million matured. The remainder of the commercial paper interest rate caps outstanding at December 31, 1993, with total notional principal amounts of $500.0 million, and the associated prime interest rate caps were terminated in April 1994. The remaining unamortized costs exceeded the net proceeds received to terminate these interest rate caps by the immaterial amount of $0.3 million, which was charged to interest expense. There were no deferred gains or losses resulting from the termination of derivative instruments at December 31, 1994 or December 31, 1993. 43 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Corporation is exposed to credit risk to the extent a counterparty fails to perform under the terms of an interest rate swap. This risk is measured as the market value of interest rate swaps with a positive fair value at December 31, 1994, reduced by the effects of master netting agreements as presented in Footnote 15 - Fair Values of Financial Instruments. However, due to the investment grade credit ratings of all counterparties and limits on the exposure with any individual counterparty, the Corporation's actual counterparty credit risk is not considered significant. Note 7--Stockholders' Equity Under the most restrictive provisions of agreements relating to outstanding debt, the Corporation may not, without the consent of the holders of such debt, permit stockholders' equity to be less than $300.0 million. Note 8--Fees and Other Income The following table sets forth the components of fees and other income. Years ended December 31, ----------------------------------- 1994 1993 1992 -------- -------- -------- Amounts in Thousands Commissions and fees .................. $148,326 $109,860 $ 99,879 Gains on sales of finance receivables . 17,050 15,788 6,604 Gains on asset sales .................. 8,989 8,157 7,279 -------- -------- -------- $174,365 $133,805 $113,762 ======== ======== ======== Note 9--Salaries and General Operating Expenses The following table sets forth the components of salaries and general operating expenses. Years ended December 31, ----------------------------------- 1994 1993 1992 -------- -------- -------- Amounts in Thousands Salaries and employee benefits ........ $185,868 $152,139 $137,914 General operating expenses ............ 152,068 130,043 123,721 -------- -------- -------- $337,936 $282,182 $261,635 ======== ======== ======== Note 10--Income Taxes The effective tax rate of the Corporation varied from the statutory Federal corporate income tax rate as follows: Years ended December 31, ------------------------------- 1994 1993 1992 ---- ---- ---- Percentage of Pretax Income Federal income tax rate ................... 35.0% 35.0% 34.0% Increase (decrease) due to: State and local income taxes, net of Federal income tax benefit ......... 5.3 5.2 6.3 Effect of 1% tax rate increase on Federal deferred tax balances ................. -- 2.8 -- Investment tax credits .................. (0.3) (0.7) (0.7) Other ................................... (1.9) (1.0) (0.9) ---- ---- ---- Effective tax rate ........................ 38.1% 41.3% 38.7% ==== ==== ==== The Revenue Reconciliation Act of 1993 (the "Act") which became effective in August 1993, provided for a 1% increase in the statutory Federal corporate income tax rate. The rate change resulted in a 1993 increase of $8.2 million to deferred tax balances, primarily related to the lease portfolio. In addition, as required by Statement of Financial Accounting Standards No. 13, "Accounting for Leases" ("SFAS 13"), the after-tax rate of return and the allocation of income was recalculated from inception for the leveraged lease portfolio to reflect the impact of the change in rate, the net effect of which was not significant. 44 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The types of temporary differences that give rise to significant portions of the deferred tax liability and the deferred provision (benefit) for income taxes are shown in the accompanying table.
Years ended December 31, ------------------------------------------- 1994 1993 1992 -------- -------- -------- Amounts in Thousands Current Federal income tax provision .............. $ 69,512 $ 68,732 $ 45,906 -------- -------- -------- Deferred Federal income tax provision: Lease financing ................................ 31,206 52,020 48,551 Net charge-offs ................................ (4,622) (10,487) (5,667) Investment tax credits amortization ............ (1,040) (2,221) (1,958) State and local taxes .......................... 1,087 (1,272) (613) Other .......................................... 1,048 (3,179) (6,761) -------- -------- -------- Total deferred Federal income tax provision ....................................... 27,679 34,861 33,552 -------- -------- -------- Total Federal income taxes ........................ 97,191 103,593 79,458 State and local income taxes ...................... 26,750 24,896 25,853 -------- -------- -------- Total provision for income taxes ................ $123,941 $128,489 $105,311 ======== ======== ========
The tax effects of temporary differences that give rise to significant portions of the deferred Federal income tax assets and liabilities are presented below. Years Ended December 31, --------------------------- Amounts in Thousands 1994 1993 -------- -------- Assets Provision for credit losses ........... $(61,303) $(50,292) Loan origination fees ................. (7,213) (7,493) Market discount income ................ (4,063) (4,698) Other ................................. (8,994) (9,466) -------- -------- Total deferred tax assets ............... (81,573) (71,949) -------- -------- Liabilities Leasing transactions .................. 490,782 451,112 Amortization of intangibles ........... 7,228 4,714 Depreciation of fixed assets .......... 1,180 1,751 Prepaid pension costs ................. 641 746 Other ................................. 1,068 233 -------- -------- Total deferred tax liabilities .......... 500,899 458,556 -------- -------- Net deferred tax liability .............. $419,326 $386,607 ======== ======== Also included in the deferred Federal income taxes caption on the Consolidated Balance Sheets are unamortized investment tax credits of $7.2 million and $8.3 million at December 31, 1994 and December 31, 1993, respectively. Included in the accrued liabilities and payables caption in the Consolidated Balance Sheets are State and local deferred tax liabilities of $77.5 million and $73.6 million at December 31, 1994 and December 31, 1993, respectively, arising from the temporary differences shown in the above tables. 45 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 11--Benefit Plans Retirement Plan Substantially all employees of the Corporation who have completed one year of service and have attained the age of 21 years participate in The CIT Group Holdings, Inc. Retirement Plan ("CIT Plan"). The retirement benefits under the CIT Plan are based on the employee's age, years of benefit service, and a percentage of qualifying compensation during the final years of employment. Plan assets consist of marketable securities, including common stock and government and corporate debt securities. The Corporation funds the plan by the amount charged to salaries and employee benefits expense to the extent it qualifies for an income tax deduction. The following table sets forth the funded status of the CIT Plan and the amounts recognized in the Consolidated Balance Sheets.
At December 31, -------------------------------------------- 1994 1993 1992 -------- ------- -------- Amounts in Thousands Actuarial present value of benefit obligations: Accumulated benefit obligation including vested benefits of $36,246 in 1994, $34,879 in 1993, and $25,480 in 1992 .................................... $ 39,686 $42,955 $32,004 ======== ======= ======= Plan assets at fair market value ......................... $ 81,533 $86,873 $76,534 Projected benefit obligation ............................. (55,848) (60,092) (48,358) -------- ------- ------- Excess plan assets ....................................... 25,685 26,781 28,176 Unrecognized prior service cost .......................... 2,103 2,002 -- Prepaid pension cost ..................................... 9,790 10,034 8,184 -------- ------- ------- Unrecognized net gain .................................... $ 13,792 $14,745 $19,992 ======== ======= ======= Pension cost (benefit) included the following components: Service cost-benefits earned during the period ........... $ 4,039 $ 3,254 $ 3,142 Interest cost on projected benefit obligation ............ 4,510 4,115 3,656 Actual (return)/loss on plan assets ...................... 2,740 (12,407) (7,990) Net amortization and deferral ............................ (11,045) 4,811 971 -------- ------- ------- Pension cost (benefit) ................................... $ 244 $ (227) $ (221) ======== ======= =======
The following assumptions were used for calculating the projected benefit obligations shown in the preceding table.
1994 1993 1992 ---- ---- ---- Discount rate .......................................... 8.75% 7.50% 8.50% Rate of future compensation increase ................... 5.00% 5.00% 5.50% Expected long-term rate of return on plan assets ....... 9.00% 9.00% 9.00%
Postretirement Benefits The Corporation provides certain health care and life insurance benefits to eligible retired employees. In 1994, salaried participants generally become eligible for retiree health care benefits after reaching age 55 with 10 years of benefit service and 10 years of medical plan participation, increasing to 11 years in 1995. Generally, the medical plans pay a stated percentage of most medical expenses reduced by a deductible as well as by payments made by government programs and other group coverage. The plans are unfunded. The Corporation adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting of Postretirement Benefits Other Than Pensions" ("SFAS 106") as of January 1, 1993. SFAS 106 requires the accrual, during the 46 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) active service period of the employee, of the cost of providing postretirement benefits, including medical and life insurance coverage. The Corporation elected to amortize the SFAS 106 transition obligation over a twenty-year period. The postretirement benefit liability at December 31, 1994 and December 31, 1993 is set forth in the following table. 1994 1993 ------- ------- Amounts in Thousands Accumulated postretirement benefit obligation ("APBO"): Retirees ................................... $23,510 $26,042 ------- ------- Fully eligible, active plan participants ... 3,690 3,648 Other active plan participants ............. 10,952 10,872 ------- ------- 38,152 40,562 Fair value of plan assets ...................... -- -- ------- ------- Unfunded postretirement obligation ............. 38,152 40,562 Unrecognized net (gain)/loss ................... (1,073) 3,240 Unrecognized transition obligation ............. 29,964 31,629 ------- ------- Accrued postretirement benefit obligation ...... $ 9,261 $ 5,693 ======= ======= The components of net periodic postretirement benefit cost were as follows. Years Ended December 31, ------------------------ 1994 1993 ------- ------- Amounts in Thousands Service cost -- benefits earned during the period ..... $1,220 $1,065 Interest cost on accumulated postretirement benefit obligation .................................. 2,818 2,920 Amortization of unrecognized transition obligation .... 1,665 1,665 ------ ------ Net periodic postretirement benefit cost .............. $5,703 $5,650 ====== ====== The following assumptions were used for calculating the APBO shown in the preceding tables. 1994 1993 ------ ------- Discount Rate....................................... 8.75% 7.50% Rate of future compensation increases............... 5.00% 5.00% Assumed Health Care Cost Trend Rate: Retirees prior to reaching age 65................. 11.00% 12.00% Retirees older than 65............................ 8.00% 9.00% The assumed health care cost trend rates decline to an ultimate level of 6.25% at December 31, 1994 and 5.5% at December 31, 1993. If the health care cost trend rates were increased by 1%, the APBO as of December 31, 1994, would be increased by $4.2 million (11.0%), and the sum of the service cost and interest cost components of net periodic postretirement benefit cost for 1994 would be increased by $0.5 million (12.4%). Savings Incentive Plan Certain employees of the Corporation participate in The CIT Group Holdings, Inc. Savings Incentive Plan. This plan qualifies under section 401(k) of the Internal Revenue Code. The Corporation's expense is based on specific percentages of employee contributions and plan administrative costs and aggregated $8.0 million, $6.8 million and $6.3 million for the years 1994, 1993 and 1992, respectively. 47 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 12--Lease Commitments The Corporation has entered into noncancellable long-term lease agreements for premises and equipment. The following table presents future minimum rentals under such noncancellable leases that have initial or remaining terms in excess of one year at December 31, 1994. At December 31, Amounts in Thousands 1995 .................................................. $ 20,833 1996 .................................................. 19,244 1997 .................................................. 16,967 1998 .................................................. 15,115 1999 .................................................. 13,030 Thereafter ............................................ 82,982 -------- Total ............................................... $168,171 ======== In addition to fixed lease rentals, leases require payment of maintenance expenses and real estate taxes, both of which are subject to escalation provisions. Minimum payments have not been reduced by minimum sublease rentals of $25.8 million due in the future under noncancellable subleases. Rental expense, net of sublease income on premises and equipment, was as follows. Years Ended December 31, --------------------------------- 1994 1993 1992 ------- ------- -------- Amounts in Thousands Premises ................................ $18,361 $17,265 $17,444 Equipment ............................... 5,202 6,738 7,391 Less sublease income .................... (1,314) (1,347) (1,316) ------- ------- ------- Total ................................. $22,249 $22,656 $23,519 ======= ======= ======= Rental expense paid to CBC totaled $1.6 million, $2.1 million and $5.3 million in 1994, 1993 and 1992, respectively. Note 13--Legal Proceedings In the ordinary course of business, there are various legal proceedings pending against the Corporation. Management believes that the aggregate liabilities, if any, arising from such actions would not have a material adverse effect on the consolidated financial position of the Corporation. Note 14--Credit-Related Commitments In the normal course of meeting the financing needs of its customers, the Corporation enters into various credit-related commitments. These financial instruments generate fees and involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the Consolidated Balance Sheets. To minimize potential credit risk, the Corporation generally requires collateral and other credit-related terms and conditions from the customer. At the time credit-related commitments are granted, the fair value of the underlying collateral and guarantees approximates or exceeds the contractual amount of the commitment. In the event a customer defaults on the underlying transaction, the maximum potential loss to the Corporation represents the contractual amount outstanding less the value of all underlying collateral and guarantees. 48 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table summarizes the contractual amounts of credit-related commitments.
At December 31, -------------------------------------------------------- Due to expire -------------------------- Total Total Within After outstanding outstanding one year one year 1994 1993 ---------- -------- ----------- ----------- Amounts in Thousands Unused commitments to extend credit Loans .................................. $1,373,029 $ -- $1,373,029 $1,086,458 Leases ................................. 41,216 -- 41,216 76,434 Letters of credit and acceptances Standby letters of credit .............. 163,081 4,848 167,929 153,665 Other letters of credit ................ 230,722 -- 230,722 149,323 Acceptances ............................ 2,088 -- 2,088 2,490 Guarantees ............................... 85,670 2,982 88,652 15,415 Foreign exchange contracts ............... 1,588 -- 1,588 913
Note 15--Fair Values of Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments" ("SFAS 107") requires disclosure of the estimated fair value of the Corporation's financial instruments, excluding leasing transactions accounted for under SFAS 13. The fair value estimates are made at a discrete point in time based on relevant market information and information about the financial instrument. Since no trading market exists for a significant portion of the Corporation's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involving uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions or estimation methods may significantly affect the estimated fair values. Because of these limitations, management provides no assurance that the estimated fair values presented would necessarily be realized upon disposition or sale. Actual fair values in the marketplace are affected by other significant factors, such as supply and demand, investment trends and the motivations of buyers and sellers, which are not considered in the methodology used to determine the estimated fair values presented. In addition, fair value estimates are based on existing on-and off-balance sheet financial instruments without attempting to estimate the value of future business transactions and the value of assets and liabilities that are part of the Corporation's overall value but are not considered financial instruments. Significant assets and liabilities that are not considered financial instruments include customer base, operating lease equipment, premises and equipment, assets received in satisfaction of loans, and deferred tax balances. In addition, tax effects relating to the unrealized gains and losses (differences in estimated fair values and carrying values) have not been considered in these estimates and can have a significant effect on fair value estimates.The carrying amounts for cash and cash equivalents approximate fair value because they have short maturities and do not present significant credit risks. Credit-related commitments, as disclosed in Note 14, are primarily short term floating rate contracts whose terms and conditions are individually negotiated, taking into account the creditworthiness of the customer and the nature, accessibility and quality of the collateral and guarantees. Therefore, the fair value of credit-related commitments, if exercised, would approximate their contractual amounts. 49 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Estimated fair values, recorded carrying values and various assumptions used in valuing the Corporation's financial instruments at December 31, 1994 and December 31, 1993 are set forth below.
1994 1993 --------------------------- -------------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value ----------- ----------- ----------- ----------- Asset Asset Asset Asset (Liability) (Liability) (Liability) (Liability) ----------- ----------- ----------- ----------- Amounts in Thousands Finance Receivables--Loans(a) ............... $11,868,692 $11,905,289 $ 9,957,459 $ 10,180,795 Other Assets(b) ............................. 183,529 205,070 $232,874 $256,370 Commercial Paper(c) ......................... (5,660,194) (5,660,194) $(6,516,139) $ (6,516,139) Fixed rate notes and subordinated fixed rate notes(d) ...................... (2,923,150) (2,854,806) $(2,592,500) $(2,736,993) Variable rate notes(d) ...................... (3,812,500) (3,807,394) $(1,686,500) $(1,685,449) Credit balances of factoring clients and Accrued liabilities and payables(e) ...... (1,231,860) (1,231,860) $ (734,098) $ (734,098) Derivative financial instruments(f) ......... Interest rate swaps ...................... Off-balance sheet assets ................ (245) 92,704 4,696 15,430 Off-balance sheet liabilities ........... (5,506) (60,313) (11,205) (88,990) Cross currency interest rate swaps ....... -- 20,981 -- 15,331 Interest rate caps ....................... -- -- -- 920 Forward interest rate agreement .......... -- (553) -- -- -------------- (a) The fair value of performing fixed-rate loans was estimated based upon a present value discounted cash flow analysis, using interest rates that were being offered at the end of the year for loans with similar terms to borrowers of similar credit quality. Discount rates used in the present value calculation range from 9.42% to 10.65% for 1994 and 7.20% to 10.40% for 1993. The maturities used represent the average contractual maturities adjusted for prepayments. For floating rate loans that reprice frequently and have no significant change in credit quality, fair values approximate carrying value. Higher than normal credit risk loans, principally nonaccrual loans, were valued using estimated cash flows discounted using a rate commensurate with the associated risk. The methodologies used to estimate fair value are further limited with respect to nonaccrual, past due and other higher than normal credit risk loans because such loans are subject to significantly greater differences in the estimated amount and timing of their projected cash flows and appropriate discount rates. The net carrying value of lease finance receivables not subject to fair value disclosure totaled $2.73 billion in 1994 and $2.50 billion in 1993. (b) Other assets subject to fair value disclosure include accrued interest receivable and investment securities. The carrying amount of accrued interest receivable approximates fair value. Investment securities actively traded in a secondary market were valued using quoted available market prices. Investment securities not actively traded in a secondary market were valued based upon recent selling price or present value discounted cash flow analysis. The carrying value of other assets not subject to fair value disclosure totaled $297.8 million in 1994 and $178.2 million in 1993. Accrued interest receivable related to swap agreements totaled $5.8 million in 1994 and $9.3 million in 1993 and is included in the carrying value of interest rate swaps. (c) The estimated fair value of commercial paper approximates carrying value due to the relatively short maturities. (d) Fixed rate notes were valued using a present value discounted cash flow analysis with a discount rate approximating current market rates for issuances by the Corporation of similar term debt at the end of the year. Discount rates used in the present value calculation ranged from 6.50% to 8.60% in 1994 and 3.16% to 6.68% in 1993. The estimated fair value for variable rate notes (except for approximately $130.0 million of structured notes with imbedded caps at December 31, 1994 and $25.0 million at December 31, 1993) approximates carrying value because the debt reprices to market terms within 90 days. (e) The estimated fair value of credit balances of factoring clients approximates carrying value due to their short settlement terms. Accrued liabilities and payables with no stated maturities have an estimated fair value which approximates carrying value. The carrying value of other liabilities not subject to fair value disclosure totaled $531.2 million in 1994 and $491.2 million in 1993. Accrued interest payable related to swap agreements totaled $11.5 million in 1994 and $15.8 million in 1993 and is included in the carrying value of interest rate swaps. (f) As previously disclosed in Note -- 6 Derivative Financial Instruments, the notional principal amount of interest rate swaps designated as hedges against the Corporation's debt totaled $5.46 billion at December 31, 1994 ($3.92 billion of which related to interest rate swaps whose fair market value represented an asset and $1.54 billion related to interest rate swaps whose fair market value represented a liability, after adjusting for master netting agreements) and $3.69 billion at December 31, 1993 ($1.42 billion of assets and $2.27 billion of liabilities). The notional principal amount of cross currency interest rate swaps totaled $190 million at December 31, 1994 and $110.0 million at December 31, 1993. The notional amount of interest rate caps at December 31, 1993 totaled $2.60 billion (there were no interest rate caps outstanding at year-end 1994). Forward interest rate agreements with a notional principal amount of $124.0 million hedge the interest rate used to price the sale of an equivalent amount of finance receivables. The estimated fair values of derivative financial instruments are obtained from dealer quotes and represent the net amount receivable or payable to terminate the agreement, taking into account current market interest rates and counterparty credit risk. The amounts shown under carrying value represent the net interest receivable or payable, or the unamortized cost of these agreements.
50 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 16--Investments in Debt and Equity Securities Effective January 1, 1994, the Corporation adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115) which addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. At December 31, 1994, the book value of the Corporation's investment in debt and equity securities subject to the provision of SFAS 115 totaled $20.3 million, all of which was designated as available for sale. Unrealized gains and losses, representing the difference between amortized cost and current fair market value were immaterial. Note 17--Ownership of the Corporation The Dai-Ichi Kangyo Bank, Limited owns 60% of the issued and outstanding stock of the Corporation, which it purchased from Manufacturers Hanover Corporation ("MHC") at year-end 1989. The remaining 40% of the Corporation's issued and outstanding stock is owned by Chemical Banking Corporation ("CBC") through a subsidiary MHC Holdings (Delaware) Inc., which CBC acquired as part of the merger between MHC and CBC on December 31, 1991. At year-end 1992, the Corporation paid a one-time special dividend in the aggregate amount of $150.0 million to its stockholders, DKB and MHC Holdings (Delaware) Inc. The stockholders then immediately contributed $150.0 million to the Corporation's additional paid-in capital in proportion to their 60% and 40% common stock ownership interests. Note 18--Acquisition of Barclays Commercial Corporation On February 28, 1994, the Corporation acquired, for cash, Barclays Commercial Corporation ("BCC"), a company of the Barclays Group. BCC had total assets of approximately $700.0 million at December 31, 1993 and total factoring volume of approximately $5.0 billion for the year then ended. The business and acquired assets of BCC were transferred to The CIT Group/Commercial Services, Inc., a wholly-owned subsidiary of the Corporation, offering a full range of factoring services, including purchase of accounts receivables, credit protection, bookkeeping, and collection activities. 51 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 19--Maturity of Finance Receivables, Net of Unearned Finance Income--Contractual Basis
December 31, 1994 ----------------------------------------------------------------------- Due Within Due Within Due Within One to Two to Due After Total One Year Two Years Four Years Four Years ------------------------------------------------------------------------ Dollar Amounts in Thousands Corporate Finance Capital Equipment Financing.......... $ 4,493,531 $ 738,329 $ 591,449 $1,023,817 $2,139,936 Business Credit...................... 1,442,049 800,779 259,366 196,951 184,953 Credit Finance....................... 719,642 212,330 281,059 195,741 30,512 ------------ ----------- ----------- ---------- ---------- 6,655,222 1,751,438 1,131,874 1,416,509 2,355,401 ------------ ----------- ----------- ---------- ---------- Factoring Commercial Services.................. 1,896,233 1,852,798 23,116 16,768 3,551 Dealer and Manufacturer Financing Industrial Financing................. 4,269,693 1,413,378 1,083,677 1,273,681 498,957 Sales Financing...................... 1,402,443 199,326 163,890 261,273 777,954 ------------ ----------- ----------- ---------- ---------- 5,672,136 1,612,704 1,247,567 1,534,954 1,276,911 ------------ ----------- ----------- ---------- ---------- Consumer Finance .................... 570,772 61,683 62,275 127,202 319,612 ------------ ----------- ----------- ---------- ---------- Total.............................. $14,794,363 $5,278,623 $2,464,832 $3,095,433 $3,955,475 ============ =========== ========== ========== ========== Percent to Total -- Contractual Basis.................. 100.0% 35.68% 16.66% 20.92% 26.74% Liquidation Basis.................. 100.0% 39.62% 18.22% 20.91% 21.25%
December 31, 1993 ------------------------------------------------------------------------ Due Within Due Within Due Within One to Two to Due After Total One Year Two Years Four Years Four Years ------------ ----------- ----------- ----------- ----------- Dollar Amounts in Thousands Corporate Finance Capital Equipment Financing.......... $ 4,394,528 $ 678,035 $ 628,845 $ 928,704 $2,158,944 Business Credit...................... 1,282,133 799,359 234,717 136,328 111,729 Credit Finance....................... 645,642 242,879 257,503 145,260 0 ------------ ----------- ----------- ---------- ---------- 6,322,303 1,720,273 1,121,065 1,210,292 2,270,673 ------------ ----------- ----------- ---------- ---------- Factoring Commercial Services.................. 981,935 949,938 6,581 13,648 11,768 Dealer and Manufacturer Financing Industrial Financing................. 3,880,991 1,266,545 965,537 1,147,218 501,691 Sales Financing...................... 1,307,544 108,460 110,178 226,220 862,686 ------------ ----------- ----------- ---------- ---------- 5,188,535 1,375,005 1,075,715 1,373,438 1,364,377 ------------ ----------- ----------- ---------- ---------- Consumer Finance ................... 131,321 11,051 11,870 26,227 82,173 ------------ ----------- ----------- ---------- ---------- Total.............................. $12,624,094 $4,056,267 $2,215,231 $2,623,605 $3,728,991 ============ ========== ========== ========== ========== Percent to Total -- Contractual Basis.................. 100.0% 32.13% 17.55% 20.78% 29.54% Liquidation Basis.................. 100.0% 36.73% 19.79% 21.21% 22.27%
---------------- The maturities shown above are based on contractual terms. Also shown, for comparative purposes, are unaudited percentage data based on a liquidation basis, which gives effect to estimated prepayments. 52 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 20--Selected Quarterly Financial Data (Unaudited)
1994 ------------------------------------------------------------------------------------------- First Quarter Second Quarter Third Quarter Fourth Quarter Year ------------- -------------- ------------- -------------- -------- Amounts in Thousands Net finance income.................... $157,128 $168,283 $160,840 $163,638 $649,889 Fees and other income................. 39,857 44,925 46,966 42,617 174,365 Salaries and general operating expenses 80,549 86,446 85,194 85,747 337,936 Net credit losses..................... 25,805 23,109 18,225 17,013 84,152 Provision for finance receivables increase (decrease)............... (924) 4,302 1,816 7,595 12,789 Depreciation on operating lease equipment..................... 14,290 16,588 16,397 17,033 64,308 Provision for income taxes............ 29,230 31,792 33,587 29,332 123,941 Net income............................ $ 48,035 $ 50,971 $ 52,587 $ 49,535 $201,128 -------------------------------------------------------------------------------------------
1993 ------------------------------------------------------------------------------------------- First Quarter Second Quarter Third Quarter Fourth Quarter Year ------------- -------------- ------------- -------------- -------- Amounts in Thousands Net finance income.................... $145,468 $153,083 $154,517 $150,779 $603,847 Fees and other income................. 27,139 27,865 51,341 27,460 133,805 Salaries and general operating expenses 67,670 68,858 72,950 72,704 282,182 Net credit losses..................... 22,387 22,174 27,201 22,646 94,408 Provision for finance receivables increase.......................... 1,914 4,718 1,203 2,631 10,466 Depreciation on operating lease equipment..................... 8,340 9,585 10,099 11,775 39,799 Provision for income taxes............ 28,764 29,010 46,956 23,759 128,489 Net income............................ $ 43,532 $ 46,603 $ 47,449 $ 44,724 $182,308 -------------------------------------------------------------------------------------------
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None 53 PART III Item 10. Directors and Executive Officers of the Registrant The names and ages of all directors, executive officers and certain significant employees of the Corporation as of February 1, 1995, and a biographical summary of each such person, appear on the following pages. No family relationship exists among these persons. The executive officers were appointed by and hold office at the will of the Board of Directors.
Other Positions/Offices Current Positions/Offices Held During the Past Five Years Name and Age and Date of Appointment and Date of Appointment ------------------------ ---------------------------------------------- ----------------------------------------------------- DIRECTORS Hisao Kobayashi 59 Chairman, The CIT Group 7/92 Managing Director, DKB 6/91 Holdings, Inc. ("CIT") Director & General Manager, 9/88 Senior Managing Director, The Dai-Ichi 5/93 International Planning & Coordination Kangyo Bank, Limited ("DKB") Division, DKB Director, CIT 12/89 Albert R. Gamper Jr. 52 President & Chief Executive Officer, 12/89 Not applicable CIT Director, CIT 5/84 Hideo Kitahara 55 Director, CIT 8/94 Director & General Manager, New York 6/91 Managing Director, DKB 6/93 Branch and Cayman Branch, DKB & President, Dai-Ichi Kangyo Trust Company of New York ("DKTC-NY") General Manager, New York Branch and 5/91 Cayman Branch, DKB & President DKTC-NY General Manager, Hong Kong Branch, 6/88 DKB & President, DKB Asia Limited Michio Murata 47 Senior Executive Vice President, CIT 5/93 Executive Vice President, CIT 5/92 Director, CIT 5/92 General Manager, Gaien-Mae Branch, DKB 4/90 Assistant General Manager of Administration 11/88 and Coordination Group, International Planning & Coordination Division, DKB Joseph A. Pollicino 55 Vice Chairman, CIT 12/87 Not applicable Director, CIT 8/86 Paul N. Roth 55 Director, CIT 12/89 Not applicable Partner, Schulte Roth & Zabel 8/69 Peter J. Tobin 50 Executive Vice President & Chief 1/92 Executive Vice President & Chief 12/85 Financial Officer, Chemical Bank & Financial Officer, Manufacturers Hanover Chemical Banking Corporation Trust Company & Manufacturers Hanover Director, CIT 5/84 Corporation Toshiji Tokiwa 54 Director, CIT 4/93 Director & General Manager, 4/93 Managing Director & General Manager, 5/94 New York Branch, DKB New York Branch, DKB Director & General Manager, 6/92 International Treasury Division, DKB General Manager, 2/92 International Treasury Division, DKB General Manager, 5/90 Treasury Division, DKB Deputy General Manager, 8/87 Treasury Division, DKB Keiji Torii 47 Executive Vice President, CIT 5/93 Chief Inspector, 2/92 Director, CIT 5/93 Inspecting Division, DKB Assistant General Manager, 6/91 Securities Division, DKB Joint General Manager, 12/88 Ginza--dori Branch, DKB William H. Turner 54 Director, CIT 1/92 Vice Chairman, Chemical Bank 8/90 Senior Executive Vice President, 1/92 Group Executive, Chemical Bank 2/87 Chemical Banking Corporation
54
Other Positions/Offices Current Positions/Offices Held During the Past Five Years Name and Age and Date of Appointment and Date of Appointment ------------------------ ---------------------------------------- ------------------------------------------------------ EXECUTIVE OFFICERS (1) Thomas L. Abbate 49 Executive Vice President, Chief 8/90 Executive Vice President, Credit 3/87 Credit Officer, The CIT Group/ Administration, CIT Industrial Financing & Executive Vice President, Credit Administration, CIT William Baronoff 64 Executive Vice President & Special 2/94 Senior Vice President, 10/87 Counsel, CIT General Counsel & Secretary, CIT Joseph J. Carroll 63 Executive Vice President & Chief 3/87 Not applicable Financial Officer, CIT Emmanuel Darmanin 50 President & CEO, The CIT 12/87 Not applicable Group/Business Credit James J. Egan Jr. 55 President & CEO, The CIT 9/87 Not applicable Group/Sales Financing George J. Finguerra 54 Senior Executive Vice President, 4/91 President & CEO, The CIT 6/87 The CIT Group/Capital Group/Equipment & Project Financing Equipment Financing Thomas A. Johnson 48 General Auditor, CIT 1/90 Not applicable Joseph M. Leone 41 Executive Vice President, The CIT Group/ 6/91 Senior Vice President & Controller, 3/87 Sales Financing The CIT Group, Inc. Lawrence A. Marsiello 45 President & CEO, The CIT 1/92 President, The CIT Group/Factoring 8/90 Group/Commercial Services Executive Vice President, The CIT 12/87 Group/Business Credit Robert J. Merritt 53 President & CEO, The CIT 12/86 Not applicable Group/Industrial Financing Drew Neidorf 41 President & CEO, The CIT 2/91 President, Fidelcor Business Credit 2/90 Group/Credit Finance Corporation William M. O'Grady 55 Executive Vice President, 1/86 Not applicable Administration, CIT Thomas J. O'Rourke 56 Senior Vice President, Marketing, 10/84 Not applicable CIT Ernest D. Stein 54 Executive Vice President, 2/94 Senior Vice President & Deputy General 4/93 General Counsel & Secretary Counsel, CIT Senior Vice President & Assistant 3/92 General Counsel, CIT Executive Vice President & General 12/85 Counsel, Manufacturers Hanover Corp. Nikita Zdanow 57 President & CEO, The CIT Group/ 4/91 President & CEO, The CIT 4/85 Capital Equipment Financing Group/Capital Financing ----------------- (1) Messrs. Gamper, Murata, Torii, and Pollicino, whose biographical summaries are listed on the preceding page, are also Executive Officers of the Corporation.
Stockholders Agreement The Corporation entered into a Stockholders Agreement simultaneously with the acquisition of a sixty percent (60%) interest in the Corporation by DKB. The agreement provides for a Board of Directors consisting of ten directors, two of which shall be the Chief Executive Officer of the Corporation and the Vice Chairman of the Corporation designated by the Board of Directors. DKB, as majority stockholder, has the right to designate six nominees for director and MHC Holdings, as minority stockholder, has the right to designate two nominees for director. DKB and MHC Holdings each agreed to vote for the other's nominees for director. Regular meetings of the Board of Directors shall be held quarterly. See Item 1 "Business--General". Outside Directorships As indicated in the table, some of the Directors of the Corporation concurrently hold positions as directors or executive officers of DKB or CBC or of subsidiaries or other affiliates of the Corporation, DKB, or CBC. Mr. Turner is a director of Franklin Electronic Publishers, Inc., an electronic publishing company, Grow Group, Inc. a chemical company, and Standard Motor Products, Inc., a manufacturing company, none of which is affiliated with the Corporation and each of which is listed on the New York Stock Exchange. Mr. Kobayashi is a director of AFLAC, Inc., a life insurance company, which is not affiliated with the Corporation and which is listed on the New York Stock Exchange. A number of the Executive Officers are also directors of privately held and not-for-profit organizations not affiliated with the Corporation. 55 The table below sets forth the annual and long-term compensation, including bonuses and deferred compensation, of the President and Chief Executive Officer, the Vice Chairman, and the other three most highly compensated executive officers of the Corporation for services rendered in all capacities to the Corporation and its subsidiaries during the fiscal years ended December 31, 1994, 1993, and 1992. SUMMARY COMPENSATION TABLE
Long-Term Compensation ------------ Annual Compensation Payouts ----------------------------------------------- ---------- (a) (b) (c) (d) (e) (f) (g) Name and Other Annual LTIP All Other Principal Position Year Salary Bonus (1) Compensation(2) Payouts(3) Compensation(4) ------------------ ---- ------ ----- ------------ ------- ------------- Albert R. Gamper, Jr ............. 1994 $530,379 $600,000 $ 46,092 $295,748 $ 30,215 President and Chief 1993 $489,996 $500,000 $ 48,919 $295,748 $ 28,594 Executive Officer 1992 $458,914 $430,000 $ 64,720 $295,748 $ 23,536 Joseph A. Pollicino .............. 1994 $392,294 $425,000 $ 28,340 $177,440 $ 24,692 Vice Chairman 1993 $359,996 $355,000 $ 29,220 $177,440 $ 23,394 1992 $339,224 $300,000 $ 42,360 $177,440 $ 22,297 Nikita Zdanow .................... 1994 $261,404 $250,000 $ 14,637 $ 96,128 $ 19,456 President and Chief 1993 $242,654 $210,000 $ 15,779 $ 96,128 $ 18,700 Executive Officer, 1992 $230,231 $185,000 $ 20,333 $ 96,128 $ 17,937 Capital Equipment Financing Robert J. Merritt ................ 1994 $257,115 $210,000 $ 13,359 $ 81,312 $ 19,285 President and Chief 1993 $245,000 $160,000 $ 14,009 $ 81,312 $ 18,794 Executive Officer, . 1992 $230,577 $135,000 $ 17,504 $ 81,312 $ 17,951 Industrial Financing Lawrence A. Marsiello ............ 1994 $227,308 $200,000 $ 12,035 $ 73,948 $ 18,092 President and Chief 1993 $216,000 $140,000 $ 12,766 $ 73,948 $ 15,889 Executive Officer, 1992 $200,616 $120,000 $ 17,083 $ 73,948 $ 15,138 Commercial Services -------------- (1) Under The CIT Group Bonus Plan, cash awards for each calendar year may be paid in amounts determined by the Executive Committee of the Board of Directors in its discretion. Senior Officer awards are reviewed and approved by the Board of Directors. The amount of awards depends on a variety of factors, including corporate performance and individual performance during the calendar year for which awards are made. All or a part of a cash award for a particular year may be paid currently or deferred and paid upon retirement in up to 5 annual installments at the option of the participant. All awards are subject to appropriate taxes and deferred amounts are credited annually with interest. (2) The payments set forth under Other Annual Compensation represent the dividends paid under the CIT Career Incentive Plan. For the performance period 1990-1992 under the CIT Career Incentive Plan, Mr. Gamper held 6,666 phantom shares of stock, Mr. Pollicino 4,000 phantom shares, Mr. Marsiello 1,666 phantom shares, Mr. Merritt 1,833 phantom shares and Mr. Zdanow 2,166 phantom shares, all of which were vested and paid out pursuant to the scheduled payout as of December 31, 1994. For the performance period 1993-1995, Mr. Gamper was awarded 12,000 phantom shares of stock, Mr. Pollicino 7,500 phantom shares, Mr. Marsiello 3,225 phantom shares, Mr. Merritt 3,600 phantom shares and Mr. Zdanow 3,750 phantom shares. (3) The payments set forth under LTIP Payouts represent the payout of shares vested under the CIT Career Incentive Plan. Dividends received under this Plan are set forth under Other Annual Compensation. (The CIT Career Incentive Plan is described in "Long Term Incentive Plan".) (4) The payments set forth under All Other Compensation represent the matching employer contribution to each participant's account and an employer flexible retirement contribution to each participant's flexible retirement account under The CIT Group Holdings, Inc. Savings Incentive Plan (the "CIT Savings Plan"). The matching employer contribution is made pursuant to a compensation deferral feature of the CIT Savings Plan under Section 401(k) of the Internal Revenue Code of 1986. The payments set forth under All Other Compensation also represent contributions to each participant's account under the Supplemental Savings Plan of CIT (the "CIT Supplemental Savings Plan"), which is an unfunded, non-qualified plan.
56 LONG-TERM INCENTIVE PLAN Under The CIT Group Holdings, Inc. Career Incentive Plan (the "CIT Career Incentive Plan"), awards are granted in the form of phantom shares of stock by the Executive Committee of the Board of Directors in its discretion. Participants in the CIT Career Incentive Plan are selected by the Executive Committee from among the executives of the Corporation and its subsidiaries who are in a position to make a substantial contribution to the long-term financial success of the Corporation or its subsidiaries. Grants to the members of the Executive Committee are made by the Board of Directors. The amount of phantom shares eligible for allocation during a Performance Period is determined by the Committee. The Performance Period is at least three consecutive calendar years. The Committee determines the Performance Goals for each Performance Period, which are tied to net income growth targets and return on equity performance. The value of the phantom shares is determined at the end of each Performance Period and compared against the pre-established Performance Goals. Following the end of a Performance Period, one-third vest immediately and one-third vest at the end of each of the next two years. Cash dividends on individual shares are paid quarterly during the performance period and the vesting period based on the number of phantom shares granted to a participant. The basis of the dividend is the quarterly return on equity of the Corporation. All or a part of the value of a vested award may either be paid currently in cash or deferred in up to 5 annual installments. Deferred amounts are credited with interest at a rate determined annually by the Committee. LONG-TERM INCENTIVE PLANS AWARDS IN LAST FISCAL YEAR
Estimated Future Payouts Under Non-Stock Price-Based Plans ------------------------------------- (a) (b) (c) (d) (e) (f) Number of Shares, Performance or Units or Other Other Period Until Threshold Target Maximum Name Rights(#) Maturation or Payout ($ per share) ($ per share) ($ per share) ------------------------------------------------------------------------------------------------------------------------------------ Albert R. Gamper, Jr ........................ 12,000 1993-1995 -- 69.15 162.12 President and Chief Executive Officer Joseph A. Pollicino ......................... 7,500 1993-1995 -- 69.15 162.12 Vice Chairman Nikita Zdanow ............................... 3,750 1993-1995 -- 69.15 162.12 President and Chief Executive Officer Capital Equipment Financing Robert J. Merritt ........................... 3,600 1993-1995 -- 69.15 162.12 President and Chief Executive Officer Industrial Financing Lawrence A. Marsiello ....................... 3,225 1993-1995 -- 69.15 162.12 President and Chief Executive Officer Commercial Services
DEFINED BENEFIT PLANS Retirement plans Effective January 1, 1990, The CIT Group Holdings, Inc. Retirement Plan (the "CIT Retirement Plan") was established. Assets necessary to fund the CIT Retirement Plan were transferred from the MHC Retirement Plan, Inc., the predecessor plan in which the Corporation's employees participated. Accumulated years of benefit service under the MHC Retirement Plan are included in the benefit formula of the CIT Retirement Plan, which covers officers and salaried employees who have one year of service and have attained age 21. 57 Subject to certain exceptions, at the normal retirement age of 65, an employee's pension is 1.25% of final average salary, as defined below, for each of the first 20 years of benefit service as a participant and .75% of such salary for each year of the next 20 years of benefit service. In general, an employee who was a participant in the MHC Retirement Plan before 1985 will not receive a pension of less than 2% of final average salary for each of the first 20 years of benefit service as a participant and 1% of such salary for each of the next 20 years of benefit service, reduced by .4% of the participant's covered compensation for each year of such benefit service up to a maximum of 35 years and further reduced by the value of certain benefits under the CIT Savings Plan. An employee who was a participant in the former CIT Retirement Plan on June 30, 1986, will not receive a pension of less than 1.1% of final average salary up to certain Social Security limits plus 1.5 % of final average salary in excess of the Social Security limits, for each year of benefit service to a maximum of 35 years, reduced by certain benefits under the CIT Savings Plan. "Final average salary" is the highest average annual salary received in any five consecutive years in the last ten years. "Salary" includes all wages paid by the Corporation, including before-tax contributions made to the CIT Savings Plan and salary reduction contributions to any Section 125 Plan, but excluding commissions, bonuses, incentive compensation, overtime, reimbursement of expenses, directors' fees, severance pay, and deferred compensation. This salary is comparable to the "Salary" shown in the Summary Compensation Table. After completing 5 years of service, an employee whose employment with the participating company has terminated is entitled to a benefit, as of the employee's normal retirement date, equal to the benefit earned to the date of termination of employment, or an actuarially reduced benefit commencing at any time after age 55 if the participant is eligible for early retirement under the CIT Retirement Plan. Certain death benefits are available to eligible surviving spouses of participants. Since various laws and regulations set limits on the amounts allocable to a participant under the CIT Savings Plan and benefits under the CIT Retirement Plan, the Corporation has a supplemental retirement plan (the "CIT Supplemental Retirement Plan"). The CIT Supplemental Retirement Plan provides retirement benefits on an unfunded basis to participants (whose benefits under the CIT Retirement Plan would be restricted by the limits) of an amount equal to the difference between the annual retirement benefits permitted and the amount that would have been paid but for the limitations imposed. The amounts set forth in the table are the amounts which would be paid to employees hired before 1985 pursuant to the CIT Retirement Plan and the CIT Supplemental Retirement Plan at a participant's normal retirement age assuming the indicated final average salary and the indicated years of benefit service and assuming that the straight life annuity form of benefit will be elected and that CIT Supplemental Retirement Plan benefits will be paid in the form of an annuity. The amounts may be overstated to the extent that they do not reflect the reduction for any benefits under the CIT Savings Plan.
PENSION PLAN TABLE Final Average Annual Benefits Based on Years of Credited Service (1) Salary of -------------------------------------------------------------------------------------------- Employee 15 20 25 30 35 40 -------- -- -- -- -- -- -- $150,000 .................... 43,445 57,926 64,908 71,890 78,871 86,371 200,000 .................... 58,445 77,926 87,408 96,890 106,371 116,371 250,000 .................... 73,445 97,926 109,908 121,890 133,871 146,371 300,000 .................... 88,445 117,926 132,408 146,890 161,371 176,371 350,000 ..................... 103,445 137,926 154,908 171,890 188,871 206,371 400,000 ..................... 118,445 157,926 177,408 196,890 216,371 236,371 450,000 ..................... 133,445 177,926 199,908 221,890 243,871 266,371 500,000 ..................... 148,445 197,926 222,408 246,890 271,371 296,371 550,000 ..................... 163,445 217,926 244,908 271,890 298,871 326,371 600,000 ..................... 178,445 237,926 267,408 296,890 326,371 356,371 650,000 ..................... 193,445 257,926 289,908 321,890 353,871 386,371
-------------- (1) At December 31, 1994, Messrs. Gamper, Pollicino, Marsiello, Merritt, and Zdanow had 27, 30, 19, 20 and 27 years of benefit service, respectively. 58 Permanent Life Insurance Options Plan Twenty-two officers of the Corporation, including Mr. Gamper, Mr. Pollicino, Mr. Marsiello, Mr. Merritt and Mr. Zdanow, are participants under the Permanent Life Insurance Options Plan. The benefit provided is paid-up life insurance equal to approximately three times salary with a life annuity option payable monthly by the Corporation upon retirement. The Participant pays a portion of the annual premium and the Corporation pays the balance on behalf of the participant. The Corporation is entitled to recoup its payments from the proceeds of the policy. Upon the participant's retirement a life annuity will be payable out of the current income of the Corporation and the Corporation anticipates recovering the cost of the life annuity out of the proceeds of the life insurance policy payable upon the death of the employee. In addition to the table of pension benefits shown on the preceding page, the Corporation is conditionally obligated to make annual payments under the Permanent Life Insurance Options Plan in the amounts indicated to the following persons at retirement: Mr. Gamper, $263,130, Mr. Pollicino, $161,642, Mr. Marsiello, $136,008, Mr. Merritt, $152,383 and Mr. Zdanow, $93,616. Compensation Committee Interlocks and Insider Participation The Executive Committee of the Board of Directors functions as the compensation committee and sets the compensation for all executives except Messrs. Gamper, Pollicino, Murata and Torii. The members of the Executive Committee are as follows: Albert R. Gamper, Jr. Michio Murata Joseph A. Pollicino Peter J. Tobin Keiji Torii The Board of Directors, except for Messrs. Gamper and Pollicino, who are absent from any portion of meetings when their compensation is discussed, deliberates over the compensation of Messrs. Gamper and Pollicino. DKB determines the compensation for Messrs. Murata and Torii. Mr. Tobin is an executive of CBC. EMPLOYMENT AGREEMENTS Mr. Gamper has an employment agreement with the Corporation which provides that he will serve as the Chief Executive Officer, President, Chairman of the Executive Committee and member of the Board of Directors of the Corporation. His employment agreement initially ran for five years from December 29, 1989 and provides for the payment of an annual base salary of $400,000, to be reviewed at least annually by the Board of Directors of the Corporation, subject to increases but not to decreases. In December 1992, Mr. Gamper's employment agreement was extended for one additional year. In December 1994, Mr. Gamper's employment agreement was extended until December 1997. Mr. Gamper's employment agreement also provides for executive incentive compensation under Incentive Plans which will be designed to be no less favorable to him than the Incentive Plans in effect prior to the purchase by DKB of 60% of the Corporation's shares. Mr. Pollicino has an employment agreement with the Corporation which provides that he shall serve as the Vice Chairman and member of the Board of Directors of the Corporation. Mr. Pollicino's employment agreement initially ran for five years from December 29, 1989 and provides for the payment of an annual base salary of $300,000, to be reviewed at least annually by the Board of Directors of the Corporation, subject to increases but not to decreases. In December 1992, Mr. Pollicino's employment agreement was extended for one additional year. In December 1994, Mr. Pollicino's employment agreement was extended until December 1997. Mr. Pollicino's employment agreement also provides for executive incentive compensation under Incentive Plans which will be designed to be no less favorable to him than the Incentive Plans in effect prior to the purchase by DKB of 60% of the Corporation's shares. In addition to Mr. Gamper and Mr. Pollicino, Mr. Marsiello, Mr. Merritt and Mr. Zdanow have employment agreements with the Corporation, each of which initially ran for three years from December 29, 1989 through December 31, 1992 59 and provides for the payment of base salary of not less than the amount received prior to the purchase by DKB of 60% of the Corporations's shares, to be reviewed at least annually by the Chief Executive Officer, subject to increases but not to decreases. In December 1992 and December 1994 the employment agreements were extended for an additional two years. These employment agreements also provide for executive incentive compensation under Incentive Plans which will be designed to be no less favorable to the executive officers than the Incentive Plans in effect prior to the aforesaid share purchase by DKB. TERMINATION AND CHANGE-IN-CONTROL ARRANGEMENTS Mr. Gamper's and Mr. Pollicino's employment agreements with the Corporation provide that if their employment is terminated without cause (as defined in the agreement) or if they resign for good reason (as defined in the agreement) they will be entitled to receive severance payments equal to their base salary for the greater of thirty-six months or the remainder of the term, provided that they do not violate the non-competition or confidentiality provisions of the agreement, in which case the Corporation would have no obligation to make any remaining payments. Further, if Mr. Gamper's and Mr. Pollicino's employment is terminated without cause or if they resign for good reason, they will be entitled to receive, among other things, full employee welfare benefit coverage as if they had retired with the Corporation's consent at age 55, a pension benefit commencing at age 55 in an amount equal to their accrued benefit under the Corporation's Retirement Plan as of the date of their termination of employment as if they had attained age 55 and had retired on such date with the Corporation's consent, a lump sum equal to the then full value of their restricted stock award under the Long Term Incentive Program of Manufacturers Hanover Corporation and its subsidiaries (the "MHC Long Term Incentive Plan") and any vested award under any similar plan as may have been adopted by the Corporation, and a single life annuity equivalent to the single life annuity they would have normally been entitled to receive under the Corporation's Permanent Life Insurance Options Plan. If, during the Term of their employment agreements, a "Change of Control" occurs, Mr. Gamper and Mr. Pollicino will be entitled to receive a "Special Payment." With respect to Mr. Gamper, the amount of such Special Payment shall equal the sum of Mr. Gamper's prior four years annual bonuses under The CIT Bonus Plan and will be payable over a two year period as follows: 1/3 of the payment shall be paid within 30 days after the Change of Control; 1/3 shall be paid on or before the first anniversary of such Change of Control; and 1/3 shall be paid on or before the second anniversary date of such Change of Control. With respect to Mr. Pollicino, the amount of such Special Payment shall equal the sum of Mr. Pollicino's prior three years annual bonuses under The CIT Bonus Plan and will be payable over a two year period as follows: 1/3 of the payment shall be paid within 30 days after the Change of Control; 1/3 shall be paid on or before the first anniversary of such Change of Control; and 1/3 shall be paid on or before the second anniversary date of such Change of Control. If, during the two year period commencing on the date of such Change of Control and ending on the second anniversary of such date, Mr. Gamper's or Mr. Pollicino's employment is involuntarily terminated by the Company for cause or he voluntarily terminates employment for any reason other than "Good Reason" as defined in his employment agreement or he breaches the non-compete or confidentiality provisions of his agreement, he shall not receive any remaining unpaid installments of this "Special Payment." The employment agreements of Mr. Marsiello, Mr. Merritt and Mr. Zdanow provide that if their employment is terminated without cause (as defined in the agreement) or if they resign for good reason (as defined in the agreement), they will be entitled to receive severance payments equal to their base salary for the greater of 24 months or the remainder of the term, provided that they do not violate the non-competition or confidentiality provisions of the agreement, in which case the Corporation would have no obligation to make any remaining payments. Further, if the employment of such executive officer is terminated without cause or if he resigns for good reason, he will be entitled to continued participation in employee welfare benefit coverage for eighteen months, a lump sum equal to the then full value of his restricted stock award under the MHC Long Term Incentive Program and any vested award under any similar plan as may have been adopted by the Corporation, and if age 55 or older on the date of termination, the benefits payable under the Corporation's Permanent Life Insurance Options Plan or if under age 55 a lump sum payment which represents the equivalent of the net after-tax present value of the single life annuity that would have been payable to the individual executive officer at age 55. If, during the Term of their employment agreement, a "Change of Control" occurs, Mr. 60 Marsiello, Mr. Merritt and Mr. Zdanow will be entitled to receive a "Special Payment." The amount of such Special Payment shall equal the sum of their prior two years annual bonuses under The CIT Bonus Plan and will be payable over a two year period as follows: 1/3 of the payment shall be paid within 30 days after the Change of Control; 1/3 shall be paid on or before the first anniversary of such Change of Control; and 1/3 shall be paid on or before the second anniversary date of such Change of Control. If during the two year period commencing on the date of such Change of Control and ending on the second anniversary of such date, their employment is involuntarily terminated by the Company for cause or they voluntarily terminate employment for any reason other than "Good Reason" as defined in their employment agreements or they breach the non-compete or confidentiality provisions of their agreements, they shall not receive any remaining unpaid installments of this "Special Payment." Item 12. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth the ownership of all of the issued and outstanding common stock of the Corporation, as of March 1, 1995. Name and Address of Owner Shares Owned Percentage ------------------------- ------------ ---------- The Dai-Ichi Kangyo Bank, Limited 600 60% 1-5, Uchisaiwaicho 1-chome Chiyoda-ku, Tokyo 100 MHC Holdings (Delaware) Inc. 400 40% 270 Park Ave New York, NY 10017 No officer or director of the Corporation owns any common stock of the Corporation. In addition, the voting securities of DKB and CBC, the parent of MHC Holdings, owned by each officer and director of the Corporation individually, and all officers and directors as a group, does not exceed one percent of the issued and outstanding securities comprising and such class of stock so owned. 61 Item 13. Certain Relationships and Related Transactions. Transactions with Management and Others The Corporation has in the past and may in the future enter into certain transactions with affiliates of the Corporation. It is anticipated that such transactions will be entered into at a fair market value for the transaction. The Corporation's interest-bearing deposits generally represent overnight money market investments of excess cash that are maintained for liquidity purposes. At December 31, 1994, the Corporation had no interest-bearing deposits with DKB or CBC. From time to time, the Corporation may maintain such deposits with DKB or CBC. At December 31, 1994, the Corporation's credit line coverage with 74 banks totaled $4.675 billion of committed facilities. Additional information regarding these credit lines can be found in Item 8. Financial Statements and Supplementary Data, "Note 5--Debt". At December 31, 1994, DKB was a committed bank under a $1.25 billion Revolving Credit Facility, a $770.0 million revolving credit facility, and a $325.0 million revolving credit facility, with commitments of $60.0 million, $80.0 million and $105.0 million, respectively. DKB is a Co-Agent under the $1.25 billion and $770.0 million Revolving Credit Facilities and the Agent under the $325.0 million facility. The Corporation has entered into interest rate swap and cross currency interest rate swap agreements with financial institutions acting as principal counterparties, including affiliates of DKB and CBC. At December 31, 1994, the notional principal amount outstanding on interest rate swap agreements with DKB and CBC totaled $270.0 million and $300.0 million, respectively. The notional principal amount outstanding on foreign currency swaps totaled $140.2 million with DKB at year-end 1994. The Corporation has entered into leveraged leasing arrangements with third party loan participants, including affiliates of DKB. Amounts owed to affiliates of DKB are discussed in Item 8. Financial Statements and Supplementary Data, "Note 2--Finance Receivables". The Corporation holds a $9.0 million letter of credit from CBC as additional collateral on a $24.4 million business aircraft loan to a third party. CBC is also indebted to the Corporation in the amount of $8.0 million for financing relating to the purchase of a business aircraft by CBC. The Corporation has also entered into various noncancellable long-term facility lease agreements with CBC. Future minimum rentals under these leases are $1.6 million in 1995, $1.5 million in 1996, $.6 million in 1997, and $.1 million in 1998. At December 31, 1994, the Corporation had entered into a credit-related commitment with DKB in the form of a letter of credit totaling $6.7 million equal to the amount of the single lump sum premium necessary to provide group life insurance coverage to certain eligible retired employees. The Corporation has issued a Prospectus, dated August 8, 1994, relating to certain debt securities of the Corporation that are currently issued and outstanding with respect to which offers and sales relating to market-making transactions may be made by Chemical Securities Inc. and/or its affiliates. Chemical Securities Inc. is a wholly-owned subsidiary of CBC. Chemical Securities Inc. paid all expenses of the Corporation of preparing the Prospectus. A subsidiary of the Corporation has entered into a cash collateral loan agreement with DKB pursuant to which DKB made a loan to a cash collateral trust in order to provide additional funds to make payments on the certificates of a contracts trust. The contracts trust was formed for the purpose of securitizing certain recreational vehicle finance receivables that were acquired by the contracts trust from another subsidiary of the Corporation. At December 31, 1994, the principal amount outstanding on the cash collateral loan was $9.5 million. Schulte Roth & Zabel, of which Mr. Roth is a partner, provides legal services to the Corporation. Attorney's fees for services to the Corporation did not constitute more than 5% of the law firm's gross revenues for the last fiscal year. Schulte Roth & Zabel has been retained in the past and will continue in the future to serve as outside counsel for DKB. 62 PART IV Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K. (a) The following documents are filed with the Securities and Exchange Commission as part of this report: 1. The financial statements of The CIT Group Holdings, Inc. and Subsidiaries as set forth on pages 28-53. 2. All schedules are omitted because they are not applicable or because the required information appears in the consolidated financial statements or the notes thereto. 3. The following is an index of the Exhibits required by Item 601 of Regulation S-K filed with the Securities and Exchange Commission as part of this report: 3(a) Restated Certificate of Incorporation of The CIT Group Holdings, Inc., amended as of December 29, 1989 (incorporated by reference to Exhibit 3(a) to Form 10-K filed by the Corporation for the fiscal year ended December 31, 1989). 3(b) By-Laws of The CIT Group Holdings, Inc., amended as of December 29, 1989 (incorporated by reference to Exhibit 3(b) to Form 10-K filed by the Corporation for the fiscal year ended December 31, 1989). 4(a) Upon the request of the Securities and Exchange Commission, the Registrant will furnish a copy of all instruments defining the rights of holders of long-term debt of the Registrant. 10(a) Stockholders Agreement (incorporated by reference to Exhibit 10(a) to Form 10-K filed by the Corporation for the fiscal year ended December 31, 1989). 10(b)(1) Employment Agreement of Albert R. Gamper, Jr. (incorporated by reference to Exhibit 10(b) to Form 10-K filed by the Corporation for the fiscal year ended December 31, 1989). 10(b)(2) Extension of Employment Agreement of Albert R. Gamper, Jr. (incorporated by reference to Exhibit 10 (b)(2) to Form 10-K filed by the Corporation for the fiscal year ended December 31, 1992). 10(b)(3) Extension of Employment Agreement of Albert R. Gamper, Jr. 10(c)(1) Employment Agreement of Nikita Zdanow (incorporated by reference to Exhibit 10(c)(1) to Form 10-K filed by the Corporation for the fiscal year ended December 31, 1992). 10(c)(2) Extension of Employment Agreement of Nikita Zdanow (incorporated by reference to Exhibit 10(c)(2) to Form 10-K filed by the Corporation for the fiscal year ended December 31, 1992). 10(c)(3) Extension of Employment Agreement of Nikita Zdanow. 10(d) The CIT Group Bonus Plan (incorporated by reference to Exhibit 10(d) to Form 10-K filed by the Corporation for the fiscal year ended December 31, 1992). 10(e) The CIT Group Holdings, Inc. Career Incentive Plan (incorporated by reference to Exhibit 10(e) to Form 10-K filed by the Corporation for the fiscal year ended December 31, 1992). 10(f) The CIT Group Holdings, Inc. Supplemental Savings Plan (incorporated by reference to Exhibit 10(f) to Form 10-K filed by the Corporation for the fiscal year ended December 31, 1992). 10(g) The CIT Group Holdings, Inc. Supplemental Retirement Plan (incorporated by reference to Exhibit 10(g) to Form 10-K filed by the Corporation for the fiscal year ended December 31, 1992). 12 Computation of Ratios of Earnings to Fixed Charges. 21 Subsidiaries of the Registrant. 23 Consent of KPMG Peat Marwick LLP. 24 Powers of Attorney. 27 Financial Data Schedule (filed electronically) (b) A Current Report on Form 8-K dated October 21, 1994 was filed with the Commission reporting the Corporation's announcement of results for the quarter ended September 30, 1994. 63 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. THE CIT GROUP HOLDINGS, INC. By: /s/ ERNEST D. STEIN ......................................... Ernest D. Stein Executive Vice President, General Counsel and Secretary March 14, 1995 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature and Title Date ------------------- ---- ALBERT R. GAMPER, JR.* ................................................... President, Chief Executive Officer and Director (principal executive officer) HISAO KOBAYASHI* ................................................... Director MICHIO MURATA* ................................................... Director JOSEPH A. POLLICINO* ................................................... Director PAUL N. ROTH* ................................................... Director *By:/s/Ernest D. Stein March 14, 1995 ------------------- Ernest D. Stein Attorney-In-Fact TOMOAKI TANAKA* ................................................... Director TOSHIJI TOKIWA* ................................................... Director PETER J. TOBIN* ................................................... Director KEIJI TORII* ................................................... Director WILLIAM H. TURNER* ................................................... Director /S/ JOSEPH J. CARROLL March 14, 1995 ................................................... Joseph J. Carroll Executive Vice President and Chief Financial Officer (principal accounting officer)
Original powers of attorney authorizing Albert R. Gamper, Jr. Ernest D. Stein, and Donald J. Rapson and each of them to sign on behalf of the above mentioned directors and are held by the corporation and available for examination by the Securities and Exchange Commission pursuant to Item 302(b) of Regulation S-T. 64 EX-10 2 EXHIBIT 10B3 Exhibit 10b3 THE CIT GROUP December 20, 1994 Mr. Nikita Zdanow 1211 Avenue of the Americas New York, NY 10036 Dear Nikita: Reference is made to your employment agreement, dated December 29, 1989 (the "Employment Agreement"), with The CIT Group Holdings, Inc. (the "Company"), as amended by letter agreements dated November 16, 1992 and April 26, 1993. This letter agreement shall constitute an additional written agreement, referenced in Section 1 of the Employment Agreement, to extend the period of the Employment Agreement. You and the Company hereby agree to extend the "Term" (as such term is defined in the Employment Agreement) of the Employment Agreement for a two-year period from December 31, 1994 so that the Term of the Employment Agreement shall end on December 31, 1996. Accordingly, effective immediately, the defined word "Term" as used in the Employment Agreement shall mean the period beginning on the Closing Date (as defined therein) and, except as otherwise provided in paragraph 4 of the Employment Agreement, ending on December 31, 1996. Further, if during the Term a "Change of Control" occurs as defined hereafter, the Term of your employment shall automatically be extended until the second anniversary date of such Change of Control. In addition to the compensation and benefits already required under the provisions of your Employment Agreement, if a Change of Control should occur on or prior to December 31, 1996, you will receive a special payment (the "Special Payment"). The amount of such Special Payment shall equal the sum of your prior two years' annual bonuses under The CIT Group Bonus Plan and will be payable over a two-year period as follows: 1/3 of the payment shall be paid to you within 30 days after the date of the Change of Control: 1/3 shall be paid to you on or before the first anniversary date of such Change of Control; and 1/3 shall be paid to you on or before the second anniversary date of such Change of Control. Notwithstanding the foregoing provisions of this paragraph, all or any part of such Special Payment shall not be payable to you: (1) to the extend that such Special Payment or any part thereof, when aggregated with any other benefit or compensation payment due or owing to you, on account of a Change of Control, under the Employment Agreement or any other benefit program maintained by the Company, would cause you to be subject to taxation under Section 4999 of the Internal Revenue Code of 1986, as amended, or (2) if during the two-year period commencing on the date of a Change of Control, and ending on the second anniversary of such date: (i) you employment is involuntarily terminated by the Company for "Cause" as defined in the Employment Agreement; (ii) you voluntarily terminate employment with the Company for any reason other than "Good Reason" as defined in the Employment Agreement; or (iii) you breach any non-competition or confidentiality covenant under Section 6 of the Employment Agreement. For purposes of this letter agreement, a termination of your employment on account of your death, disability or retirement on or after age 55 under the terms of the Company's retirement plan shall constitute a termination for "Good Reason." In the absence of a separate beneficiary designation, your beneficiary under the Group Life Insurance Plan will receive any Special Payment remaining to be paid upon your death. Mr. Nikita Zdanow December 20, 1994 Page 2 For purposes of this letter agreement, a "Change of Control" shall be deemed to have occurred if: (1) any Person or Group other than DKB or Chemical Bank or their Affiliates becomes the Beneficial Owner, directly or indirectly, of securities representing a majority of the combined voting power of the Company's then outstanding securities generally entitled to vote for the election of directors (capitalized terms not otherwise defined herein are used as defined under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder); or (2) as a result of a cash tender offer, merger or other business combination, sales of assets or contested election, or any combination of the foregoing transactions (a "Transaction"), the personas who were directors of the Company immediately before the Transaction shall cease to constitute a majority of the Board of the Company or of any successor to the Company. Notwithstanding the foregoing, a Change of Control resulting from a Change of Control of DKB or Chemical Bank shall not require the extension of the Term hereunder. Except as otherwise specified herein, all of the terms of the Employment Agreement shall remain in full force and effect. THIS LETTER AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN THAT STATE. This letter agreement may be executed in two counterparts each of which will be deemed an original but all of which together will constitute one and the same instrument. Please indicate your agreement with the terms of this letter agreement by signing and returning the enclosed copy thereof, whereupon this letter agreement will constitute a binding extension of the Employment Agreement between you and the Company. Very truly yours, THE CIT GROUP HOLDINGS, INC. /s/ Albert R. Gamper, Jr. By: -------------------------------- Albert R. Gamper, Jr. President and Chief Executive Officer Accepted and Agreed this 28 day of December, 1994: [Illegible] ------------------------- (Executive's Signature) EX-10 3 EXHIBIT 10BC Exhibit 10c3 THE CIT GROUP March 9, 1995 Mr. Albert R. Gamper, Jr. 650 CIT Drive Livingston, NJ 07039 Dear Al: Reference is made to your employment agreement, dated December 29, 1989 (the "Employment Agreement"), with The CIT Group Holding, Inc. (the "Company"), as amended by letter agreements dated November 16, 1992 and April 26, 1993. This letter agreement shall constitute an additional written agreement, referenced in Section 1 of the Employment Agreement, to extend the period of the Employment Agreement. You and the Company hereby agree to extend the "Term" (as such term is defined in the Employment Agreement) of the Employment Agreement for a two-year period from December 31, 1995 so that the Term of the Employment Agreement shall end on December 31, 1997. Accordingly, effective immediately, the defined word "Term" as used in the Employment Agreement shall mean the period beginning on the Closing Date (as defined therein) and, except as otherwise provided in paragraph 4 of the Employment Agreement, ending on December 31, 1997. If, during the Term a "Change of Control" occurs, as defined in Section 7(a) of your Employment Agreement, you will be entitled to receive, in addition to the compensation and benefits already required under the provisions of your Employment Agreement, a special payment (the "Special Payment"). The amount of such Special Payment shall equal the sum of your prior four years' annual bonuses under The CIT Bonus Plan and will be payable over a two year period as follows: 1/3 of the payment shall be paid to you within 30 days after the date of the Change of Control; 1/3 shall be paid to you on or before the first anniversary date of such Change of Control; and 1/3 shall be paid to you on or before the second anniversary date of such Change of Control. Notwithstanding the foregoing provisions of this paragraph, any remaining installment of such Special Payment shall not be payable to you, if during the two-year period commencing on the date of such Change of Control and ending on the second anniversary of such date: (i) your employment is involuntarily terminated by the Company for "Cause", as defined in the Employment Agreement; (ii) you voluntarily terminate employment with the Company for any reason other than "Good Reason", as defined in the Employment Agreement; or (iii) you breach any non-competition or confidentiality covenant under Section 6 of the Employment Agreement. For purposes of this letter agreement, the termination of your employment on account of your death, disability or retirement on or after age 55 under the terms of the Company's retirement plan, shall constitute a termination for Good Reason. In the absence of a separate beneficiary designation, your beneficiary under the Group Life Insurance Plan will receive any Special Payment remaining to be paid upon your death. Except as otherwise specified herein, all of the terms of the Employment Agreement shall remain in full force and effect. THIS LETTER AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN THAT STATE. This letter agreement may be executed in two counterparts each of which will be deemed an original but all of which together will constitute one and the same instrument. Mr. Albert R. Gamper, Jr. December 20, 1994 Page 2 Please indicate your acceptance of the terms of this letter agreement by signing and returning the enclosed copy thereof, whereupon this letter agreement will constitute a binding extension of the Employment Agreement between you and the Company. Very truly yours, THE CIT GROUP HOLDINGS, INC By: /s/ Hisao Kobayashi --------------------- Hisao Kobayashi Chairman of the Board Accepted and Agreed this 29 day of December, 1994: [Illegible] ------------------------- (Executive's Signature) EX-12 4 EXHIBIT 12 Exhibit 12 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Years Ended December 31, ------------------------------ 1994 1993 1992 ---- ---- ---- Dollar Amounts in Thousands Net income ................................................... $201,128 $182,308 $162,300 Provision for income taxes ................................... 123,941 128,489 105,311 Extraordinary item--loss on early extinguishment of debt, net of income tax benefit ................................. -- -- 4,241 -------- -------- -------- Earnings before provision for income taxes and extraordinary item ....................................................... 325,069 310,797 271,852 -------- -------- -------- Fixed Charges: Interest and debt expenses on indebtedness ............... 613,957 508,006 552,017 Interest factor--one third of rentals on real and personal properties ........................................... 7,855 8,001 8,278 -------- -------- -------- Total fixed charges ...................................... 621,812 516,007 560,295 -------- -------- -------- Total earnings before provisions for income taxes, extraordinary item, and fixed charges ............ $946,881 $826,804 $832,147 ======== ======== ======== Ratios of Earnings to Fixed Charges .......................... 1.52 1.60 1.49
EX-21 5 EXHIBIT 21 EXHIBIT 21 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT December 31, 1994
Jurisdiction of Name of Subsidiary Incorporation ------------------ --------------- The CIT Group/Credit Finance, Inc.............................................. Delaware The CIT Group/Sales Financing, Inc............................................. Delaware The CIT Group/Consumer Finance, Inc............................................ Delaware Equipment Credit Services, Inc................................................. Delaware North American Exchange, Inc................................................... Delaware C.I.T. Corporation (Maine)..................................................... Maine C.I.T. Corporation of the South, Inc. ......................................... Delaware William Iselin & Company, Inc. (N.Y.).......................................... New York The CIT Group/Commercial Services, Inc. (Del.)*................................ Delaware The CIT Group/Capital Transportation, Inc.................................. Delaware The CIT Group/Commercial Services, Inc. ....................................... New York CIT Foreign Sales Corporation One, Ltd..................................... Barbados CIT FSC Two, Ltd........................................................... Bermuda CIT FSC Three, Ltd......................................................... Bermuda CIT FSC Four, Ltd.......................................................... Bermuda CIT FSC Seven, Ltd......................................................... Bermuda CIT FSC Nine, Ltd.......................................................... Bermuda CIT FSC Ten, Ltd........................................................... Bermuda The CIT Group/Capital Aircraft, Inc........................................ Delaware The CIT Group/Factoring One, Inc........................................... New York CIT FSC Five, Ltd...................................................... Bermuda The CIT Group/BCC Inc.*.................................................... Delaware The CIT Group, Inc............................................................. New Jersey The CIT Group/Capital Investments, Inc......................................... New York Assurers Exchange, Inc......................................................... Delaware C.I.T. Financial Management, Inc............................................... New York The CIT Group/Capital Equipment Financing, Inc................................. Delaware Banord Limited............................................................. United Kingdom Equipment Acceptance Corporation........................................... New York The CIT Group/Asset Management Inc............................................. Delaware Commercial Investment Trust Corporation........................................ Delaware The CIT Group/Business Credit, Inc............................................. New York Meinhard-Commercial Corporation................................................ New York 650 Management Corp............................................................ New Jersey The CIT Group/Equity Investments, Inc.......................................... New Jersey The CIT Group/Venture Capital, Inc......................................... New Jersey The CIT Group/Equipment Financing, Inc......................................... New York C.I.T. Realty Corporation.................................................. Delaware CIT FSC Eleven, Ltd........................................................ Bermuda CIT FSC Twelve, Ltd........................................................ Bermuda CIT FSC Fourteen, Ltd...................................................... Bermuda CIT FSC Fifteen, Ltd....................................................... Bermuda CIT FSC Sixteen, Ltd....................................................... Bermuda CIT FSC Seventeen, Ltd..................................................... Bermuda CIT FSC Eighteen, Ltd...................................................... Bermuda CIT FSC Nineteen, Ltd...................................................... Bermuda The CIT Group/El Paso Refinery, Inc........................................ Delaware The CIT Group/Industrial Properties, Inc................................... Delaware Bunga Bebaru, Ltd.......................................................... Bermuda CIT Leasing (Bermuda), Ltd................................................. Bermuda The CIT Group/Corporate Aviation, Inc...................................... Delaware C.I.T. Leasing Corporation................................................. Delaware CIT FSC Six, Ltd....................................................... Bermuda CIT FSC Eight, Ltd..................................................... Bermuda The CIT Group Securitization Corporation....................................... Delaware The CIT Group/Consumer Finance, Inc. (NY)...................................... New York C.I.T. Financial International, N. V........................................... Netherlands Antilles C.I.T. Financial Overseas, B. V................................................ Netherlands Antilles The CIT Group Securitization Corporation II.................................... Delaware The CIT Group/Consumer Finance, Inc. (IL)...................................... Illinois ------------------- * These subsidiaries were merged into The CIT Group/Commercial Services, Inc. as of the close of business on December 31, 1994.
EX-23 6 EXHIBIT 23 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT To the Board of Directors of The CIT Group Holdings, Inc.: We consent to incorporation by reference in Registration Statements No. 33-50666, No. 33-58418, No. 33-52685 and No. 33-85224 on Form S-3 of The CIT Group Holdings, Inc. of our report dated January 17, 1995, relating to the consolidated balance sheets of The CIT Group Holdings, Inc. and subsidiaries as of December 31, 1994 and 1993, 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, 1994, which report appears in the December 31, 1994 Annual Report on Form 10-K of The CIT Group Holdings, Inc. Our report on the consolidated financial statements refers to a change in the method of accounting for postretirement benefits other than pensions in 1993. KPMG PEAT MARWICK LLP Short Hills, New Jersey March 13, 1995 EX-24 7 EXHIBIT 24 Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of THE CIT GROUP HOLDINGS, INC., a Delaware corporation, which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Act of 1934, as amended, an annual report on Form 10-K, hereby constitutes and appoints ALBERT R. GAMPER, JR., ERNEST D. STEIN, and DONALD J. RAPSON his true and lawful attorneys-in-fact and agents, and each of them with full power to act without the others, his true and lawful attorneys-in-fact and agents, for him and in his name, place, and stead, in any and all capacities, to sign such Form 10-K and any and all amendments thereof, with power where appropriate to affix the corporate seal of said corporation thereto and to attest to said seal, and to file such Form 10-K and each such amendment, with all exhibits thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person and hereby ratifies and confirms all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereby. IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the 3rd day of March, 1995. /s/ Albert R. Gamper, Jr. ---------------------------------- Albert R. Gamper, Jr. POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of THE CIT GROUP HOLDINGS, INC., a Delaware corporation, which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Act of 1934, as amended, an annual report on Form 10-K, hereby constitutes and appoints ALBERT R. GAMPER, JR., ERNEST D. STEIN, and DONALD J. RAPSON his true and lawful attorneys-in-fact and agents, and each of them with full power to act without the others, his true and lawful attorneys-in-fact and agents, for him and in his name, place, and stead, in any and all capacities, to sign such Form 10-K and any and all amendments thereof, with power where appropriate to affix the corporate seal of said corporation thereto and to attest to said seal, and to file such Form 10-K and each such amendment, with all exhibits thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person and hereby ratifies and confirms all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereby. IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the 3rd day of March, 1995. /s/ Toshiji Tokiwa ---------------------------------- Toshiji Tokiwa POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of THE CIT GROUP HOLDINGS, INC., a Delaware corporation, which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Act of 1934, as amended, an annual report on Form 10-K, hereby constitutes and appoints ALBERT R. GAMPER, JR., ERNEST D. STEIN, and DONALD J. RAPSON his true and lawful attorneys-in-fact and agents, and each of them with full power to act without the others, his true and lawful attorneys-in-fact and agents, for him and in his name, place, and stead, in any and all capacities, to sign such Form 10-K and any and all amendments thereof, with power where appropriate to affix the corporate seal of said corporation thereto and to attest to said seal, and to file such Form 10-K and each such amendment, with all exhibits thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person and hereby ratifies and confirms all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereby. IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the 3rd day of March, 1995. /s/ Keiji Torii ---------------------------------- Keiji Torii POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of THE CIT GROUP HOLDINGS, INC., a Delaware corporation, which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Act of 1934, as amended, an annual report on Form 10-K, hereby constitutes and appoints ALBERT R. GAMPER, JR., ERNEST D. STEIN, and DONALD J. RAPSON his true and lawful attorneys-in-fact and agents, and each of them with full power to act without the others, his true and lawful attorneys-in-fact and agents, for him and in his name, place, and stead, in any and all capacities, to sign such Form 10-K and any and all amendments thereof, with power where appropriate to affix the corporate seal of said corporation thereto and to attest to said seal, and to file such Form 10-K and each such amendment, with all exhibits thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person and hereby ratifies and confirms all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereby. IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the 3rd day of March, 1995. /s/ Hisao Kobayashi ---------------------------------- Hisao Kobayashi POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of THE CIT GROUP HOLDINGS, INC., a Delaware corporation, which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Act of 1934, as amended, an annual report on Form 10-K, hereby constitutes and appoints ALBERT R. GAMPER, JR., ERNEST D. STEIN, and DONALD J. RAPSON his true and lawful attorneys-in-fact and agents, and each of them with full power to act without the others, his true and lawful attorneys-in-fact and agents, for him and in his name, place, and stead, in any and all capacities, to sign such Form 10-K and any and all amendments thereof, with power where appropriate to affix the corporate seal of said corporation thereto and to attest to said seal, and to file such Form 10-K and each such amendment, with all exhibits thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person and hereby ratifies and confirms all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereby. IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the 3rd day of March, 1995. /s/ Michio Murata ---------------------------------- Michio Murata POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of THE CIT GROUP HOLDINGS, INC., a Delaware corporation, which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Act of 1934, as amended, an annual report on Form 10-K, hereby constitutes and appoints ALBERT R. GAMPER, JR., ERNEST D. STEIN, and DONALD J. RAPSON his true and lawful attorneys-in-fact and agents, and each of them with full power to act without the others, his true and lawful attorneys-in-fact and agents, for him and in his name, place, and stead, in any and all capacities, to sign such Form 10-K and any and all amendments thereof, with power where appropriate to affix the corporate seal of said corporation thereto and to attest to said seal, and to file such Form 10-K and each such amendment, with all exhibits thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person and hereby ratifies and confirms all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereby. IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the 3rd day of March, 1995. /s/ Joseph A. Pollicino ---------------------------------- Joseph A. Pollicino POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of THE CIT GROUP HOLDINGS, INC., a Delaware corporation, which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Act of 1934, as amended, an annual report on Form 10-K, hereby constitutes and appoints ALBERT R. GAMPER, JR., ERNEST D. STEIN, and DONALD J. RAPSON his true and lawful attorneys-in-fact and agents, and each of them with full power to act without the others, his true and lawful attorneys-in-fact and agents, for him and in his name, place, and stead, in any and all capacities, to sign such Form 10-K and any and all amendments thereof, with power where appropriate to affix the corporate seal of said corporation thereto and to attest to said seal, and to file such Form 10-K and each such amendment, with all exhibits thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person and hereby ratifies and confirms all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereby. IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the 3rd day of March, 1995. /s/ Paul N. Roth ---------------------------------- Paul N. Roth POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of THE CIT GROUP HOLDINGS, INC., a Delaware corporation, which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Act of 1934, as amended, an annual report on Form 10-K, hereby constitutes and appoints ALBERT R. GAMPER, JR., ERNEST D. STEIN, and DONALD J. RAPSON his true and lawful attorneys-in-fact and agents, and each of them with full power to act without the others, his true and lawful attorneys-in-fact and agents, for him and in his name, place, and stead, in any and all capacities, to sign such Form 10-K and any and all amendments thereof, with power where appropriate to affix the corporate seal of said corporation thereto and to attest to said seal, and to file such Form 10-K and each such amendment, with all exhibits thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person and hereby ratifies and confirms all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereby. IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the 3rd day of March, 1995. /s/ Hideo Kitahara ---------------------------------- Hideo Kitahara POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of THE CIT GROUP HOLDINGS, INC., a Delaware corporation, which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Act of 1934, as amended, an annual report on Form 10-K, hereby constitutes and appoints ALBERT R. GAMPER, JR., ERNEST D. STEIN, and DONALD J. RAPSON his true and lawful attorneys-in-fact and agents, and each of them with full power to act without the others, his true and lawful attorneys-in-fact and agents, for him and in his name, place, and stead, in any and all capacities, to sign such Form 10-K and any and all amendments thereof, with power where appropriate to affix the corporate seal of said corporation thereto and to attest to said seal, and to file such Form 10-K and each such amendment, with all exhibits thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person and hereby ratifies and confirms all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereby. IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the 3rd day of March, 1995. /s/ Peter J. Tobin ---------------------------------- Peter J. Tobin POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of THE CIT GROUP HOLDINGS, INC., a Delaware corporation, which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Act of 1934, as amended, an annual report on Form 10-K, hereby constitutes and appoints ALBERT R. GAMPER, JR., ERNEST D. STEIN, and DONALD J. RAPSON his true and lawful attorneys-in-fact and agents, and each of them with full power to act without the others, his true and lawful attorneys-in-fact and agents, for him and in his name, place, and stead, in any and all capacities, to sign such Form 10-K and any and all amendments thereof, with power where appropriate to affix the corporate seal of said corporation thereto and to attest to said seal, and to file such Form 10-K and each such amendment, with all exhibits thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person and hereby ratifies and confirms all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereby. IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the 3rd day of March, 1995. /s/ William H. Turner ---------------------------------- William H. Turner EX-27 8 FINANCIAL DATA SCHEDULE
5 1,000 YEAR YEAR DEC-31-1993 DEC-31-1993 DEC-31-1993 DEC-31-1994 101,554 6,558 0 0 12,624,094 14,794,363 169,378 192,421 0 0 0 0 0 0 0 0 13,728,481 15,963,490 0 0 4,279,000 6,735,650 250,000 250,000 0 0 0 0 1,442,235 1,543,027 13,728,481 15,963,490 0 0 1,245,658 1,438,211 0 0 282,182 337,936 0 0 104,874 96,941 508,006 613,957 310,797 325,069 128,489 123,941 182,308 201,128 0 0 0 0 0 0 182,308 201,128 0 0 0 0