-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VjrFBUL5sE+UjbLc/pCQbTbw0gmhiRcypeZDHURdnyBaKByz5nJN5Gfc6QxVjjfO bcNEiKDjAneXK3C7wuNaXg== 0000891092-97-000053.txt : 19970307 0000891092-97-000053.hdr.sgml : 19970307 ACCESSION NUMBER: 0000891092-97-000053 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970306 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CIT GROUP HOLDINGS INC /DE/ CENTRAL INDEX KEY: 0000020388 STANDARD INDUSTRIAL CLASSIFICATION: SHORT-TERM BUSINESS CREDIT INSTITUTIONS [6153] IRS NUMBER: 132994534 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-01861 FILM NUMBER: 97551847 BUSINESS ADDRESS: STREET 1: 1211 AVE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10036 BUSINESS PHONE: 2125361950 MAIL ADDRESS: STREET 1: 1211 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10036 FORMER COMPANY: FORMER CONFORMED NAME: CIT FINANCIAL CORP/OLD/ DATE OF NAME CHANGE: 19860512 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 For the fiscal year ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------- Commission file number 1-1861 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. 80% of the voting stock of the Registrant is owned by The Dai-Ichi Kangyo Bank, Limited and 20% by CBC Holding (Delaware) Inc., a wholly-owned subsidiary of The Chase Manhattan 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, 1997--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 .............. 11 Item 8. Financial Statements and Supplementary Data ..................... 26 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........................ 49 Part III Item 10. Directors and Executive Officers of the Registrant .............. 50 Item 11. Executive Compensation .......................................... 52 Long-Term Incentive Plan ................................... 53 Defined Benefit Plans ...................................... 53 Employment Agreements ...................................... 55 Termination and Change-in-Control Arrangements ............. 56 Item 12. Security Ownership of Certain Beneficial Owners and Management .. 57 Item 13. Certain Relationships and Related Transactions .................. 57 Part IV Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K .. 58 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 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 which offer commercial and consumer financing, and factoring products and services to clients. The Corporation had 2,950 employees at December 31, 1996, up from 2,750 employees at December 31, 1995. The Dai-Ichi Kangyo Bank, Limited ("DKB") owns eighty percent (80%) of the issued and outstanding shares of common stock of the Corporation. DKB purchased a sixty percent (60%) common stock interest in the Corporation from Manufacturers Hanover Corporation ("MHC") at year-end 1989 and acquired an additional twenty percent (20%) common stock interest in the Corporation on December 15, 1995 from CBC Holding (Delaware) Inc. (formerly known as MHC Holdings (Delaware) Inc.) ("CBC Holding"), a wholly owned subsidiary of Chemical Banking Corporation ("CBC"). The Chase Manhattan Corporation ("Chase") acquired CBC Holding as part of the merger between Chase and CBC on March 31, 1996 and continues to own the remaining twenty percent (20%) common stock interest in the Corporation through CBC Holding. DKB has an option which expires on December 15, 2000 to purchase the remaining twenty percent (20%) common stock interest from Chase. In accordance with a stockholders' agreement among DKB, Chase, as successor to CBC, and the Corporation, dated as of December 29, 1989, as amended by an Amendment to Stockholders' Agreement, dated December 15, 1995 (the "Stockholders' Agreement"), one nominee of the Board of Directors is designated by Chase. The Stockholders' Agreement also contains restrictions with respect to the transfer of the stock of the Corporation to third parties. BUSINESS AND SERVICES Commercial Lending and Leasing Business Credit 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, refinancings, debtor-in-possession and turnaround financings. 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. Capital Equipment Financing The CIT Group/Capital Equipment Financing specializes in customized secured financing and leasing for medium-sized and large corporations in the form of single investor leases, debt and equity portions of leveraged leases, operating leases, direct loans, and sale and leaseback arrangements for major capital equipment and other income producing assets. Such business is developed directly with large companies and through third parties. To strategically target 1 marketing efforts on the aerospace, rail, maritime and energy industries, The CIT Group/Capital Equipment Financing, on January 1, 1997, transferred $1.5 billion of equipment financing and leasing assets, along with certain of its operations and employees, to The CIT Group/Industrial Financing. The CIT Group/Capital Equipment Financing is headquartered in New York City, with a full service office in New York and additional sales coverage in certain key markets. Credit Finance 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, in refinancings, acquisitions, leveraged buyouts, reorganizations, restructurings, turnarounds and Chapter 11 financing and confirmation plans. 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 offices in five other cities. Industrial Financing The CIT Group/Industrial Financing offers secured equipment financing and leasing products, including direct secured loans, leases, revolving lines of credit, sale and leaseback arrangements, vendor financing and specialized wholesale and retail financing for distributors and manufacturers, portfolio acquisition, business aircraft financing, third party financing and medical equipment financing. As described above, the $1.5 billion portfolio transfer from The CIT Group/Capital Equipment Financing and related realignment of staffing will create a single, nationwide equipment financing franchise. The CIT Group/Industrial Financing is headquartered in Livingston, New Jersey with a network of offices in twenty-two cities, including Tempe, Arizona and Atlanta, Georgia, which also serve as regional and customer service offices. Commercial Services The CIT Group/Commercial Services, one of the largest factors in the United States, offers a full range of domestic and international customized credit protection and lending services. These services include factoring, working capital and term loans, receivable management outsourcing, bulk purchases of accounts receivable, import and export financing and letter of credit programs. 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. Consumer Related Lending Consumer Finance The CIT Group/Consumer Finance offers loans and lines of credit secured primarily by first or second mortgages on residential real estate. The CIT Group/Consumer Finance originates business through various channels including direct marketing to consumers, mortgage brokers and correspondent institutional relationships. This business is headquartered in Livingston, New Jersey with twenty-five offices servicing brokers and consumers in over forty states. Three regional correspondent offices purchase loans from third parties. A national home equity center engages in nationwide direct marketing. Servicing and collection support is provided by The CIT Group/Sales Financing asset service center located in Oklahoma City, Oklahoma and by The CIT Group/Consumer Finance quality control and document center located in Marlton, New Jersey. Sales Financing The CIT Group/Sales Financing, working through dealers, manufacturers and brokers provides retail secured financing on a nationwide basis for the purchase of recreational vehicles, manufactured housing and recreational boats. The CIT Group/Sales Financing also purchases portfolios of these assets from banks, savings and loans, investment banks and others, offers to manufacturers retail and wholesale "private label" financing programs, and provides servicing for portfolios owned by other financial institutions, U.S. government agencies, and securitization trusts. The CIT Group/Sales Financing is headquartered in 2 Livingston, New Jersey with an asset service center in Oklahoma City, Oklahoma, and covers the United States from six regional business centers located in Atlanta, Boston, Kansas City, Sacramento, Oklahoma City and Seattle. Other Equity Investments and Venture Capital The CIT Group/Equity Investments and its subsidiary The CIT Group/Venture Capital originate and participate in merger and acquisition transactions, purchasing private equity and equity-related securities, and arranging transaction financing. This unit also invests 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 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 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 DKB is a bank holding company within the meaning of the Bank Holding Company Act of 1956 (the "Act"), and 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 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 3 collection, repossession, and claims handling procedures and other trade practices. In most states the consumer sales finance and loan business and the consumer mortgage loan and 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 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 13--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 position, results of operations or liquidity of the Corporation. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of security holders during the fourth quarter of 1996. 4 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The outstanding common stock of the Corporation is owned 80% by DKB and 20% by CBC Holding. There is no public trading market for the Corporation's common stock. Commencing with the 1996 second quarter, the Corporation operates under a policy requiring the payment of dividends by the Corporation equal to and not exceeding 30% of net operating earnings on a quarterly basis. Previously, the Corporation's dividend policy required payment of dividends of 50% of net operating earnings on a quarterly basis. Such dividends are paid to DKB and CBC Holding based upon their respective stock ownership in the Corporation. On December 24, 1996, with consent of the Corporation's stockholders, the Corporation paid a special dividend in the aggregate amount of $165.0 million to its stockholders. Each stockholder immediately contributed an aggregate amount equal to the special dividend to the Corporation as additional paid-in-capital. The Corporation intends to continue to operate under the 30% dividend policy as set forth above. Below are the dividends paid during the past two years: Dividends Paid 1996 1995 ------------- ---- ---- Amounts in Millions Regular Dividends First Quarter .......................... $ 37.9 $ 26.2 Second Quarter ......................... 22.5 28.6 Third Quarter .......................... 19.7 29.0 Fourth Quarter ......................... 18.8 20.3 ------ ------ Sub-total ........................ 98.9 104.1 Special Dividend ....................... 165.0 -- ------ ------ Total ............................ $ 263.9 $ 104.1 ====== ====== The fourth quarter dividend is usually paid on the basis of actual operating earnings for October and November and an estimate of operating earnings for December. However, the dividend for the fourth quarter of 1995 was paid on the basis of actual operating earnings for October and November only, in order to make payment prior to the sale by CBC Holding to DKB of a twenty percent (20%) common stock interest in the Corporation. During the first quarter of 1996, the Corporation declared and paid a dividend of $8.9 million based on actual earnings for December 1995. Stockholders' equity at December 31, 1996 was $2.1 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. 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, ------------------------------------------------------------------ 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- Dollar Amounts in Millions Finance income ........................... $1,646.2 $1,529.2 $1,263.8 $1,111.9 $1,091.5 Interest expense ......................... 848.3 831.5 614.0 508.0 552.0 ------- ------- ------- ------- ------- Net finance income ...................... 797.9 697.7 649.8 603.9 539.5 Fees and other income ................... 244.1 184.7 174.4 133.8 113.8 ------- ------- ------- ------- ------- Operating revenue ....................... 1,042.0 882.4 824.2 737.7 653.3 ------- ------- ------- ------- ------- Salaries and employee benefits 223.0 193.4 185.8 152.1 137.9 General operating expenses ............... 170.1 152.3 152.1 130.1 123.7 ------- ------- ------- ------- ------- Salaries and general operating expenses .............................. 393.1 345.7 337.9 282.2 261.6 Provision for credit losses .............. 111.4 91.9 96.9 104.9 103.2 Depreciation on operating lease equipment ....................... 121.7 79.7 64.4 39.8 16.7 ------- ------- ------- ------- ------- Operating expenses ....................... 626.2 517.3 499.2 426.9 381.5 ------- ------- ------- ------- ------- Income before provision for income taxes and extraordinary item .......... 415.8 365.1 325.0 310.8 271.8 Provision for income taxes ............... 155.7 139.8 123.9 128.5 105.3 ------- ------- ------- ------- ------- Income before extraordinary item ......... 260.1 225.3 201.1 182.3 166.5 Extraordinary item - loss on early extinguishment of debt, net of income tax benefit .................... -- -- -- -- (4.2) ------- ------- ------- ------- ------- Net income ............................... $260.1 $ 225.3 $ 201.1 $ 182.3 $ 162.3 ======= ======= ======= ======= ======= Ratio of earnings to fixed charges ....... 1.49 1.44 1.52 1.60 1.49
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, ------------------------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- ------- -------- -------- Dollar Amounts in Millions Finance income (a) ..................... 9.90% 9.90% 9.19% 8.93% 9.40% Interest expense (a) ................... 5.08 5.36 4.42 4.00 4.67 --------- -------- -------- -------- -------- Net finance income .................... 4.82 4.54 4.77 4.93 4.73 Fees and other income .................. 1.48 1.20 1.28 1.09 1.00 --------- -------- -------- -------- -------- Operating revenue ..................... 6.30 5.74 6.05 6.02 5.73 --------- -------- -------- -------- -------- Salaries and employee benefits ......... 1.35 1.26 1.36 1.24 1.21 General operating expenses ............. 1.03 0.99 1.12 1.06 1.09 --------- --------- --------- --------- --------- Salaries and general operating expenses ............................... 2.38 2.25 2.48 2.30 2.30 Provision for credit losses ............ 0.67 0.60 0.71 0.86 0.90 Depreciation on operating lease equipment ........................... 0.74 0.52 0.47 0.32 0.15 -------- -------- -------- -------- -------- Operating expenses ..................... 3.79 3.37 3.66 3.48 3.35 -------- -------- -------- -------- -------- Income before provision for income taxes and extraordinary item ........ 2.51 2.37 2.39 2.54 2.38 Provision for income taxes ............. 0.94 0.91 0.91 1.05 0.92 -------- -------- -------- -------- -------- Income before extraordinary item ....... 1.57 1.46 1.48 1.49 1.46 Extraordinary item - loss on early extinguishment of debt, net of income tax benefit .................. -- -- -- -- (0.04) -------- -------- -------- -------- -------- Net income ............................. 1.57% 1.46% 1.48% 1.49% 1.42% ======== ======== ======== ======== ======== Average financing and leasing assets (b) .......................... $16,543.1 $15,377.5 $13,630.3 $12,262.9 $11,401.7 Average finance receivables ............ $16,352.2 $15,397.8 $13,819.9 $12,266.1 $11,675.6
- ---------- (a) Excludes interest income and interest expense relating to short-term interest-bearing deposits. (b) Average financing and leasing assets is calculated by adding averages of finance receivables, operating lease equipment, and certain investments included in other assets in the Consolidated Balance Sheets and subtracting average credit balances of factoring clients. 7 The following table sets forth selected consolidated financial information regarding the Corporation's financial position. 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, --------------------------------------------------------------------- 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- Dollar Amounts in Millions Finance receivables .................... $16,996.6 $15,795.5 $14,794.4 $12,624.1 $11,771.5 Reserve for credit losses .............. (220.8) (206.0) (192.4) (169.4) (158.5) Net finance receivables ................ 16,775.8 15,589.5 14,602.0 12,454.7 11,613.0 Operating lease equipment, net ......... 1,402.1 1,113.0 867.9 751.9 462.8 Total assets .......................... 18,932.5 17,420.3 15,959.7 13,725.0 13,026.1 Capitalization: Commercial paper .................... 5,827.0 6,105.6 5,660.2 6,516.1 6,173.5 Variable rate senior notes .......... 3,717.5 3,827.5 3,812.5 1,686.5 1,477.8 Fixed rate senior notes ............. 4,761.2 3,337.0 2,619.4 2,389.0 2,476.6 Subordinated fixed rate notes ....... 300.0 300.0 300.0 200.0 200.0 Stockholders' equity ................ 2,075.4 1,914.2 1,793.0 1,692.2 1,601.1 Dividends paid-regular ................. 98.9 104.1 100.3 91.2 81.0 Dividends paid-special ................. 165.0 -- -- -- 150.0 Ratio of total debt to stockholders' equity .............................. 7.04-1 7.09-1 6.91-1 6.38-1 6.45-1
8 Reserve for Credit Losses and Nonperforming Assets The following tables set forth information as of the dates shown concerning the reserve for credit losses and the carrying value of nonaccrual finance receivables and assets received in satisfaction of loans. This information should be read in conjunction with the discussions of "Provision and Reserve for Credit Losses" and "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 and Item 8. Financial Statements and Supplementary Data.
1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ Dollar Amounts in Millions Balance, January 1 ..................... $206.0 $192.4 $169.4 $158.5 $155.1 ------ ------ ------ ------ ------ Finance receivables charged-off ........ (122.2) (96.9) (95.4) (105.6) (110.2) Recoveries on finance receivables previously charged-off .............. 20.7 19.7 11.2 11.2 11.9 ------ ------ ------ ------ ------ Net credit losses ................ (101.5) (77.2) (84.2) (94.4) (98.3) ------ ------ ------ ------ ------ Provision for credit losses ............ 111.4 91.9 96.9 104.9 103.2 Portfolio acquisitions (dispositions), net ................................. 4.9 (1.1) 10.3 0.4 (1.5) ------ ------ ------ ------ ------ Net addition to reserve for credit losses ........................... 116.3 90.8 107.2 105.3 101.7 ------ ------ ------ ------ ------ Balance, December 31 ................... $220.8 $206.0 $192.4 $169.4 $158.5 ====== ====== ====== ====== ====== Reserve for credit losses as a percentage of: Finance receivables ................. 1.30% 1.30% 1.30% 1.34% 1.35% ====== ====== ====== ====== ====== Nonaccrual finance receivables ...... 184.6% 147.7% 174.6% 121.0% 67.7% ====== ====== ====== ====== ====== December 31, ------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------ ------ ------- ------ ------ Dollar Amounts in Millions Nonaccrual finance receivables ............. $119.6 $139.5 $110.2 $139.9 $234.2 Nonaccrual finance receivables as a percentage of finance receivables ....... 0.70% 0.88% 0.75% 1.11% 1.99% Assets received in satisfaction of loans ... $ 47.9 $ 42.0 $ 86.5 $ 87.0 $ 93.8 Assets received in satisfaction of loans as a percentage of finance receivables .... 0.29% 0.27% 0.58% 0.69% 0.80% Total nonperforming assets ................. $167.5 $181.5 $196.7 $226.9 $328.0 Total nonperforming assets as a percentage of finance receivables ....... 0.99% 1.15% 1.33% 1.80% 2.79%
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 and net credit losses incurred. Business units comprising the commercial caption include Business Credit, Capital Equipment Financing, Commercial Services, Credit Finance and Industrial Financing. Business units comprising the consumer caption include Consumer Finance (started de novo in December 1992) and Sales Financing. 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 Millions December 31, 1996 Commercial .......................... $13,757.6 $219.8 1.60% $ 80.4 0.59% Consumer ............................ 3,239.0 72.5 2.24% 21.1 0.75% -------- ------ ---- ------ ---- $16,996.6 $292.3 1.72% $ 101.5 0.62% ======== ====== ==== ====== ==== December 31, 1995 Commercial .......................... $13,451.5 $228.7 1.70% $ 67.1 0.51% Consumer ............................ 2,344.0 35.2 1.50% 10.1 0.44% -------- ------ ---- ------ ---- $15,795.5 $263.9 1.67% $ 77.2 0.50% ======== ====== ==== ====== ==== December 31, 1994 Commercial .......................... $12,821.2 $166.8 1.30% $ 74.8 0.62% Consumer ............................ 1,973.2 10.1 0.51% 9.4 0.55% -------- ------ ---- ------ ---- $14,794.4 $176.9 1.20% $ 84.2 0.61% ======== ====== ==== ====== ==== December 31, 1993 Commercial .......................... $11,185.2 $199.8 1.79% $ 82.9 0.77% Consumer ............................ 1,438.9 16.3 1.13% 11.5 0.77% -------- ------ ---- ------ ---- $12,624.1 $216.1 1.71% $ 94.4 0.77% ======== ====== ==== ====== ==== December 31, 1992 Commercial .......................... $10,359.7 $318.0 3.07% $ 85.7 0.83% Consumer ............................ 1,411.8 17.8 1.26% 12.6 0.91% -------- ------ ---- ------ ---- $11,771.5 $335.8 2.85% $ 98.3 0.84% ======== ====== ==== ====== ====
10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 1996 vs. 1995 Highlights For the year ended December 31, 1996, net income totaled $260.1 million, an increase of 15.5 percent from the $225.3 million for 1995, and represented the ninth consecutive increase in annual earnings and the sixth consecutive year of record earnings. The 1996 results reflect stronger revenues from increased finance income, higher fees and other income, partially offset by an increase in operating expenses. Financing and leasing assets, which include finance receivables and operating lease equipment, totaled a record $18.4 billion, an increase of 8.8 percent over 1995. This increase is the result of growth in the operating lease portfolio as well as strong new business originations across all units, particularly in the areas of consumer and small to medium ticket equipment financing, offset by termination activity and, to a lesser extent, by paydowns. Additionally, the Corporation continued its securitization activity, securitizing $774.9 million of recreational vehicle and recreational marine finance receivables during 1996, compared to recreational vehicle and manufactured housing finance receivables of $723.2 million in 1995. Net Finance Income A comparison of the components of 1996 and 1995 net finance income is set forth below.
Years Ended December 31, Increase ------------------------ ----------------- 1996 1995 Amount Percent ---------- ---------- --------- ------- Dollar Amounts in Millions Finance income ......................... $ 1,646.2 $ 1,529.2 $ 117.0 7.7% Interest expense ....................... 848.3 831.5 16.8 2.0 ---------- ---------- -------- ---- Net finance income ..................... $ 797.9 $ 697.7 $ 100.2 14.4% ========== ========== ======== ==== Average financing & leasing assets (AEA) $ 16,543.1 $ 15,377.5 $1,165.6 7.6% ========== ========== ======== ==== Net finance income as a % of AEA ....... 4.82% 4.54% ========== ==========
Finance income totaled $1,646.2 million in 1996, up $117.0 million or 7.7% over 1995. As a percentage of AEA, finance income was 9.90% for both periods. Interest expense totaled $848.3 million in 1996, up $16.8 million or 2.0% over 1995. As a percentage of AEA, 1996 interest expense decreased to 5.08% from 5.36% in 1995. Net finance income increased $100.2 million or 14.4% in 1996, surpassing the growth in AEA as a result of both lower borrowing costs and higher yield related fees on account terminations. Fees and Other Income Fees and other income improved $59.4 million to $244.1 million during 1996 due to higher gains from equipment sales and venture capital investment transactions, increased servicing fees associated with the Corporation's managed third party portfolio and higher factoring commissions. 11 Provision and Reserve for Credit Losses Net credit losses were $101.5 million in 1996 compared to $77.2 million in 1995, primarily reflecting provisions related to certain nonaccrual loans secured by oceangoing carriers and cruise line vessels as well as seasoning of the consumer portfolio. As a percentage of average finance receivables, net credit losses were 0.62% in 1996 compared to 0.50% in 1995. Information concerning the provision and reserve for credit losses is summarized in the following table. Years ended December 31, ------------------------- 1996 1995 ------- ------- Dollar Amounts in Millions Net credit losses ........................ $ 101.5 $ 77.2 ======= ======= Provision for credit losses .............. $ 111.4 $ 91.9 ======= ======= Net credit losses as a percentage of average finance receivables ............ 0.62% 0.50% ======= ======= Reserve for credit losses ................ $ 220.8 $ 206.0 ======= ======= Reserve for credit losses as a percentage of finance receivables ...... 1.30% 1.30% ======= ======= The reserve for credit losses is 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. Finance receivables are reviewed periodically to determine the probability of loss. 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. Salaries and General Operating Expenses Salaries and general operating expenses increased $47.4 million or 13.7 percent to $393.1 million in 1996 from $345.7 million in 1995. Salaries and employee benefits rose $29.6 million (15.3%) while general operating expenses rose $17.8 million (11.7%). Personnel increased to 2,950 at December 31, 1996 from 2,750 at December 31, 1995. Management monitors productivity via the relationship of salaries and general operating expenses to both AEA and average serviced assets ("ASA"). ASA is comprised of earning assets, off-balance sheet securitized finance receivables and other receivables serviced for third parties. Changes in the relationship of salaries and employee benefits and general operating expenses to AEA and ASA are set forth below:
Years Ended December 31, Dollar Amounts in Millions ---------------------------------------------------- 1996 1995 Amount % AEA % ASA Amount % AEA % ASA ------ ---- ---- ------ ---- ---- Salaries and employee benefits $223.0 1.35% 1.22% $193.4 1.26% 1.19% General operating expenses ... 170.1 1.03 0.93 152.3 0.99 0.94 ------ ---- ---- ------ ---- ---- Total .................... $393.1 2.38% 2.15% $345.7 2.25% 2.13% ====== ==== ==== ====== ==== ====
The increase in expenses from 1995 to 1996 is primarily due to strong new business originations and 12.6% growth in average serviced assets, as well as the Corporation's continued investment in its consumer related infrastructure. The Corporation manages expenditures using a comprehensive budgetary process. Expenses are monitored closely by business unit management and are reviewed monthly with senior management of the Corporation. To ensure overall 12 project cost control, an approval and review procedure is in place for all major capital expenditures, such as purchases of computer equipment, including a post-implementation analysis. Depreciation on Operating Lease Equipment Depreciation on operating lease equipment for 1996 was $121.7 million, up from $79.7 million for 1995 due to growth in the operating lease portfolio. Income Taxes The provision for Federal and state and local income taxes totaled $155.7 million in 1996 compared with $139.8 million in 1995. The effective income tax rate for 1996 declined to 37.4% compared to 38.3% in 1995 as a result of state and local tax planning strategies. Financing and Leasing Assets Financing and leasing assets (comprised of finance receivables and operating lease equipment) rose $1.5 billion (8.8%) to $18.4 billion in 1996 as presented by business unit in the following table.
December 31 Increase (Decrease) --------------------- ------------------- 1996 1995 Amount Percent -------- -------- --------- ------- Dollar Amounts in Millions Finance Receivables Business Credit ........................ $ 1,235.6 $ 1,471.0 $ (235.4) (16.0)% Capital Equipment Financing ............ 4,302.7 4,548.7 (246.0) (5.4) Commercial Services .................... 1,804.7 1,743.3 61.4 3.5 Credit Finance ......................... 797.8 758.7 39.1 5.2 Industrial Financing ................... 5,616.8 4,929.9 686.9 13.9 Consumer Finance ....................... 2,005.5 1,039.0 966.5 93.0 Sales Financing ........................ 1,233.5 1,304.9 (71.4) (5.5) --------- --------- -------- ---- Total Finance Receivables .......... 16,996.6 15,795.5 1,201.1 7.6 --------- --------- -------- ---- Operating Lease Equipment, net Capital Equipment Financing ............ 975.5 750.0 225.5 30.1 Industrial Financing ................... 426.6 363.0 63.6 17.5 --------- --------- -------- ---- Total Operating Lease Equipment, net 1,402.1 1,113.0 289.1 26.0 --------- --------- -------- ---- Total Financing and Leasing Assets . $ 18,398.7 $ 16,908.5 $ 1,490.2 8.8% ========= ========= ======== ====
The changes in the preceding table are discussed below. o Business Credit--Receivables declined to $1.2 billion at December 31, 1996. Record new business originations were offset by high customer terminations and paydowns as customers' access to alternative financing sources (capital markets and banks) increased. o Capital Equipment Financing--Growth in new business originations was offset by liquidations and a net transfer of $57.5 million of finance receivables to assets received in satisfaction of loans. Growth in operating lease equipment occurred primarily in commercial aircraft and railroad equipment. o Commercial Services--Finance receivables increased 3.5% to $1.8 billion at December 31, 1996 as a result of increased factoring volume. o Credit Finance--Strong new business originations partially offset by liquidations due to a highly competitive marketplace resulted in the 5.2% rise in finance receivables to $797.8 million at December 31, 1996. o Industrial Financing--Another record year of new business originations resulted in finance receivable growth of 13.9%. Operating lease equipment grew $63.6 million with increases in various collateral types including business aircraft and manufacturing equipment. 13 o Consumer Finance--Record new business originations, including real estate secured finance receivable portfolio purchases of $468.7 million, led to this unit's 93.0% increase in finance receivables. o Sales Financing--New business originations were offset by recreational vehicle and recreational marine finance receivable securitizations of $774.9 million (of which $112.0 million was classified as assets held for sale at December 31, 1995) and the classification of an additional $116.3 million of recreational vehicle and recreational marine finance receivables to assets held for sale at December 31, 1996. Financing and Leasing Assets Composition Financing and leasing assets are composed of loans and direct financing and leveraged leases with commercial and consumer customers located principally in the United States and operating lease equipment, largely commercial aircraft (44.5% of the operating lease portfolio), placed with lessees both domestically and internationally. Transaction Type Financing and leasing assets by transaction type are set forth in the following table.
1996 Percent 1995 Percent -------- -------- ------- ------- Dollar Amounts in Millions Commercial ................... $ 13,757.6 74.8% $ 13,451.5 79.5% Consumer ..................... 3,239.0 17.6 2,344.0 13.9 Operating lease equipment, net 1,402.1 7.6 1,113.0 6.6 ---------- ----- ---------- ----- $ 18,398.7 100.0% $ 16,908.5 100.0% ========== ===== ========== =====
Business units comprising the commercial caption include Business Credit, Capital Equipment Financing, Commercial Services, Credit Finance and Industrial Financing. Business units comprising the consumer caption include Consumer Finance and Sales Financing. Geographic Composition The following table presents financing and leasing assets by customer location.
At December 31, 1996 At December 31, 1995 --------------------- -------------------- Amount Percent Amount Percent -------- --------- ------- -------- Dollar Amounts in Millions United States West ................................. $ 4,539.7 24.7% $ 3,959.9 23.4% Northeast ............................ 4,250.9 23.1 4,094.2 24.2 Midwest .............................. 3,703.1 20.1 3,209.1 19.0 Southeast ............................ 2,780.6 15.1 2,631.7 15.6 Southwest ............................ 2,015.3 11.0 1,929.8 11.4 Foreign (principally commercial aircraft) 1,109.1 6.0 1,083.8 6.4 --------- ----- --------- ----- Total .............................. $18,398.7 100.0% $16,908.5 100.0% ========= ===== ========= =====
14 Industry Composition The following table presents financing and leasing assets by major industry class.
At December 31, 1996 At December 31, 1995 ----------------------- ----------------------- Amount Percent Amount Percent ---------- --------- ----------- -------- Dollar Amounts in Millions Manufacturing(a) (none greater than 3.9%) ............ $ 4,425.7 24.1% $ 4,328.6 25.6% Home mortgage ........................................ 2,005.5 10.9 1,039.0 6.1 Commercial airlines(b) ............................... 1,910.0 10.4 1,911.6 11.3 Construction (c) ..................................... 1,683.1 9.1 1,463.9 8.7 Retail ............................................... 1,651.1 9.0 1,519.3 9.0 Transportation(d) .................................... 1,184.5 6.4 1,043.1 6.1 Manufactured housing(e) .............................. 837.4 4.6 618.6 3.7 Other (none greater than 3.4%)(f) .................... 4,701.4 25.5 4,984.4 29.5 -------- ---- -------- ---- Total ............................................. $18,398.7 100.0% $16,908.5 100.0% ======== ==== ======== ====
- ---------- (a) Includes manufacturers of industrial machinery, steel and metal products, textiles and apparel, printing and paper products and other industries. (b) Refer to the Commercial Airlines section of "Financing and Leasing Assets Concentrations" for a discussion of the commercial airlines portfolio. (c) Primarily relates to equipment. Does not include real estate development and acquisition. (d) Transportation includes rail, bus, over-the-road trucking, and business aircraft industries. (e) Excludes securitized finance receivables of $412.2 million and $470.8 million at December 31, 1996 and 1995, respectively. (f) Excludes securitized recreational vehicle finance receivables of $746.8 million and $445.7 million at December 31, 1996 and 1995, respectively, and recreational marine finance receivables of $278.4 million at December 31, 1996. Financing and Leasing Assets Concentrations Commercial Airlines Commercial airline finance receivables of $1.3 billion and operating lease equipment of $624.0 million totaled $1.9 billion (10.4% of total financing and leasing assets) at December 31, 1996 compared with $1.9 billion (11.3%) in 1995. The portfolio is secured by commercial aircraft and related equipment. Management continues to limit 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, --------------------------- 1996 1995 -------- ------- Dollar Amounts in Millions Finance receivables Amount outstanding(a) ............... $1,286.0 $1,412.2 Number of obligors .................. 54 51 Operating lease equipment Net carrying value .................. $ 624.0 $ 499.4 Number of obligors .................. 32 24 Total ............................... $1,910.0 $1,911.6 Number of obligors(b) .................. 72 68 Number of aircraft(c) .................. 239 256 - ---------- (a) Includes accrued rents on operating leases 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 1996, the portfolio consisted of Stage III aircraft of $1,733.2 million (90.7%) and Stage II aircraft of $149.1 million (7.8%) versus Stage III aircraft of $1,664.3 million (87.1%) and Stage II aircraft of $207.7 million (10.9%) at year-end 1995. Kiwi International Airlines ("Kiwi") filed for protection under Chapter 11 of the Bankruptcy Code on September 30, 1996 and grounded its fleet in mid-October. Kiwi is under operating lease agreements for four aircraft with the Corporation. The aircraft are included in operating lease equipment at December 31, 1996 in the amount of $30.9 million. During January 1997, Kiwi resumed certain of its operations but did not emerge from Chapter 11. The above event will not have a significant effect on the Corporation's consolidated financial position, results of operations, or liquidity. 15 Foreign Outstandings Financing and leasing assets to foreign obligors, primarily to the commercial airline industry, are all U.S. dollar denominated and totaled $1.11 billion at December 31, 1996. The largest exposures at December 31, 1996 were to obligors in Mexico, $141.5 million (0.77% of financing and leasing assets), France, $130.4 million (0.71%), and the United Kingdom, $126.9 million (0.69%). The remaining foreign exposure is geographically disbursed with no individual country representing more than 0.51% of financing and leasing assets. At December 31, 1995, financing and leasing assets to foreign obligors totaled $1.08 billion. Outstandings totaled $145.5 million (0.86%) to obligors in the United Kingdom, France, $122.0 million (0.72%), Mexico, $115.8 million (0.68%) and Australia, $97.0 million (0.57%). No other countries had obligors with aggregate outstandings exceeding 0.51% of financing and leasing assets. Highly Leveraged Transactions The Corporation uses the following criteria to classify a buyout financing or recapitalization which equals or exceeds $20 million as a highly leveraged transaction (HLT): o The transaction at least doubles the borrower's liabilities and results in a leverage ratio (as defined) higher than 50%, or o The transaction results in a leverage ratio higher than 75%, or o 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: o The original financing has been repaid using cash flow from operations, planned asset sales, or a capital infusion, or o 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 originates and participates in HLTs, which totaled $321.4 million (1.75% of financing and leasing assets) at December 31, 1996, down from $412.6 million (2.44%) at December 31, 1995. The decline in HLT outstandings during 1996 was primarily due to payoff of accounts as well as the removal of two companies that met the delisting criteria described above, 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 flows from operations. Unfunded commitments to lend in secured HLT situations were $144.1 million at December 31, 1996 compared with $220.4 million at year-end 1995. At December 31, 1996, the HLT portfolio consisted of 27 obligors in 3 different industry groups, with 29.52% of the outstandings located in the Northeast region of the United States and 23.77% in the Southeast. One account totaling $16.0 million and $20.1 million was classified as nonaccrual at December 31, 1996 and 1995, respectively. Past Due and Nonaccrual Finance Receivables and Assets Received in Satisfaction of Loans Finance receivables past due 60 days or more increased to $292.3 million (1.72% of finance receivables) at December 31, 1996, from $263.9 million (1.67%) at December 31, 1995. The increase in delinquencies is primarily attributable to a shift in portfolio mix toward more seasoned consumer finance receivables. Finance receivables on nonaccrual status declined to $119.6 million (0.70% of finance receivables) at December 31, 1996, from $139.5 million (0.88%) at December 31, 1995, primarily due to the transfer of oceangoing carriers and cruise line vessels to assets received in satisfaction of loans. Assets received in satisfaction of loans increased to $47.9 million at December 31, 1996 from $42.0 million at December 31, 1995. The increase was primarily due to the previously mentioned transfers, offset by the sale of an equity interest in a building supply retailer. The Corporation has remarketed a majority of the oceangoing carriers and is in the process of remarketing the remaining carriers and cruise line vessels. 16 The following table summarizes by type assets received in satisfaction of loans. At December 31, ------------------------- 1996 1995 ------- ------- Amounts in Millions Transportation(a) ............................... $ 33.6 $ 8.9 Property, equipment and other ................... 14.3 9.0 Retail merchandise, property and accounts receivable(b) ........................ -- 24.1 ------ ------ Total ......................................... $ 47.9 $ 42.0 ====== ====== - ---------- (a) Transportation includes oceangoing carriers and cruise line vessels in 1996 and oceangoing carriers in 1995. (b) Retail merchandise, property and accounts receivable included an equity interest in a building supply retailer. Total nonperforming assets, comprised of finance receivables on nonaccrual status and assets received in satisfaction of loans, declined to $167.5 million at December 31, 1996 from $181.5 million at year end 1995. As a percentage of finance receivables, total nonperforming assets were 0.99% at December 31, 1996, down from 1.15% at December 31, 1995. Credit Risk Management Financing and leasing assets are evaluated 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 ECC 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). As economic and market conditions change, credit risk management practices are reviewed and modified, if necessary, to minimize the risk of credit loss. Commercial financing and leasing assets are periodically evaluated based upon credit criteria developed under the Corporation's uniform credit grading system. Concentrations are monitored and limits are changed by management as conditions warrant to minimize the risk of credit loss. Periodically, the status of loans greater than $500,000 to obligors with higher (riskier) credit grades is individually reviewed with the Asset Quality Review Committee, comprised of members of senior management including the Vice Chairman, Executive Vice President-Credit Administration and Chief Financial Officer. For consumer loans, management has developed and implemented automated credit scoring models for each loan type (e.g., recreational vehicles, manufactured housing, home mortgage and recreational boats) that include both customer demographics and credit bureau characteristics. The Corporation's credit criteria include reliance on scores combined with judgment. The credit scoring models are reviewed for effectiveness monthly utilizing statistical tools. Consumer loans are periodically evaluated using past due, vintage curve and other statistical tools to analyze trends and credit performance by loan type, including analysis of specific credit characteristics and other selected subsets of the portfolios. Compliance with established corporate policies and procedures and the 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 and reported on a timely basis. Asset/Liability Management Management strives to manage interest rate and liquidity risk and optimize net finance income 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 17 senior representatives of DKB and Chase. Three members of the Capital Committee are also members of the Corporation's Board of Directors. The Capital Committee establishes and regularly reviews interest rate sensitivity, funding needs, liquidity, and asset-pricing to determine short-term and long-term funding strategies, including the use of off-balance sheet derivative financial instruments. The Corporation does not enter into derivative financial instruments for trading or speculative purposes. Derivative positions, all of which are entered into as hedges, are managed 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 used for derivative financial instruments each of whom has specific credit exposure limits, which are based on market value. The Executive Credit Committee approves each counterparty and its related market value and credit exposure limit annually or more frequently if any changes are recommended. Market values are calculated periodically for each swap contract, summarized by counterparty and reported to the Capital Committee. For additional information regarding the Corporation's derivative portfolio, refer to "Note 7-Derivative Financial Instruments" in Item 8. Financial Statements and Supplementary Data. Interest Rate Risk Management Changes in market interest rates or in the relationships between short-term and long-term market interest rates or different interest rate indices (basis risk) create risks which can potentially affect net finance income. Such changes can affect the interest rates charged on interest-earning assets differently than the interest rates paid on interest-bearing liabilities. The Capital Committee actively manages interest rate risk by changing the proportion of fixed and floating rate debt and by utilizing primarily interest rate swaps and, to a lesser extent, other derivative instruments 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 other derivative instruments are 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 liquidity needs of the Corporation. For example, a fixed rate, fixed term loan transaction may initially be funded by commercial paper, resulting in interest rate risk. To reduce this risk, the Corporation may enter into a hedge that has an inverse correlation to the interest rate sensitivity created, whereby the Corporation would pay a fixed interest rate and receive a commercial paper interest rate. Basis risk is similarly managed through the issuance of new debt or the utilization of interest rate swaps or other derivative instruments. The Corporation's degree of interest rate sensitivity is continuously monitored and simulated through computer modeling by measuring the repricing characteristics of interest-sensitive assets, liabilities, and off-balance sheet derivatives. These characteristics include the dollar amounts, maturities, estimated prepayments, interest rates, and reference rate or other market based indices which are updated and reviewed periodically. The model is used to project net interest income assuming stable interest rates as well as various other hypothetical interest rate scenarios and the results are reviewed monthly by the Capital Committee. Utilizing the Corporation's computer modeling, if no new fixed rate loans or leases were extended and no actions to alter the existing interest rate sensitivity were taken subsequent to December 31, 1996, an immediate hypothetical 1% parallel rise in the yield curve on January 1, 1997 would reduce net income by an estimated $2.9 million after-tax over the next twelve months. Although management believes that this measure provides a meaningful estimate of the Corporation's interest rate sensitivity, it does not reflect changes in the credit quality, size and composition of the balance sheet and other business developments that could affect net income. Further, it does not necessarily represent management's current view of future market interest rate movements. The Corporation periodically enters into structured financings (involving both 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 solely issuing debt. For example, in order to fund LIBOR interest rate based assets, a medium-term variable rate note based upon the Federal Funds rate can be issued and coupled with an interest rate swap exchanging the Federal Funds rate for a LIBOR interest rate. This creates, in effect, a lower cost LIBOR based medium-term obligation which also reduces the interest rate basis risk of funding LIBOR based assets with commercial paper or Federal Funds rate based debt. 18 Interest rate swaps with notional principal amounts of $5.26 billion at December 31, 1996 and $5.27 billion at December 31, 1995 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 but reduces the Corporation's benefits from lower interest rates. Interest rate swaps are further discussed in Note 7-Derivative Financial Instruments in Item 8. Financial Statements and Supplementary Data. A comparative analysis of the weighted average principal outstanding and interest rates paid on the Corporation's debt before and after the effect of interest rate swaps is shown in the following table.
Years Ended December 31, --------------------------------------------------------------------------------- 1996 1995 --------------------------------------- ---------------------------------------- Before After Before After ------------------- ------------------ ------------------ ------------------- Dollar Amounts in Millions Commercial paper and variable rate senior notes .................... $ 9,952.2 5.48% $ 6,774.3 5.42% $ 9,785.4 6.03% $ 7,226.0 6.02% Fixed rate senior and subordinated notes ........ 3,917.0 6.83% 7,094.9 6.68% 3,194.5 7.09% 5,753.9 6.78% --------- --------- --------- --------- Composite .................. $13,869.2 5.86% $13,869.2 6.06% $12,979.9 6.29% $12,979.9 6.36% ========= ========= ========= =========
The increases in the composite interest rates after the effect of hedging activity reflects the greater proportion of debt effectively paying fixed interest rates. The weighted average interest rates before the effect of hedging activity do not reflect the interest expense that would have been incurred had the Corporation chosen to manage interest rate risk without the use of derivatives. 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 sources of funding are commercial paper borrowings, proceeds from the sales of medium-term notes and other debt securities, and securitizations. Liquidity Commercial paper outstanding decreased $278.6 million to $5.8 billion at December 31, 1996 and represented 39.9% of total debt outstanding (45.0% at December 31, 1995), while fixed rate senior and subordinated notes increased to $5.1 billion at December 31, 1996 or 34.7% of total debt (26.8% at December 31, 1995), an increase of $1.4 billion from December 31, 1995. Variable rate term debt totaled $3.7 billion or 25.4% of total debt outstanding at December 31, 1996 (28.2% at December 31, 1995). These changes primarily reflect the funding of the increased level of financing and leasing assets with fixed rate debt. Commercial paper borrowings are supported by a variety of bank credit facilities. At December 31, 1996, credit lines with 60 banks totaled $5.18 billion and support the current commercial paper position as well as growth in the foreseeable future. Credit line coverage increased to 90.2% of operating commercial paper outstanding (commercial paper outstanding less interest-bearing deposits) at year-end 1996, as compared to 77.7% at December 31, 1995 due to higher bank credit facilities and a decreased level of commercial paper outstanding. No borrowings have been made under credit lines supporting commercial paper since 1970. As part of the Corporation's continuing program of accessing the public and private asset backed securitization markets as an additional liquidity source, the Corporation securitized recreational vehicle and recreational marine finance receivables of $774.9 million, an increase of $51.7 million over $723.2 million of recreational vehicle and manufactured housing finance receivables in 1995. At December 31, 1996, $211.8 million of registered but unissued securities relating to the Corporation's asset backed securitization program remained available under shelf registration statements. 19 Capitalization The following table presents information regarding the Corporation's capital structure. At December 31, --------------------------- 1996 1995 --------- --------- Dollar Amounts in Millions Commercial paper .............................. $ 5,827.0 $ 6,105.6 Variable rate senior notes .................... 3,717.5 3,827.5 Fixed rate senior and subordinated notes ...... 5,061.2 3,637.0 -------- -------- Total debt .................................... 14,605.7 13,570.1 Stockholders' equity .......................... 2,075.4 1,914.2 -------- -------- Total capitalization .......................... $16,681.1 $15,484.3 ======== ======== Debt-to-equity ratio .......................... 7.04 to 1 7.09 to 1 ======== ======== Through March 31, 1996, the Corporation operated under a dividend policy requiring the payment of dividends by the Corporation equal to and not exceeding 50% of net operating earnings on a quarterly basis. Commencing with the 1996 second quarter dividend, the dividend policy of the Corporation was changed to require the payment of dividends by the Corporation of 30% of net operating earnings on a quarterly basis. During 1996, regular cash dividends of $98.9 million were paid, including $8.9 million relating to December 1995 earnings. On December 24, 1996, with the consent of the Corporation's stockholders, the Corporation paid a special dividend in the aggregate amount of $165.0 million to its stockholders. DKB and CBC Holding immediately contributed $165.0 million to the paid-in-capital of the Corporation in proportion to their respective 80% and 20% ownership interests. Notwithstanding the special dividend and subsequent capital contribution, the Corporation intends to continue to follow the 30% dividend policy described above. During the year, $2.3 billion of variable rate notes and $2.5 billion of fixed rate notes were issued with individual terms ranging from one to ten years. Repayments of debt during 1996 totaled $3.5 billion. At December 31, 1996, $3.5 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 & Poor's Corporation. In February 1997, CIT Capital Trust I (the "Trust"), a wholly-owned subsidiary of the Corporation, issued $250.0 million of 7.70% Preferred Capital Securities in a private offering. The Trust subsequently invested the offering proceeds in Junior Subordinated Debentures of the Corporation, having identical rates and payment dates. Preferred Capital Securities are further discussed in Note 21--Subsequent Event--Preferred Capital Securities in Item 8. Financial Statements and Supplementary Data. Recently Issued Accounting Pronouncements The Corporation adopted Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125") as amended by Statement of Financial Accounting Standards No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125" (collectively referred to hereafter as "SFAS 125") on January 1, 1997. SFAS 125 uses a "financial components" approach that focuses on control to determine the proper accounting for financial asset transfers, addresses the accounting for servicing rights on financial assets in addition to mortgage loans and extends the disaggregated lower of cost or market approach for measuring servicing rights (including excess servicing) on all financial assets. Securitizations of finance receivables are accounted for as sales when legal and effective control over the related receivables is surrendered. Servicing assets or liabilities are recognized when the servicing rights are retained by the seller. The Corporation believes that the 1997 adoption of SFAS 125 will not have a significant impact on the Corporation's financial position, results of operations, or liquidity. 20 1995 vs. 1994 Highlights For the year ended December 31, 1995 net income totaled $225.3 million, an increase of 12.0 percent from the $201.1 million for 1994, and represented the eighth consecutive increase in annual earnings and the fifth consecutive year of record earnings. The current results reflect finance income from a higher level of financing and leasing assets, improved other income, and lower net credit losses, offset by an increase in borrowing costs. Financing and leasing assets, which include finance receivables and operating lease equipment, totaled a record $16.91 billion, an increase of 8.0 percent over 1994. Manufactured housing and recreational vehicle receivables of $723.2 million were securitized during 1995 compared to $198.7 million in 1994. Net Finance Income A comparison of the components of 1995 and 1994 net finance income is set forth below.
Years Ended December 31, Increase ------------------------------ ---------------------- 1995 1994 Amount Percent ---------- ---------- --------- ------- Dollar Amounts in Millions Finance income ................................ $ 1,529.2 $ 1,263.8 $ 265.4 21.0% Interest expense .............................. 831.5 614.0 217.5 35.4 -------- -------- ------- ---- Net finance income ............................ $ 697.7 $ 649.8 $ 47.9 7.4% ======== ======== ======= ==== Average financing & leasing assets (AEA) ...... $15,377.5 $13,630.3 $1,747.2 12.8% ======== ======== ======= ==== Net finance income as a percent of AEA 4.54% 4.77% ======== ========
Finance income totaled $1,529.2 million in 1995, up $265.4 million or 21.0% over 1994. As a percentage of AEA, 1995 finance income increased to 9.90% from 9.19% in 1994. Interest expense totaled $831.5 million in 1995, up $217.5 million or 35.4% over 1994. As a percentage of AEA, 1995 interest expense increased to 5.36% from 4.42% in 1994. Net finance income (finance income less interest expense) increased $47.9 million or 7.4% in 1995, trailing the growth in AEA of 12.8% as higher 1995 market interest rates increased borrowing costs more rapidly than lending yields due to heightened pricing competition, particularly from banks. Fees and Other Income Fees and other income improved $10.3 million to $184.7 million during 1995 due to higher gains from securitizations of manufactured housing and recreational vehicle receivables, offset by lower factoring commissions due to the weak retailing environment. 21 Provision and Reserve for Credit Losses Net credit losses were $77.2 million in 1995, down $7.0 million (8.3%) from $84.2 million in 1994 reflecting a higher level of recoveries during 1995. As a percentage of average finance receivables, net credit losses improved to 0.50% in 1995 from 0.61% in 1994. Information concerning the provision and reserve for credit losses is summarized in the following table. Years ended December 31, ------------------------- 1995 1994 -------- -------- Dollar Amounts in Millions Net credit losses .................................. $ 77.2 $ 84.2 ====== ====== Total provision for credit losses .................. $ 91.9 $ 96.9 ====== ====== Net credit losses as a percentage of average finance receivables ............................. 0.50% 0.61% ====== ====== Reserve for credit losses .......................... $206.0 $192.4 ====== ====== Salaries and General Operating Expenses Salaries and general operating expenses increased $7.8 million or 2.3 percent to $345.7 million in 1995 from $337.9 million in 1994, reflecting significant productivity achievements during a year of 8.0 percent financing and leasing asset growth. Salaries and employee benefits rose $7.6 million (4.0%) and general operating expenses increased $0.2 million during 1995. Personnel increased to 2,750 at December 31, 1995 from 2,700 at December 31, 1994. Management monitors productivity via the relationship of salaries and general operating expenses to AEA, a measure of operating expense efficiency based upon owned assets. Management also monitors the relationship of salaries and general operating expense to average serviced assets ("ASA"), which includes earning assets and off balance sheet securitized finance receivables and other receivables serviced for third parties. Changes in the relationship of salaries and general operating expenses to AEA and ASA are set forth below: 1995 1994 -------- -------- Average earning assets ....................... 2.25% 2.48% Average serviced assets ...................... 2.13% 2.40% Income Taxes The provision for Federal and state and local income taxes totaled $139.8 million in 1995 compared with $123.9 million in 1994. The effective income tax rate for 1995 was 38.3% compared to 38.1% in 1994. 22 Financing and Leasing Assets Financing and leasing assets (comprised of finance receivables and operating lease equipment) rose $1.25 billion (8.0%) to $16.91 billion in 1995 as presented by business unit in the following table.
December 31, Increase ----------------------------- -------------------------- 1995 1994 Amount Percent --------- --------- ---------- ---------- Dollar Amounts in Millions Finance Receivables Business Credit ............................... $ 1,471.0 $ 1,442.1 $ 28.9 2.0% Capital Equipment Financing ................... 4,548.7 4,493.5 55.2 1.2 Commercial Services ........................... 1,743.3 1,896.2 (152.9) (8.1) Credit Finance ................................ 758.7 719.6 39.1 5.4 Industrial Financing .......................... 4,929.9 4,269.7 660.2 15.4 Consumer Finance .............................. 1,039.0 570.8 468.2 82.0 Sales Financing ............................... 1,304.9 1,402.5 (97.6) (6.9) -------- -------- ------- ---- Total Finance Receivables ................... 15,795.5 14,794.4 1,001.1 6.8 -------- -------- ------- ---- Operating Lease Equipment, net Capital Equipment Financing ................... 750.0 648.7 101.3 15.6 Industrial Financing .......................... 363.0 219.2 143.8 65.6 -------- ------- ------- ---- Total Operating Lease Equipment, net ........ 1,113.0 867.9 245.1 28.2 -------- ------- ------- ---- Total Financing and Leasing Assets .......... $16,908.5 $15,662.3 $1,246.2 8.0% ======== ======== ======= ====
The changes in the preceding table are discussed below. o Business Credit--Record new business volume was largely offset by high customer paydowns and terminations as customers access to alternative financing sources increased, resulting in modest growth of 2.0% to $1.47 billion at December 31, 1995. o Capital Equipment Financing--Finance receivables and volume rose modestly during 1995 due to heightened pricing competition from other financial institutions. Growth in the operating lease equipment portfolio is primarily in railcar and other transportation equipment categories. o Commercial Services--Finance receivables decreased 8.1% to $1.74 billion at December 31, 1995 as factoring volume declined 1.9% from 1994 on weakness in retail sales. o Credit Finance--Finance receivables in this unit continued their steady growth, rising 5.4% in 1995 to $758.7 million. o Industrial Financing--Another record year of new business originations resulted in finance receivable growth of 15.4%. Operating lease equipment grew $143.8 million with increases in various collateral types including tractors, trailers and buses and business aircraft. o Consumer Finance--New business volume grew 28.2% million in this unit's third full year of operations, increasing receivables to over $1.0 billion. o Sales Financing--Higher originations in recreational vehicle and manufactured housing resulted in record new business volume offset by finance receivable securitizations of $723.2 million (of which $68.7 million was classified as assets held for sale at December 31, 1994) and the reclassification of an additional $112.0 million of recreational vehicle finance receivables to assets held for sale at December 1995. 23 Financing and Leasing Assets Composition Financing and leasing assets are composed of loans and direct financing and leveraged leases with commercial and consumer customers located principally in the United States and operating lease equipment, largely commercial aircraft (44.9% of the operating lease portfolio), placed with lessees both domestically and internationally. The portfolio composition did not change significantly from year-end 1994. Transaction Type Financing and leasing assets by transaction type are set forth in the following table.
1995 Percent 1994 Percent -------- ------- ------- ------- Dollar Amounts in Millions Commercial .................................... $13,451.5 79.5% $12,821.2 81.9% Consumer ...................................... 2,344.0 13.9 1,973.2 12.6 Operating lease equipment, net ................ 1,113.0 6.6 867.9 5.5 -------- ----- ------- ----- $16,908.5 100.0% $15,662.3 100.0% ======== ===== ======= =====
Business units comprising the commercial caption include Business Credit, Capital Equipment Financing, Commercial Services, Credit Finance and Industrial Financing. Business units comprising the consumer caption include Consumer Finance and Sales Financing. Financing and Leasing Assets Concentrations Commercial Airlines Commercial airline finance receivables of $1.4 billion and operating lease equipment of $499.4 million totaled $1.9 billion (11.3% of total financing and leasing assets) at December 31, 1995 compared with $1.9 billion (12.1%) in 1994. The portfolio is secured by commercial aircraft and related equipment. Management continues to limit 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, --------------------------- 1995 1994 --------- ---------- Dollar Amounts in Millions Finance receivables Amount outstanding(a) .................... $1,412.2 $1,417.0 Number of obligors ....................... 51 46 Operating lease equipment Net carrying value ....................... $ 499.4 $ 482.3 Number of obligors ....................... 24 21 Total .................................. $1,911.6 $1,899.3 Number of obligors(b) .................... 68 62 Number of aircraft(c) .................... 256 272 - ---------- (a) Includes accrued rents on operating leases 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 1995, the portfolio consisted of Stage III aircraft of $1,664.3 million (87.1%) and Stage II aircraft of $207.7 million (10.9%) versus Stage III aircraft of $1,587.5 million (83.6%) and Stage II aircraft of $262.2 million (13.8%) at year-end 1994. The decline in the number of aircraft from December 1994 principally reflects the maturity of loans with one obligor collateralized by 17 aircraft. 24 Foreign Outstandings Financing and leasing assets to foreign obligors, primarily to the commercial airline industry, are all U. S. dollar denominated and totaled $1.08 billion at December 31, 1995. The largest exposures at December 31, 1995 were to obligors in the United Kingdom, $145.5 million (0.86% of financing and leasing assets), France, $122.0 million (0.72%), and Mexico, $115.8 million (0.68%). The remaining foreign exposure is geographically disbursed with no individual country representing more than 0.57% of financing and leasing assets. At December 31, 1994, financing and leasing assets to foreign obligors totaled $1.12 billion. Outstandings totaled $177.2 million (1.13%) to obligors in the United Kingdom, $140.0 million (0.89%), Mexico, $120.2 million (0.77%), France and $99.7 million (0.64%) to obligors in Australia. No other countries had obligors with aggregate outstandings exceeding 0.57% of financing and leasing assets. Highly Leveraged Transactions The Corporation originates and participates in HLTs, which totaled $412.6 million (2.44% of financing and leasing assets) at December 31, 1995, down from $436.1 million (2.78%) at December 31, 1994. The decline in HLT outstandings during 1995 was primarily due to payoff of accounts as well as a company that met the 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 flows from operations. Unfunded commitments to lend in secured HLT situations were $220.4 million at December 31, 1995 compared with $202.1 million at year-end 1994. At December 31, 1995, the HLT portfolio consisted of 33 obligors in 3 different industry groups, with 34.32% of the outstandings located in the Southeast region of the United States and 24.43% in the West. One account totaling $20.1 million was classified as nonaccrual at December 31, 1995, compared with four accounts totaling $57.7 million at year-end 1994. Past Due and Nonaccrual Finance Receivables and Assets Received in Satisfaction of Loans Finance receivables past due 60 days or more increased to $263.9 million (1.67% of finance receivables) at December 31, 1995, from $176.9 million (1.20%) at December 31, 1994. Finance receivables of $42.9 million collateralized by oceangoing carriers of a shipping company and $36.6 million of finance receivables collateralized by two cruise line vessels were placed on nonaccrual status during the third quarter of 1995. The shipping company ceased operations during the third quarter and during the fourth quarter, the cruise line discontinued its operations and filed for protection under Chapter 11 of the Bankruptcy Code. Finance receivables on nonaccrual status, included in past due finance receivables, rose to $139.5 million (0.88% of finance receivables) at December 31, 1995, from $110.2 million (0.75%) at December 31, 1994, primarily due to the loans discussed above. Assets received in satisfaction of loans declined to $42.0 million at December 31, 1995 from $86.5 million at December 31, 1994. The December 31, 1994 balance included two commercial aircraft which were placed on long term leases during 1995. The following table summarizes by type assets received in satisfaction of loans. At December 31, ------------------------- 1995 1994 ------ ------ Amounts in Millions Retail merchandise, property and accounts receivable(a) ................................... $ 24.1 $ 32.3 Transportation(b) ................................. 8.9 4.4 Property, equipment and other ..................... 9.0 13.8 Commercial aircraft ............................... -- 36.0 ----- ----- Total .......................................... $ 42.0 $86.5 ===== ====== - ---------- (a) Retail merchandise, property and accounts receivable includes an equity interest in a building supply retailer. (b) Transportation includes oceangoing carriers in 1995 and buses in 1994. 25 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, 1996 and 1995, 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, 1996. 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, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the 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, 1996 and 1995, and the results of their operations and cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Short Hills, New Jersey January 17, 1997, except as to Note 21 which is as of February 21, 1997 26 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Assets December 31, ------------------------ 1996 1995 ----------- ----------- Amounts in Millions Financing and leasing assets Loans Commercial ....................................... $ 10,195.6 $ 10,356.3 Consumer ......................................... 3,239.0 2,344.0 Lease receivables ................................... 3,562.0 3,095.2 ----------- ----------- Finance receivables (Note 3) ..................... 16,996.6 15,795.5 Reserve for credit losses (Note 4) .................. (220.8) (206.0) ----------- ----------- Net finance receivables .......................... 16,775.8 15,589.5 Operating lease equipment, net (Note 5) ............. 1,402.1 1,113.0 Cash and cash equivalents ........................... 103.1 161.5 Other assets ........................................ 651.5 556.3 ----------- ----------- Total assets ................................ $ 18,932.5 $ 17,420.3 =========== =========== Liabilities and Stockholders' Equity Debt (Notes 6 and 7) Commercial paper .................................... $ 5,827.0 $ 6,105.6 Variable rate senior notes .......................... 3,717.5 3,827.5 Fixed rate senior notes ............................. 4,761.2 3,337.0 Subordinated fixed rate notes ....................... 300.0 300.0 ----------- ----------- Total debt .................................. 14,605.7 13,570.1 Credit balances of factoring clients ................ 1,134.1 980.9 Accrued liabilities and payables .................... 594.0 485.9 Deferred Federal income taxes (Note 11) ............. 523.3 469.2 ----------- ----------- Total liabilities ........................... 16,857.1 15,506.1 Stockholders' equity (Note 8) Common stock -- authorized, issued and outstanding -- 1,000 shares ...................... 250.0 250.0 Paid-in capital ..................................... 573.3 408.3 Retained earnings ................................... 1,252.1 1,255.9 ----------- ----------- Total stockholders' equity .................. 2,075.4 1,914.2 ----------- ----------- Total liabilities and stockholders' equity .. $ 18,932.5 $ 17,420.3 =========== =========== See accompanying notes to consolidated financial statements. 27 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, ------------------------------------- 1996 1995 1994 --------- --------- -------- Amounts in Millions Finance income .......................................... $1,646.2 $1,529.2 $1,263.8 Interest expense ........................................ 848.3 831.5 614.0 --------- --------- -------- Net finance income .................................. 797.9 697.7 649.8 Fees and other income (Note 9) .......................... 244.1 184.7 174.4 --------- --------- -------- Operating revenue ................................... 1,042.0 882.4 824.2 --------- --------- -------- Salaries and general operating expenses (Note 10) ....... 393.1 345.7 337.9 Provision for credit losses (Note 4) .................... 111.4 91.9 96.9 Depreciation on operating lease equipment (Note 5) ...... 121.7 79.7 64.4 --------- --------- -------- Operating expenses .................................. 626.2 517.3 499.2 --------- --------- -------- Income before provision for income taxes ............ 415.8 365.1 325.0 Provision for income taxes (Note 11) .................... 155.7 139.8 123.9 --------- --------- -------- Net income .......................................... $ 260.1 $ 225.3 $ 201.1 ========= ========= ========
See accompanying notes to consolidated financial statements. 28 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, ---------------------------------- 1996 1995 1994 ---------- ---------- ---------- Amounts in Millions Common stock Balance, beginning and end of period .............. $ 250.0 $ 250.0 $ 250.0 ---------- ---------- ---------- Paid-in capital Balance, beginning of period ...................... $ 408.3 $ 408.3 $ 408.3 Capital contribution from stockholders (Note 1) ... 165.0 -- -- ---------- ---------- ---------- Balance, end of period ........................... $ 573.3 $ 408.3 $ 408.3 ---------- ---------- ---------- Retained earnings Balance, beginning of period ...................... $ 1,255.9 $ 1,134.7 $ 1,033.9 Net income ........................................ 260.1 225.3 201.1 Dividends paid -- regular ......................... (98.9) (104.1) (100.3) -- special (Note 1) ................ (165.0) -- -- ---------- ---------- ---------- Balance, end of period ............................ 1,252.1 1,255.9 1,134.7 ---------- ---------- ---------- Total stockholders' equity (Note 8) ........... $ 2,075.4 $ 1,914.2 $ 1,793.0 ========== ========== ==========
See accompanying notes to consolidated financial statements. 29 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, ------------------------------------- 1996 1995 1994 ----------- ----------- ----------- Amounts in Millions Cash flows from operations Net income .................................................. $ 260.1 $ 225.3 $ 201.1 Adjustments to reconcile net income to net cash flows from operations: Provision for credit losses .......................... 111.4 91.9 96.9 Depreciation and amortization ........................ 140.3 88.7 75.4 Provision for deferred Federal income taxes .......... 54.1 42.5 27.7 Gains on sales of equipment, other investments and receivable sales and securitizations ............... (78.9) (36.8) (26.1) Increase in accrued liabilities and payables ......... 108.1 131.2 24.2 Increase in other assets ............................. (65.9) (17.7) (0.1) Other ................................................ (3.7) (22.7) (17.2) ----------- ----------- ----------- Net cash flows provided by operations ............. 525.5 502.4 381.9 ----------- ----------- ----------- Cash flows from investing activities Loans extended .............................................. (31,414.4) (30,567.6) (23,610.9) Collections on loans ........................................ 30,355.8 28,750.8 22,394.0 Purchases of assets to be leased ............................ (1,664.0) (1,079.8) (1,039.7) Proceeds from asset and receivable sales .................... 1,144.9 816.8 535.6 Collections on lease receivables ............................ 776.4 712.9 632.2 Purchases of finance receivables portfolios ................. (661.3) (22.7) (181.7) Proceeds from sales of assets received in satisfaction of loans .................................... 76.7 26.2 40.4 Purchases of investment securities .......................... (20.8) (12.1) (21.1) Net decrease (increase) in short-term factoring receivables .................................... (0.3) 123.6 (207.4) Acquisition of Barclays Commercial Corporation .............. -- -- (435.6) Other ....................................................... (25.5) (43.4) (26.7) ----------- ----------- ----------- Net cash flows used for investing activities ...... (1,432.5) (1,295.3) (1,920.9) ----------- ----------- ----------- Cash flows from financing activities Proceeds from the issuance of variable and fixed rate notes ......................................... 4,776.0 3,698.6 3,985.8 Repayments of variable and fixed rate notes ................. (3,461.8) (2,966.0) (1,529.6) Net (decrease) increase in commercial paper ................. (278.6) 445.4 (855.9) Cash dividends paid ......................................... (263.9) (104.1) (100.3) Capital contribution from stockholders ...................... 165.0 -- -- Repayments of non-recourse leveraged lease debt ............. (146.2) (135.7) (103.1) Proceeds from non-recourse leveraged lease debt ............. 58.1 9.7 47.0 ----------- ----------- ----------- Net cash flows provided by financing activities ... 848.6 947.9 1,443.9 ----------- ----------- ----------- Net (decrease) increase in cash and cash equivalents ......................................... (58.4) 155.0 (95.1) Cash and cash equivalents, beginning of year ................ 161.5 6.5 101.6 ----------- ----------- ----------- Cash and cash equivalents, end of year ...................... $ 103.1 $ 161.5 $ 6.5 ----------- ----------- ----------- Supplemental disclosures Interest paid ............................................... $ 842.6 $ 958.8 $ 616.8 Federal and State and local income taxes paid ............... $ 102.5 $ 95.0 $ 98.9 Noncash transfer of finance receivables to other assets (principally securitizations) ..................... $ 778.9 $ 772.5 $ 117.1 Noncash transfers of finance receivables to assets received in satisfaction of loans ........................ $ 91.8 $ 30.8 $ 80.5 Noncash transfer of assets received in satisfaction of loans to finance receivables .......................... $ 10.9 $ 40.6 $ -- Noncash transfer of finance receivables to operating lease equipment ................................ $ 14.4 $ -- $ -- Noncash transfers of assets received in satisfaction of loans to operating lease equipment .................... $ -- $ -- $ 17.3
See accompanying notes to consolidated financial statements 30 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1--The Corporation The CIT Group Holdings, Inc. (the "Corporation") engages in commercial and consumer financial services activities through a nationwide distribution network. The Dai-Ichi Kangyo Bank, Limited ("DKB") owns 80% of the issued and outstanding stock of the Corporation, 60% of which it purchased from Manufacturers Hanover Corporation ("MHC") in 1989. DKB acquired an additional 20% of the Corporation from Chemical Banking Corporation ("CBC") in December 1995. The remaining 20% of the Corporation's issued and outstanding stock is owned by The Chase Manhattan Corporation ("Chase") which merged with CBC during 1996. DKB has an option expiring December 15, 2000 to purchase the remaining twenty percent (20%) common stock interest from Chase. On December 24, 1996, the Corporation paid a special dividend in the aggregate amount of $165.0 million to its stockholders, DKB and Chase. The stockholders then immediately contributed $165.0 million to the Corporation's paid-in capital in proportion to their 80% and 20% common stock ownership interests, respectively. Note 2--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. All significant intercompany transactions have been eliminated. Prior period amounts, principally in the Consolidated Statements of Cash Flows, have been reclassified to conform to the current presentation. Financing and Leasing Assets The Corporation provides funding for a variety of financing arrangements including term loans, lease financing and operating leases. Lease receivables include leveraged leases, for which a major portion of the funding is provided by third party lenders, on a nonrecourse basis, with the Corporation providing the balance and acquiring title to the property. The amounts outstanding on loans and 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 accretion 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 in the transaction, net of related deferred tax liabilities. Rental income on operating leases is recognized on an accrual basis. 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. For certain consumer loans, the accrual of finance income is suspended at either 120 days when no contractual payments are received or at 180 days when partial payments have been received. Accrued but uncollected income at the date finance income is suspended is reversed and charged against income to the extent the estimated fair value of collateral does not satisfy both 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 or returned to accrual status. 31 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Fees and other income includes: (1) factoring commissions, (2) commitment, facility, letters of credit and syndication fees, (3) servicing fees and (4) gains and losses from the sales of equipment, other investments and the sales and securitizations of finance receivables. 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 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. Management performs periodic reviews of the estimated residual values with other than temporary impairment, if any, being recognized in the current period. 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. 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. Although certain consumer loans are reviewed individually for charge-offs, automatic charge-offs are recorded on consumer loans when no contractual payments are received for 120 days, or at 180 days when partial payments have been received. Impaired Loans The Corporation adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan", as amended by Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures", (collectively referred to hereafter as "SFAS 114") on January 1, 1995. SFAS 114 requires 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. Impaired loans include any loan transaction on nonaccrual status or any troubled debt restructuring entered into after December 31, 1994, subject to periodic review by the Corporation's Asset Quality Review Committee ("AQR"). The AQR is comprised of members of senior management, which covers finance receivables of $500,000 or more meeting certain credit risk grading parameters. Excluded from impaired loans are: 1) certain individual small dollar commercial nonaccrual loans (under $500,000) for which the collateral value supports the outstanding balance, 2) consumer loans which are subject to automatic charge-off procedures, and 3) short-term factoring customer receivables, generally having terms of no more than 30 days. In general, the impaired loans are collateral dependent. Any shortfall between the value and the recorded investment in the loan is recognized by recording a provision for credit losses. Other Assets At the time management decides to proceed with a securitization of loans, such loans are considered available for sale, classified as other assets and carried at the lower of aggregate cost or market value. 32 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Certain consumer loans are originated and sold to trusts which, in turn, issue asset-backed securities to investors. The Corporation retains the servicing rights and participates in certain cash flows from the loans. The present value of expected net cash flows which exceeds the estimated cost of servicing is recorded at the time of sale as "excess servicing assets". In determining expected net cash flows, the Corporation considers assumptions of prepayment and loss experience and market interest rates. Excess servicing assets are stated at the lower of amortized cost or fair value, which is determined by adjusting the present value of the remaining cash flows for anticipated prepayment and loss experience. Amortization is recognized on excess servicing assets systematically in relation to the excess cash flows of securitizations. In 1996, the Corporation adopted Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS 122"). SFAS 122 requires an enterprise that acquires mortgage servicing rights through either the purchase or origination of mortgage loans and then sells or securitizes those loans with servicing rights retained to allocate the total cost between the mortgage servicing rights and the loans based on their relative fair values. This Statement applies to the sale or securitization of home mortgage or manufactured housing finance receivables when servicing is retained. The Statement also requires that the enterprise assess its capitalized mortgage servicing rights for impairment based on the fair value of those rights. The adoption of SFAS 122 did not affect the Corporation's consolidated financial position, results of operations or liquidity for the year ended December 31, 1996. The excess of purchase price over fair market value of assets acquired (goodwill) in connection with business acquisitions is amortized on a straight line basis over a period not to exceed 20 years. Assets received in satisfaction of loans are carried at the lower of carrying value or estimated fair value less selling costs, with write-downs at the time of receipt recognized by recording a provision for credit losses. Subsequent write-downs of such assets, which may be required due to a decline in estimated fair market value after receipt, are reflected in general operating expenses. 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. Derivative Financial Instruments The Corporation enters into interest rate swap 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. The Corporation does not enter into derivative financial instruments for trading or speculative purposes. The net interest differential, including premiums paid or received, if any, on interest rate swaps 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 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 the maturity of the hedged asset or liability position. The Corporation will also utilize derivative instruments to hedge the interest rate used to price the anticipated securitization of loans. Such transactions are designated as hedges against a securitization that is probable and for which the significant characteristics and terms have been identified but for which there is no legally binding obligation. The loans to be securitized 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. In the event the anticipated securitization does not occur, the related hedge position would be liquidated with any gain or loss recognized at such time, and the related assets would be reclassified to loans. 33 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Income Taxes 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. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income at the time of enactment. 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 using an actuarial method over the related lease term. 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. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Note 3--Finance Receivables Included in lease receivables at December 31, 1996 and 1995 are leveraged lease receivables of $648.8 million and $576.7 million, respectively. Leveraged lease receivables exclude the portion of lease receivables offset by related non-recourse debt payable to third-party lenders of $2.1 billion at both December 31, 1996 and 1995, including amounts owed to affiliates of DKB which totaled $486.6 million at year-end 1996, and $501.3 million at year-end 1995. Also excluded from finance receivables are $1.4 billion of finance receivables at December 31, 1996 ($0.9 billion in 1995) previously securitized by the Corporation. Commercial and consumer loans are presented net of unearned income of $540.4 million and $571.2 million at December 31, 1996 and 1995, respectively. Lease receivables are presented net of unearned income of $1.0 billion and $978.9 million at December 31, 1996 and 1995, respectively. The following table sets forth the contractual maturities of finance receivables.
December 31, 1996 December 31, 1995 ----------------------- ---------------------- Amount Percent Amount Percent ---------- ------- --------- ------- Dollar Amounts in Millions Due Within One Year ............................. $ 5,698.2 33.53% $ 5,523.6 34.97% Due Within One to Two Years ..................... 2,515.6 14.80 2,488.8 15.76 Due Within Two to Four Years .................... 3,647.0 21.46 3,288.7 20.82 Due After Four Years ............................ 5,135.8 30.21 4,494.4 28.45 --------- ------ --------- ------ Total...................................... $16,996.6 100.00% $15,795.5 100.00% ========= ====== ========= ======
34 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. The following table sets forth information regarding finance receivables on nonaccrual status and assets received in satisfaction of loans. At December 31, ------------------------- 1996 1995 -------- ------- Amounts in Millions Nonaccrual finance receivables .................. $119.6 $139.5 Assets received in satisfaction of loans ........ 47.9 42.0 ------ ------ Total nonperforming assets .................... $167.5 $181.5 ====== ====== Percent to finance receivables .................. 0.99% 1.15% ====== ====== The amount of finance income recognized on year-end nonaccrual finance receivables totaled $8.5 million, $8.0 million and $6.2 million in 1996, 1995 and 1994, respectively. The amount of finance income which would have been recorded under contractual terms for such nonaccrual receivables totaled $24.7 million, $29.3 million, and $20.7 million in 1996, 1995 and 1994, respectively. At December 31, 1996 and 1995, the recorded investment in impaired loans, which are generally collateral dependent, totaled $103.9 million and $159.3 million, respectively. The fair value of the collateral or the present value of expected future cash flows equaled or exceeded the recorded investment for the impaired loans and, as such, there was no related SFAS 114 allowance for credit losses. The average monthly recorded investment in the impaired loans was $89.4 million and $116.9 million for the years ended December 31, 1996 and 1995, respectively. There was no finance income recorded on these loans during 1996 after being classified as impaired. During 1995, finance income of $1.0 million was recognized on these loans after being classified as impaired loans. The adoption of SFAS 114 on January 1, 1995 had no material effect on the Corporation's 1995 financial condition, results of operation or liquidity. At December 31, 1996, and 1995, the Corporation had $10.8 million and $30.0 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 $0.7 million, $2.8 million and $0.8 million in 1996, 1995 and 1994, respectively. Finance income on these restructured receivables would have been $1.3 million, $3.3 million and $2.1 million for 1996, 1995 and 1994, respectively, based on original contractual terms. 35 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 4--Reserve for Credit Losses The following table presents changes in the reserve for credit losses.
1996 1995 1994 ------- ------- ------- Amounts in Millions Balance, January 1 ................................................. $206.0 $192.4 $169.4 ------ ------ ------ Finance receivables charged-off .................................... (122.2) (96.9) (95.4) Recoveries on finance receivables previously charged-off ..................................................... 20.7 19.7 11.2 ------ ------ ------ Net credit losses ............................................... (101.5) (77.2) (84.2) ------ ------ ------ Provision for credit losses ........................................ 111.4 91.9 96.9 Portfolio acquisitions (dispositions), net ......................... 4.9 (1.1) 10.3 ------ ------ ------ Net addition to the reserve for credit losses ...................... 116.3 90.8 107.2 ------ ------ ------ Balance, December 31 ............................................... $220.8 $206.0 $192.4 ====== ====== ====== Reserve for credit losses as a percentage of finance receivables ..................................................... 1.30% 1.30% 1.30% ====== ====== ======
Note 5--Operating Lease Equipment The following table provides an analysis of operating lease equipment by equipment type, net of accumulated depreciation of $287.7 million in 1996 and $198.1 million in 1995. At December 31, ------------------------- 1996 1995 -------- -------- Amounts in Millions Commercial aircraft ........................... $ 624.0 $ 499.4 Railroad equipment ............................ 273.2 153.4 Business aircraft ............................. 167.8 141.2 Trucks, trailers and buses .................... 160.1 163.2 Other ......................................... 177.0 155.8 -------- -------- Total ....................................... $1,402.1 $1,113.0 ======== ======== Included in the preceding table is equipment not currently subject to lease agreements of $1.9 million and $24.4 million at December 31, 1996 and 1995, respectively. During the first quarter of 1996, the Corporation adopted Statement of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). SFAS 121 requires that a review for impairment be performed whenever events or changes in circumstances indicate that the carrying amount of long-lived assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The adoption of SFAS 121 did not have a significant impact on the Corporation's consolidated financial position, results of operations or liquidity. 36 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Rental income on operating leases, included in finance income, totaled $182.4 million in 1996, $128.8 million in 1995 and $97.2 million in 1994. The following table presents future minimum lease rentals on noncancellable operating leases as of December 31, 1996. 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. Amounts Years Ended December 31, in Millions - ----------------------- ----------- 1997 .................................................. $193.7 1998 .................................................. 162.7 1999 .................................................. 126.3 2000 .................................................. 91.9 2001 .................................................. 70.1 Thereafter ............................................ 89.8 ------ Total ............................................... $734.5 ====== Note 6--Debt The following table presents data on commercial paper borrowings.
1996 1995 1994 --------- ---------- --------- Dollar Amounts in Millions At December 31, Borrowings outstanding .......................................... $5,827.0 $6,105.6 $5,660.2 Weighted average interest rate .................................. 5.45% 5.75% 5.65% Weighted average maturity ....................................... 32 days 45 days 22 days For the year ended December 31, Daily average borrowings ........................................ $5,817.7 $5,800.1 $6,532.5 Maximum amount outstanding ...................................... $6,591.3 $6,672.1 $7,207.3 Weighted average interest rate (excluding amounts related to interest bearing deposits) ................................ 5.44% 5.95% 4.31%
37 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table presents the contractual maturities of total debt at December 31, 1996.
Commercial Variable rate 1996 1995 paper senior notes Total Total ---------- ------------ ----- ----- Amounts in Millions Due in 1996 (rates ranging from 5.55% to 5.95%) ........... $ -- $ -- $ -- $8,505.6 Due in 1997 (rates ranging from 5.04% to 6.14%) ........... 5,827.0 2,856.0 8,683.0 806.0 Due in 1998 (rates ranging from 5.47% to 6.03%)(1) ........ -- 461.5 461.5 241.5 Due in 1999 (rates ranging from 5.04% to 6.06%) ........... -- 380.0 380.0 380.0 Due after 2001 (rate of 5.85%) ............................ -- 20.0 20.0 -- -------- -------- -------- -------- Total.............................................. $5,827.0 $3,717.5 $9,544.5 $9,933.1 ======== ======== ======== ========
Fixed Rate Notes 1996 1995 Senior Subordinated Total Total ---------- ------------ ----- ----- Amounts in Millions Due in 1996 (rates ranging from 4.75% to 8.88%) ........... $ -- $ -- $ -- $1,030.0 Due in 1997 (rates ranging from 5.50% to 8.75%) ........... 700.2 -- 700.2 702.0 Due in 1998 (rates ranging from 5.63% to 8.75%) ........... 1,550.0 -- 1,550.0 800.0 Due in 1999 (rates ranging from 5.38% to 6.63%) ........... 1,070.0 -- 1,070.0 20.0 Due in 2000 (rate of 6.15%) ............................... 20.0 -- 20.0 20.0 Due in 2001 (rates ranging from 5.63% to 9.25%) ........... 500.0 200.0 700.0 200.0 Due after 2001 (rates ranging from 5.37% to 7.13%)(2) ..... 928.6 100.0 1,028.6 870.2 -------- -------- -------- -------- Face amount of maturities ................................. 4,768.8 300.0 5,068.8 3,642.2 Issue discount ............................................ (7.6) -- (7.6) (5.2) -------- -------- -------- -------- Total ................................................. $4,761.2 $ 300.0 $5,061.2 $3,637.0 ======== ======== ======== ========
- ---------- (1) $61.5 million may be repaid at the option of the holder upon 30 days' notice. (2) $100.0 million may be repaid at the option of the holder upon 30 days' notice. Fixed rate senior and subordinated debt outstanding at December 31, 1996, matures at various dates through 2008 at interest rates ranging from 5.38% to 9.25%. The consolidated weighted average interest rates on fixed rate senior and subordinated debt at December 31, 1996 and 1995 were 6.52% and 7.00%, respectively. Variable rate senior notes outstanding at December 31, 1996 with interest rates ranging from 5.25% to 5.94% mature at various dates through 2003. The consolidated weighted average interest rates on variable rate senior notes at December 31, 1996 and 1995 were 5.44% and 5.64%, respectively. The following table represents information on unsecured revolving lines of credit with 60 banks which support commercial paper borrowings at December 31, 1996. Maturity Amount -------- ----------------- Amounts in Millions May 1997 .............................................. $1,212.0 September 1997 ........................................ 81.0 May 2001 .............................................. 3,638.0 September 2001 ........................................ 244.0 -------- Total ............................................... $5,175.0 ======== The credit line agreements contain clauses which allow the Corporation to extend the termination dates upon written consent from the participating banks. There have been no borrowings under credit lines supporting commercial paper since 1970. 38 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 7--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 transactions, all of which are transacted in over-the-counter (OTC) markets, with other financial institutions acting as principal counterparties, including subsidiaries of DKB and Chase. 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. The following table presents the notional principal amounts, weighted average interest rates expected to be received or paid and the contractual maturities of interest rate swaps at December 31, 1996.
Years ending Floating to Fixed to Floating to December 31, Fixed Rate Floating Rate Floating Rate - ------------ ----------------------------- ---------------------------- -------------------------- Notional Amounts in Millions Notional Receive Pay Notional Receive Pay Notional Receive Pay Amount Rate Rate Amount Rate Rate Amount Rate Rate -------- ------- ---- -------- ------- ---- ------- ------ ---- 1997 ............ $1,425.0 5.86% 5.99% $250.2 6.94% 5.97% $456.0 5.54% 5.56% 1998 ............ 700.0 6.27% 6.61% -- -- -- -- -- -- 1999 ............ 980.0 5.75% 6.15% -- -- -- 130.0 5.55% 5.76% 2000 ............ 700.0 5.93% 7.05% 20.0 6.15% 5.76% -- -- -- 2001 ............ 200.0 5.80% 7.45% 200.0 5.82% 5.50% -- -- -- 2002-2008 ....... -- -- -- 200.0 5.92% 5.58% -- -- -- ------- ----- ----- ------ ------ ------ ------ ----- ----- $4,005.0 $670.2 $586.0 ======= ====== ====== Weighted average rate .... 5.91% 6.40% 6.28% 5.71% 5.54% 5.60% ===== ===== ===== ===== ===== =====
All rates were those in effect at December 31, 1996. Variable rates are based on the contractually determined rate or other market rate indices and may change significantly, affecting future cash flows. The following table presents the notional principal amounts of interest rate swaps by class and the corresponding hedged liability position. Notional Amounts Interest Rate Swaps in Millions Comments - ------------------- ----------- -------- Floating to fixed rate swaps Hedging commercial paper $3,005.0 Effectively converts the interest rate on an equivalent amount of commercial paper to a fixed rate. Hedging variable rate notes 1,000.0 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 4,005.0 ------- Fixed to floating rate swaps Hedging fixed rate notes 670.2 Effectively converts the interest rate on an equivalent amount of fixed rate notes to a variable rate. ----------------------------------- Basis swaps Hedging variable rate debt 586.0 Effectively fixes the spread between the rates on an equivalent amount of variable rate notes and various market interest rate indices. ------- ----------------------------------- Total interest rate swaps $5,261.2 ======= 39 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Corporation's hedging activity increased interest expense by $27.8 million, $7.8 million and $27.3 million in 1996, 1995 and 1994, respectively, over the interest expense that would have been incurred with an identical debt structure but without the Corporation's hedging activity. However, this calculation of interest expense 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. Basis swap agreements involve the exchange of two different floating rate interest payment obligations and are used to manage the basis risk between floating rate indices. Additionally, there were cross-currency interest rate swaps with a notional principal amount of $218.6 million on which the Corporation was paying interest at a weighted average rate of 5.67% at December 31, 1996 that effectively converted yen denominated fixed rate debt into variable rate U.S. dollar obligations. These swaps have maturities ranging from 1999 to 2006 to correspond with the terms of the debt. 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, 1996, reduced by the effects of master netting agreements as presented in Footnote 16 --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 8--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 9--Fees and Other Income The following table sets forth the components of fees and other income.
Years ended December 31, ------------------------------- 1996 1995 1994 ------- ------- ------- Amounts in Millions Commissions, fees and other ........................................... $165.2 $147.9 $148.3 Gains on equipment and other investment sales ......................... 54.6 10.5 10.1 Gains on sales and securitizations of finance receivables ............. 24.3 26.3 16.0 ------ ------ ------ $244.1 $184.7 $174.4 ====== ====== ======
Note 10--Salaries and General Operating Expenses The following table sets forth the components of salaries and general operating expenses. Years ended December 31, -------------------------------- 1996 1995 1994 -------- --------- ------- Amounts in Millions Salaries and employee benefits .............. $223.0 $193.4 $185.8 General operating expenses .................. 170.1 152.3 152.1 ------ ------ ------ $393.1 $345.7 $337.9 ====== ====== ====== 40 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 11--Income Taxes The effective tax rate of the Corporation varied from the statutory Federal corporate income tax rate as follows: Years ended December 31, --------------------------------- 1996 1995 1994 --------- --------- ------- Percentage of Pretax Income Federal income tax rate .................. 35.0% 35.0% 35.0% Increase (decrease) due to: State and local income taxes, net of Federal income tax benefit ......... 4.5 5.1 5.3 Investment tax credits .................. (0.3) (0.3) (0.3) Other ................................... (1.8) (1.5) (1.9) ---- ---- ---- Effective tax rate ...................... 37.4% 38.3% 38.1% ==== ==== ==== The provision for income taxes is comprised of the following: Years ended December 31, -------------------------------- 1996 1995 1994 -------- --------- ------- Amounts in Millions Current Federal income tax provision ....... $ 72.9 $ 68.5 $ 69.5 Deferred Federal income tax provision ...... 54.1 42.5 27.7 ------ ------ ------ Total Federal income taxes ................. 127.0 111.0 97.2 State and local income taxes ............... 28.7 28.8 26.7 ------ ------ ------ Total provision for income taxes ........... $ 155.7 $ 139.8 $ 123.9 ====== ====== ====== 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, --------------------------- 1996 1995 --------- ------- Amounts in Millions Assets Provision for credit losses .................. $ (83.8) $ (73.8) Loan origination fees ........................ (10.5) (9.1) Other ........................................ (37.8) (20.2) ------ ------ Total deferred tax assets .................... (132.1) (103.1) ------ ------ Liabilities Leasing transactions ......................... 610.0 549.5 Market discount income ....................... 23.8 -- Amortization of intangibles .................. 9.2 11.2 Prepaid pension costs ........................ 2.0 2.3 Depreciation of fixed assets ................. 2.7 0.3 Other ........................................ 2.7 2.7 ------ ----- Total deferred tax liabilities ......... 650.4 566.0 ------ ----- Net deferred tax liability ...................... $ 518.3 $ 462.9 ====== ====== Also, included in deferred Federal income taxes on the Consolidated Balance Sheets are unamortized investment tax credits of $5.0 million and $6.3 million at December 31, 1996 and December 31, 1995, respectively. Included in the accrued liabilities and payables caption in the Consolidated Balance Sheets are state and local deferred tax liabilities of $97.4 million and $86.4 million at December 31, 1996 and December 31, 1995, respectively, arising from the temporary differences shown in the above tables. 41 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 12--Postretirement and Other Benefit Plans Retirement Plan Substantially all employees of the Corporation who have completed one year of service and are 21 years of age participate in The CIT Group Holdings, Inc. Retirement Plan (the "Plan"). The retirement benefits under the 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 to the extent the funding qualifies for an income tax deduction. Such funding is charged to salaries and employee benefits expense. The accompanying table sets forth the funded status of the Plan and the amounts recognized in the Consolidated Balance Sheets.
A December 31, --------------------------- 1996 1995 1994 ------ ------ ------ Amounts in Millions Actuarial present value of benefit obligations: Accumulated benefit obligation including vested benefits of $54.8 in 1996, $54.0 in 1995, and $36.2 in 1994 ........ $ 61.6 $ 58.1 $39.7 ====== ====== ===== Plan assets at fair market value ........................... $109.9 $101.2 $81.5 Projected benefit obligation ............................... (84.0) (79.9) (55.8) ------ ------ ----- Excess plan assets ......................................... 25.9 21.3 25.7 Unrecognized prior service cost ............................ 1.8 1.9 2.1 Unrecognized net gain ...................................... 15.9 10.5 13.8 ------ ------ ----- Prepaid pension cost ....................................... $ 8.2 $ 8.9 $ 9.8 ====== ====== ===== Pension cost included the following components: Service cost-benefits earned during the period ............. $ 5.3 $ 3.8 $ 4.0 Interest cost on projected benefit obligation .............. 5.7 4.9 4.5 Actual (return)/loss on plan assets ........................ (11.5) (21.9) 2.7 Net amortization and deferral .............................. 1.2 14.1 (11.0) ------ ------ ----- Pension cost ............................................... $ 0.7 $ 0.9 $ 0.2 ====== ====== =====
The following assumptions were used for calculating the projected benefit obligations shown in the preceding table. 1996 1995 1994 ---- ---- ---- Discount rate ..................................... 7.50% 7.25% 8.75% Rate of increase in compensation .................. 4.50% 4.50% 5.00% Expected long-term rate of return on plan assets .. 10.00% 10.00% 9.00% Postretirement Medical and Life Insurance Benefits The Corporation provides certain health care and life insurance benefits to eligible retired employees. Salaried participants generally become eligible for retiree health care benefits after reaching age 55 with 10 years of benefit service and 11 years of medical plan participation. 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. 42 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The postretirement benefit liability at December 31, 1996 and December 31, 1995 is set forth in the following table. 1996 1995 ------ ------ Amounts in Millions Accumulated postretirement benefit obligation ("APBO"): Retirees ............................................... $22.5 $21.8 Fully eligible, active plan participants ............... 4.1 4.8 Other active plan participants ......................... 8.3 13.8 ----- ----- Unfunded postretirement obligation ....................... 34.9 40.4 Unrecognized prior service cost .......................... -- (0.5) Unrecognized net gain .................................... (7.7) (0.8) Unrecognized transition obligation ....................... 26.2 28.3 ----- ----- Accrued postretirement benefit obligation ................ $16.4 $13.4 ===== ===== The components of net periodic postretirement benefit cost were as follows.
Years ended December 31, --------------------------------- 1996 1995 1994 ----- ----- ---- Amounts in Millions Service cost, benefits earned during the period ......................... $1.1 $1.1 $1.2 Interest cost on accumulated postretirement benefit obligation .......... 2.4 3.2 2.8 Amortization of unrecognized transition obligation ...................... 1.7 1.7 1.7 Amortization of gain .................................................... (0.6) -- -- Amortization of unrecognized prior service cost ......................... -- (0.1) -- ---- ---- ---- Net periodic postretirement benefit cost ............................... $4.6 $5.9 $5.7 ==== ==== ====
The following assumptions were used for calculating the APBO shown in the preceding tables.
1996 1995 1994 ------- ------- ------- Discount Rate ......................................................... 7.50% 7.25% 8.75% Rate of increase in compensation ...................................... 4.50% 4.50% 5.00% Assumed Health Care Cost Trend Rate: Retirees prior to reaching age 65 ................................ 9.00% 10.00% 11.00% Retirees older than 65 ........................................... 6.00% 7.00% 8.00%
The assumed health care cost trend rates decline to an ultimate level of 4.75% in 2001 for retirees prior to reaching age 65 and 4.75% in 1998 for retirees older than 65 for 1996, 4.75% in 2003 for retirees prior to reaching age 65 and 4.75% in 2000 for retirees older than 65 for 1995 and 6.25% in 2001 for all retirees for 1994. If the health care cost trend rate were increased by 1%, the APBO relating to the medical benefits as of December 31, 1996, would be increased by $2.4 million (9.5%), and the sum of the service cost and interest cost components of net periodic postretirement benefit cost relating to the medical benefits for 1996 would be increased by $0.3 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 $9.1 million, $8.2 million and $8.0 million for 1996, 1995 and 1994, respectively. 43 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 13--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, 1996. At December 31, Amounts in Millions - --------------- ------------------- 1997 ............................................... $ 23.8 1998 ............................................... 22.3 1999 ............................................... 18.9 2000 ............................................... 15.6 2001 ............................................... 14.5 Thereafter ......................................... 60.5 ------ Total ............................................. $155.6 ====== 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 $19.6 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, ------------------------------------- 1996 1995 1994 ------- -------- ------- Amounts in Millions Premises $18.0 $18.0 $18.3 Equipment 6.3 5.7 5.2 Less sublease income (1.2) (1.3) (1.3) ----- ----- ----- Total $23.1 $22.4 $22.2 ===== ===== ===== Rental expense paid to Chase totaled $0.5 million, $0.6 million and $1.6 million in 1996, 1995 and 1994, respectively. Note 14--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 will not have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Corporation. Note 15--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, management believes 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. 44 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The accompanying table summarizes the contractual amounts of credit-related commitments.
Due to expire ---------------------- Total Total Within After outstanding outstanding At December 31, one year one year 1996 1995 - -------------- -------- -------- ---------- ----------- Amounts in Millions Unused commitments to extend credit Loans .............................................. $1,457.2 $30.2 $1,487.4 $1,244.1 Leases ............................................. 50.9 -- 50.9 61.6 Letters of credit and acceptances Standby letters of credit .......................... 144.8 6.8 151.6 176.9 Other letters of credit ............................ 221.2 10.5 231.7 197.2 Acceptances ........................................ 14.6 - 14.6 3.9 Guarantees ............................................. 51.9 28.0 79.9 101.2 Foreign exchange contracts ............................. 0.8 - 0.8 0.1
Note 16--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 established 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 15, 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. 45 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, 1996 and 1995 are set forth below.
1996 1995 -------------------------- ------------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value ---------- --------- ---------- --------- Asset Asset Asset Asset (Liability) (Liability) (Liability) (Liability) ---------- --------- ---------- --------- Amounts in Millions Finance Receivables-Loans(a) ........................ $13,275.2 $13,480.1 $12,563.4 $12,844.1 Other Assets(b) ..................................... $ 389.7 $ 424.4 $ 305.5 $ 333.2 Commercial Paper(c) ................................. $(5,827.0) $(5,827.0) $(6,105.6) $(6,105.6) Fixed rate senior notes and subordinated fixed rate notes(d) .................. $(5,061.2) $(5,091.6) $(3,637.0) $(3,762.2) Variable rate notes(d) .............................. $(3,717.5) $(3,714.3) $(3,827.5) $(3,827.5) Credit balances of factoring clients and accrued liabilities and payables(e) ............. $(1,578.9) $(1,578.9) $(1,344.8) $(1,344.8) Derivative Financial Instruments(f) Interest Rate Swaps Off-balance sheet assets ........................ $ -- $ 6.3 $ -- $ 2.8 Off-balance sheet liabilities ................... $ -- $ (64.6) $ -- $ (107.8) Cross currency interest rate swaps .............. $ -- $ 14.1 $ -- $ 36.8 Forward interest rate agreement ................... $ -- $ -- $ -- $ (0.5)
- ---------------- (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 7.96% to 9.37% for 1996 and 8.46% to 9.99% for 1995. 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. The net carrying value of lease finance receivables not subject to fair value disclosure totaled $3.5 billion in 1996 and $3.0 billion in 1995. (b) Other assets subject to fair value disclosure include accrued interest receivable, excess servicing assets and investment securities. The carrying amount of accrued interest receivable approximates fair value. The fair value of excess servicing assets was determined by adjusting the present value of remaining cash flows for anticipated prepayment and loss experience. Investment securities actively traded in a secondary market were valued using quoted available market prices. Investments 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 $261.8 million in 1996 and $250.8 million in 1995. (c) The estimated fair value of commercial paper approximates carrying value due to its relatively short maturity. (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 5.53% to 6.95% in 1996 and 5.30% to 6.25% in 1995. The estimated fair value for variable rate notes differs from carrying value as a result of a foreign denominated issuance. (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 $672.5 million in 1996 and $591.2 million in 1995. (f) As previously disclosed in Note 7-Derivative Financial Instruments, the notional principal amount of interest rate swaps designated as hedges against the Corporation's debt totaled $5.26 billion at December 31, 1996 ($1.80 billion of which related to interest rate swaps whose fair market value represented an asset and $3.46 billion related to interest rate swaps whose fair market value represented a liability, after adjusting for master netting agreements) and $5.27 billion at December 31, 1995 ($0.7 billion of assets and $4.6 billion of liabilities). The notional principal amount of cross currency interest rate swaps totaled $218.6 million at December 31, 1996 and $190.2 million at December 31, 1995. 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. 46 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 17--Investments in Debt and Equity Securities At December 31, 1996 and 1995, the book value of the Corporation's investments in debt and equity securities subject to the provision of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" totaled $24.4 million and $22.3 million, respectively, 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 18--Accounting for Stock-Based Compensation The Corporation's Long Term Incentive Plan (the "CIT Career Incentive Plan") awards phantom shares of stock to selected executives. The performance period for each plan is three consecutive calendar years and performance goals are a function of net income growth targets and return on equity performance. The value of the shares is determined at the end of each performance period based upon a price/earnings multiplier determined by the Executive Committee of the Board of Directors of the Corporation. Following the end of a performance period, one-third of the shares vest immediately and one-third vest at the end of each of the next two years. All vested shares are settled in cash. Prior to January 1, 1996, the Corporation accounted for the CIT Career Incentive Plan in accordance with the provisions of Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" and related interpretations. On January 1, 1996, the Corporation adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") which did not change the accounting for plans settled in cash and, therefore, had no impact on the Corporation. Compensation cost is recognized over the periods in which the participants' services are rendered and a liability has been established for the estimated payments to participants. The amount of compensation cost recorded for the CIT Career Incentive Plan during 1996, 1995 and 1994 was $9.5 million, $3.8 million and $4.0 million, respectively. Note 19--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. Note 20--Certain Relationships and Related Transactions 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, 1995, the Corporation had $135.0 million of interest-bearing deposits with DKB. At December 31, 1996, the Corporation had no such deposits. From time to time, the Corporation may maintain such deposits with DKB or Chase. At December 31, 1996, the Corporation's credit line coverage with 60 banks totaled $5.18 billion of committed facilities. Additional information regarding these credit lines can be found in Note 6-Debt. At December 31, 1996, DKB was a committed bank under a $3.6 billion revolving credit facility, a $244.0 million revolving credit facility, a $1.2 billion revolving credit facility, and an $81.0 million revolving credit facility, with commitments of $108.8 million, $93.8 million, $36.3 million and $31.3 million, respectively. DKB is the agent under the $244.0 million facility and the $81.0 million facility. Chase is both the agent and a committed bank under the $3.6 billion revolving credit facility and the $1.2 billion revolving credit facility with commitments of $187.5 million and $62.5 million, respectively. At December 31, 1995, the Corporation's credit line coverage with 69 banks totaled $4.64 billion of committed facilities. At December 31, 1995, 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 47 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) commitments of $55.0 million, $80.0 million and $105.0 million, respectively. DKB was 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 Chase. At December 31, 1996, the notional principal amount outstanding on interest rate swap agreements with DKB and Chase totaled $270.0 million and $705.0 million, respectively. At December 31, 1995, the notional principal amount outstanding on interest rate swap agreements with DKB and Chase totaled $270.0 million and $300.0 million, respectively. The notional principal amount outstanding on foreign currency swaps totaled $168.0 million and $140.2 million with DKB at year-end 1996 and 1995, respectively. 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 Note 3-Finance Receivables. The Corporation held a $9.0 million letter of credit from Chase as additional collateral on a business aircraft loaned to a third party with an outstanding balance of $22.2 million and $23.1 million at December 31, 1996 and 1995, respectively. Chase is also indebted to the Corporation in the amount of $7.3 million and $7.7 million, at December 31, 1996 and 1995, respectively, for financing relating to the purchase of a business aircraft by Chase. The Corporation has also entered into various noncancellable long-term facility lease agreements with Chase. Future minimum rentals under these leases are $0.5 million in 1997, $0.5 million in 1998, $0.4 million in 1999, $0.1 million in 2000. At December 31, 1996 and 1995, the Corporation had entered into credit-related commitments with DKB in the form of letters of credit totaling $19.8 million and $21.7 million, respectively, equal to the amount of the single lump sum premium necessary to provide group life insurance coverage to certain eligible retired employees and an amount to fund certain overseas finance receivables. The Corporation purchased finance receivables totaling $33.4 million from Chase during 1996. The Corporation has entered into cash collateral loan agreements with DKB pursuant to which DKB made loans to four separate cash collateral trusts in order to provide additional security for payments on the certificates of the related contract trusts. These contract trusts were formed for the purpose of securitizing certain recreational vehicle and recreational marine finance receivables. At December 31, 1996 and 1995, the principal amount outstanding on the cash collateral loans was $40.7 million and $12.3 million, respectively. The Corporation has entered into multiple trust agreements with Chase with respect to certain securitization transactions. Note 21--Subsequent Event--Preferred Capital Securities In February 1997, CIT Capital Trust I, (the "Trust"), a wholly-owned subsidiary of the Corporation, issued $250.0 million of 7.70% Preferred Capital Securities (the "Capital Securities") in a private offering. The Trust subsequently invested the offering proceeds in Junior Subordinated Debentures (the "Debentures") of the Corporation, having identical rates and payment dates. The Debentures of the Corporation represent the sole assets of the Trust. Holders of the Capital Securities are entitled to receive cumulative distributions at an annual rate of 7.70% through either the redemption date or maturity of the Debentures (February 15, 2027). Both the Capital Securities issued and the Trust owned Debentures of the Corporation are redeemable in whole or in part on or after February 15, 2007 or at anytime in whole upon changes in specific tax legislation, bank regulatory guidelines or securities law. Distributions by the Trust are guaranteed by the Corporation to the extent that the Trust has funds available for distribution. 48 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For financial reporting purposes, the Capital Securities will be presented in the consolidated balance sheet of the Corporation as a separate line item directly above stockholders' equity and captioned "Redeemable preferred capital securities of subsidiary holding solely parent company debentures". For financial reporting purposes, the Corporation will record distributions payable on the Capital Securities as an expense in the consolidated statements of income. Note 22--Selected Quarterly Financial Data (Unaudited)
1996 ------------------------------------------------------------------ First Second Third Fourth Quarter Quarter Quarter Quarter Year ------ ------- ------ ------ ------- Amounts in Millions Net finance income ......................... $195.4 $197.3 $201.4 $203.8 $797.9 Fees and other income ...................... 52.7 73.2 50.9 67.3 244.1 Salaries and general operating expenses .... 95.9 97.6 97.9 101.7 393.1 Provision for credit losses ................ 27.8 26.6 24.2 32.8 111.4 Depreciation on operating lease equipment ........................... 27.5 28.8 28.0 37.4 121.7 Provision for income taxes ................. 37.1 45.1 37.1 36.4 155.7 Net income ................................. $ 59.8 $ 72.4 $ 65.1 $ 62.8 $260.1 ------------------------------------------------------------------ 1995 ------------------------------------------------------------------ First Second Third Fourth Quarter Quarter Quarter Quarter Year ------ ------- ------ ------ ------ Amounts in Millions Net finance income ......................... $164.5 $171.5 $178.8 $182.9 $697.7 Fees and other income ...................... 43.4 41.9 47.8 51.6 184.7 Salaries and general operating expenses ........................ 84.8 82.3 85.9 92.7 345.7 Provision for credit losses ................ 21.0 22.2 24.0 24.7 91.9 Depreciation on operating lease equipment ........................... 17.6 17.2 21.4 23.5 79.7 Provision for income taxes ................. 31.7 35.2 36.8 36.1 139.8 Net income ................................. $ 52.8 $ 56.5 $ 58.5 $ 57.5 $225.3 ------------------------------------------------------------------
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 49 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, 1997, 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 61 Senior Advisor, The Dai-Ichi Kangyo 5/95 Senior Managing Director, DKB 5/93 Bank, Limited ("DKB") Managing Director, DKB 6/91 Chairman,The CIT Group Holdings, 7/92 Inc. ("CIT") Director, CIT 12/89 Albert R. Gamper Jr. 54 President & Chief Executive 12/89 Not applicable Officer, CIT Director, CIT 5/84 Takasuke Kaneko 54 Director CIT 6/95 Director and General Manager, 8/94 Managing Director, DKB 5/95 International Planning and Coordination Division, DKB Director and General Manager, 6/94 International Planning Division, DKB General Manager, International 5/94 Planning Division, DKB General Manager, International 5/93 Finance Division, DKB Senior Executive Vice President, CIT 1/90 Director, CIT 12/89 Kenji Nakamura 53 Director, CIT 6/95 General Manager, 5/95 Director and General Manager, 6/95 New York Branch and Cayman New York Branch, DKB Branch, DKB General Manager, 10/93 Otemachi Branch, DKB Deputy General Manager, 5/92 Personnel Division, DKB Deputy General Manager, 6/91 Personnel Planning Division, DKB Joseph A. Pollicino 57 Vice Chairman, CIT 12/89 Not applicable Director, CIT 8/86 Paul N. Roth 57 Director, CIT 12/89 Not applicable Partner, Schulte Roth & Zabel 8/69 Peter J. Tobin 52 Chief Financial Officer, 4/96 Chief Financial Officer, Chemical 1/92 The Chase Manhattan Corporation Bank & Chemical Banking Director, CIT 5/84 Corporation Keiji Torii 49 Senior Executive Vice President, CIT 4/96 Executive Vice President, CIT 5/93 Director, CIT 5/93 Chief Inspector, 2/93 Inspecting Division, DKB Assistant General Manager, 6/90 Securities Division, DKB Yasuo Tsunemi 49 Director, CIT 4/96 General Manager, International Banking 8/94 General Manager, International 5/95 Coordination Division, DKB Planning and Coordination Division, DKB General Manager, Americas Division, DKB 5/94 Credit Supervisor, International Credit 1/92 Supervision Division, DKB Yukiharu Uno 44 Executive Vice President, CIT 4/96 Assistant General Manager of the Americas 8/94 Director, CIT 4/96 Group, International Banking Coordination Division, DKB Head of CIT Office, 9/93 Americas Division, DKB Manager, Americas Division, DKB 4/91
50
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 51 Executive Vice President, Chief 8/90 Not applicable Credit Officer, The CIT Group/ Industrial Financing & Executive Vice President, Credit Administration, The CIT Group Thomas C. Bloch 52 President & CEO, The CIT Group/ 2/96 Executive Vice President, The CIT Group/ 4/94 Business Credit Business Credit Senior Vice President, The CIT Group/ 4/85 Capital Equipment Financing James J. Egan Jr. 57 President & CEO, The CIT 9/87 Not applicable Group/Sales Financing George J. Finguerra 56 Senior Executive Vice President, 1/97 Senior Executive Vice President, 4/91 The CIT Group/Equipment Financing The CIT Group/Capital Equipment Financing Thomas B. Hallman 44 President & CEO, The CIT Group/ 5/95 President & Director, National Product 6/94 Consumer Finance Division, Globe Mortgage Company Director, National Residential Lending, 3/93 First Nationwide Bank Director, National Mortgage Origination, 8/85 Citibank, N.A. & Citicorp Thomas A. Johnson 50 General Auditor, CIT 1/90 Not applicable Joseph M. Leone 43 Executive Vice President & 7/95 Executive Vice President, The CIT 6/91 Chief Financial Officer, CIT Group/Sales Financing Lawrence A. Marsiello 47 President & CEO, The CIT 1/92 Not applicable Group/Commercial Services Robert J. Merritt 55 President & CEO, The CIT 12/86 Not applicable Group/Industrial Financing William M. O'Grady 57 Executive Vice President, 1/86 Not applicable Administration, The CIT Group Thomas J. O'Rourke 58 Senior Vice President, Marketing, 10/84 Not applicable The CIT Group Sharon L. Spector 51 President & CEO, The CIT Group/ 1/97 Senior Executive Vice President, Credit Finance The CIT Group/Commercial Services 5/94 Executive Vice President, The CIT Group/Commercial Services 5/88 Ernest D. Stein 56 Executive Vice President, 2/94 Senior Vice President & Deputy General 4/93 General Counsel & Secretary, CIT Counsel, CIT Senior Vice President & Assistant 3/92 General Counsel, CIT Executive Vice President & General 12/85 Counsel, Manufacturers Hanover Corp. Nikita Zdanow 59 President & CEO, The CIT Group/ 4/85 Not applicable Capital Equipment Financing
- ---------- (1) Messrs. Gamper, Pollicino, Torii, and Uno, 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, which agreement was amended on December 15, 1995 simultaneously with the acquisition of an additional twenty percent (20%) common stock interest in the Corporation by DKB from CBC Holding. The agreement, as amended, provides for a Board of Directors consisting of ten directors. CBC Holding, as minority stockholder, has the right to designate one nominee for director. DKB agreed to vote for the nominees for director of CBC Holding. Regular meetings of the Board of Directors are 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 Chase or CBC or of subsidiaries or other affiliates of the Corporation, DKB, or Chase. 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. 51 Item 11. Executive Compensation. 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, 1996, 1995, and 1994. 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. ........ 1996 $600,002 $785,000 $74,319 $722,369 $33,000 President and Chief .......... 1995 $542,302 $675,000 $87,626 $722,369 $30,692 Executive Officer ............ 1994 $530,379 $600,000 $46,092 $295,748 $30,215 Joseph A. Pollicino .......... 1996 $439,998 $550,000 $44,775 $433,400 $26,600 Vice Chairman ................ 1995 $401,523 $475,000 $51,205 $433,400 $25,061 1994 $392,294 $425,000 $28,340 $177,440 $24,692 Lawrence A. Marsiello ........ 1996 $246,231 $235,000 $14,882 $173,360 $18,849 President and Chief .......... 1995 $237,000 $220,000 $19,490 $173,360 $18,480 Executive Officer ............ 1994 $227,308 $200,000 $12,035 $ 73,948 $18,092 Commercial Services Robert J. Merritt ............ 1996 $279,039 $285,000 $16,803 $198,606 $20,162 President and Chief .......... 1995 $268,064 $240,000 $22,726 $198,606 $19,723 Executive Officer ............ 1994 $257,115 $210,000 $13,359 $ 81,312 $19,285 Industrial Financing Nikita Zdanow ................ 1996 $281,024 $225,000 $17,196 $198,606 $20,241 President and Chief .......... 1995 $270,054 $250,000 $22,224 $198,606 $19,802 Executive Officer ............ 1994 $261,404 $250,000 $14,637 $ 96,128 $19,456 Capital Equipment Financing
- ---------- (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 20,000 phantom shares, Mr. Pollicino was awarded 12,000 phantom shares, Mr. Marsiello was awarded 4,800 phantom shares, Mr. Merritt was awarded 5,500 phantom shares, and Mr. Zdanow was awarded 5,500 phantom shares. The shares awarded for the performance period 1993-1995 are vested in one-third increments commencing January 1996. For the performance period 1996-1998 under the CIT Career Incentive Plan, Mr. Gamper was awarded 20,000 phantom shares of stock, Mr. Pollicino was awarded 12,000 phantom shares, Mr. Marsiello was awarded 3,225 phantom shares, Mr. Merritt was awarded 3,600 phantom shares and Mr. Zdanow was awarded 3,750 shares. The shares awarded for the performance period 1996-1998 will vest in one-third increments commencing January 1999. (3) The payments set forth under LTIP Payouts represent the payout of shares vested under the CIT Career Incentive Plan. The payout in 1994 is for shares awarded for the performance period 1990-1992. The payouts in 1995 and 1996 are for shares awarded for the performance period 1993-1995. 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. 52 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 Executive Committee. The Performance Period is at least three consecutive calendar years. The Executive 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 Executive 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)(1) - ----------------------------------------------------------------------------------------------------------------------- Albert R. Gamper, Jr. .......... 20,000 1996-1998 -- 176.52 355.13 President and Chief Executive Officer Joseph A. Pollicino ............ 12,000 1996-1998 -- 176.52 355.13 Vice Chairman Lawrence A. Marsiello .......... 3,225 1996-1998 -- 176.52 355.13 President and Chief Executive Officer Commercial Services Robert J. Merritt .............. 3,600 1996-1998 -- 176.52 355.13 President and Chief Executive Officer Industrial Financing Nikita Zdanow .................. 3,750 1996-1998 -- 176.52 355.13 President and Chief Executive Officer Capital Equipment Financing
- ---------- (1) The aggregate amount of all award payouts shall not exceed 3% of the total pre-tax income of the Corporation during the Performance Period. 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. 53 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 who retire from the Corporation (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 ................. 43,242 57,656 64,570 71,484 78,397 85,897 200,000 ................. 58,242 77,656 87,070 96,484 105,897 115,897 250,000 ................. 73,242 97,656 109,570 121,484 133,397 145,897 300,000 ................. 88,242 117,656 132,070 146,484 160,897 175,897 350,000 ................. 103,242 137,656 154,570 171,484 188,397 205,897 400,000 ................. 118,242 157,656 177,070 196,484 215,897 235,897 450,000 ................. 133,242 177,656 199,570 221,484 243,397 265,897 500,000 ................. 148,242 197,656 222,070 246,484 270,897 295,897 550,000 ................. 163,242 217,656 244,570 271,484 298,397 325,897 600,000 ................. 178,242 237,656 267,070 296,484 325,897 355,897 650,000 ................. 193,242 257,656 289,570 321,484 353,397 385,897
- ---------- (1) At December 31, 1996, Messrs. Gamper, Pollicino, Marsiello, Merritt, and Zdanow had 29, 32, 21, 22 and 29 years of benefit service, respectively. 54 Executive Retirement Plan Executive officers of the Corporation, including Mr. Gamper, Mr. Pollicino, Mr. Marsiello, Mr. Merritt and Mr. Zdanow, are participants under the Executive Retirement Plan. The benefit provided is life insurance equal to approximately three times salary during such participant's employment, 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 participants. In addition to the table of pension benefits shown on the preceding page, the Corporation is conditionally obligated to make annual payments under the Executive Retirement Plan in the amounts indicated to the following persons at retirement: Mr. Gamper, $343,130, Mr. Pollicino, $217,642, Mr. Marsiello, $163,608, Mr. Merritt, $181,983 and Mr. Zdanow, $127,116. 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, Torii and Uno. The members of the Executive Committee are as follows: ALBERT R. GAMPER, JR. JOSEPH A. POLLICINO PETER J. TOBIN KEIJI TORII YUKIHARU UNO 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. Torii and Uno. Mr. Tobin is an executive of Chase. 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 subsequently was extended until December 1997. The agreement 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. 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 subsequently was extended until December 1997. The agreement 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. 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, and subsequently were extended until December 1998. Their agreements provide for the payment of an annual base salary of not less than the amount received prior to the purchase by DKB of 60% of the Corporation's shares, to be reviewed at least annually by the Chief Executive Officer, subject to increases but not to decreases. Their employment agreements also provide for executive incentive compensation under Incentive Plans which will be designed to be no less favorable to them than the Incentive Plans in effect prior to the purchase by DKB of 60% of the Corporation's shares. 55 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 Executive Retirement Plan. 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 twenty-four 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 Executive Retirement 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 respective employment agreements, a "Change of Control" occurs, Mr. Gamper, Mr. Pollicino, Mr. Marsiello, Mr. Merritt and Mr. Zdanow will be entitled to receive a "Special Payment." The amount of such Special Payment shall equal, with respect to Mr. Gamper, the sum of his prior four years annual bonuses under the CIT Bonus Plan, with respect to Mr. Pollicino, the sum of his prior three years annual bonuses under the CIT Bonus Plan, and with respect to Mr. Marsiello, Mr. Merritt and Mr. Zdanow, the sum of their prior two years annual bonuses under The CIT Bonus Plan. The Special Payment 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 date 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 respective 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. 56 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, 1997. Name and Address of Owner Shares Owned Percentage ------------------------- ------------ ---------- The Dai-Ichi Kangyo Bank, Limited 800 80% 1-5, Uchisaiwaicho 1-chome Chiyoda-ku, Tokyo 100 CBC Holding (Delaware) Inc. 200 20% 270 Park Avenue New York, NY 10017 No officer or director of the Corporation owns any common stock of the Corporation. In addition, the voting securities of any class of securities of DKB and Chase, the parent of CBC Holding, 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 any such class of stock so owned. 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. Additional information regarding these transactions can be found in Item 8. Financial Statements and Supplementary Data, "Note 20--Certain Relationships and Related Transactions". Schulte Roth & Zabel LLP, of which Mr. Roth is a partner, provides legal services to the Corporation. Schulte Roth & Zabel LLP has been retained in the past and will continue in the future to serve as outside counsel for DKB. 57 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 27-49. 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)(1) 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(a)(2) Amendment, dated December 15, 1995, to the Stockholders Agreement, dated December 29, 1989 (incorporated by reference to Exhibit 10(a) to Form 8-K dated December 15, 1995). 10(a)(3) Registration Rights Agreement, dated December 15, 1995 (incorporated by reference to Exhibit 10(b) to Form 8-K dated December 15, 1995). 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. (incorporated by reference to Exhibit 10(b)(3) to Form 10-K filed by the Corporation for the fiscal year ended December 31, 1994). 10(c) 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). 58 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 17, 1996 was filed with the Commission reporting the Corporation's announcement of results for the quarter ended September 30, 1996. A Current Report on Form 8-K dated December 24, 1996 was filed with the Commission reporting a special dividend by the Corporation to its stockholders and a subsequent capital contribution in a like aggregate principal amount by the stockholders to the Corporation in December 1996. A Current Report on Form 8-K dated January 23, 1997, as amended by Form 8-K/A dated February 14, 1997, was filed with the Commission reporting the Corporation's announcement of results for the year ended December 31, 1996. 59 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 5, 1997 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 TAKASUKE KANEKO* - ---------------------------------- Director KENJI NAKAMURA* - ---------------------------------- Director JOSEPH A. POLLICINO* *By: /s/ Ernest D. Stein March 5, 1997 - ---------------------------------- ---------------------- Director Ernest D. Stein Attorney-In-Fact PAUL N. ROTH* - ---------------------------------- Director PETER J. TOBIN* - ---------------------------------- Director KEIJI TORII* - ---------------------------------- Director YASUO TSUNEMI* - ---------------------------------- Director YUKIHARU UNO* - ---------------------------------- Director /S/ JOSEPH M. LEONE March 5, 1997 - ---------------------------------- Joseph M. Leone 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 are held by the Corporation and available for examination by the Securities and Exchange Commission pursuant to Item 302(b) of Regulation S-T. 60 EX-10 2 EXHIBIT 10(C) THE CIT GROUP, INC. December 6, 1996 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 December 20, 1994. The Board of Directors (the "Board") of The CIT Group Holdings, Inc. (the "Company"), is pleased to extend your employment agreement with the Company on the following terms and conditions, all other terms and conditions being null and void: 1. Term. This letter agreement will be effective as of January 1, 1997. The term of this Agreement (the "Term") will be for a period of twenty-four months beginning on January 1, 1997 and, except as otherwise provided in paragraph 4 below, ending on December 31, 1998. This letter agreement and the Term may be extended for one or more additional periods by written agreement signed by you and the Company at any time prior to the end of the Term then in effect. 2. Duties. During the Term, you will serve in such capacities and devote substantially all of your business time and energies to the business of the Company and faithfully, diligently and competently perform such duties, as are assigned to you by the Chief Executive Officer of the Company (the "CEO") or pursuant to his delegation. 3. Compensation and Benefits. In full consideration for all services rendered by you in all capacities during the Term, you will receive the following compensation and benefits: (a) Base Salary. An annual base salary of not less than the amount you received immediately prior to the commencement of this current employment agreement payable in accordance with the customary payroll practices of the Company. Your Base Salary and performance will be reviewed by the CEO or pursuant to his delegation during the Term pursuant to normal Company practices. Your Base Salary may be increased (but not reduced) by the CEO from time to time, based upon your performance and responsibilities, pursuant to the Company's standard procedures for salary adjustments. (b) Bonuses. You will participate in all executive bonus and incentive compensation plans (collectively, "Incentive Plans") now or hereafter maintained by the Company for which your level of employment makes you eligible in accordance with the Company's policies and the terms of such Incentive Plans. (c) Expense Reimbursement. The Company will reimburse you, in accordance with applicable policies and practices of the Company in effect from time to time, for your ordinary and necessary business expenses. (d) Other Benefits. You will be eligible to participate in all employee retirement and welfare benefit plans now or hereafter maintained by or on behalf of the Company, including the Company's Executive Retirement Program and receive all fringe benefits and vacations, for which your level of employment makes you eligible in accordance with the Company's policies and the terms of such plans. In addition, the Company will provide you with (i) a supplemental pension benefit and (ii) a supplemental savings benefit, in each case in an amount equal to the value of the benefit you would be entitled to receive under the Company's Retirement Plan or Savings Incentive Plan, as the case may be, but for the limitations on the amount of such benefits imposed by Internal Revenue Code Sections 415 and 401(a)(17). In connection with your benefits under the Company's Executive Retirement Program, the Company will not unreasonably withhold its consent to your retirement. (e) Modifications. The Company may at any time or from time to time amend, modify, suspend or terminate any bonus, incentive compensation or other benefit plans or programs provided hereunder for any reason and without your consent; provided that, without your consent, the Company may not reduce the aggregate value of the benefits provided to the Executive hereunder, or administer the Company Executive Retirement Program in a manner substantially inconsistent with past practices. 4. Termination of the Executive's Employment. (a) By the Company. The Company may terminate your employment in its sole discretion at any time during the Term, with or without Cause, upon written notice by the Company to you, and your employment will terminate on the date such notice is given. For purposes of this letter agreement, "Cause" means (1) Nonperformance, defined as your substantial failure to perform your duties or responsibilities, as determined by the CEO, or (2) Malfeasance, defined as (A) your gross negligence, recklessness or malfeasance in the performance of your duties hereunder, (B) your committing any criminal act, act or fraud or other misconduct resulting or intending to result directly or indirectly in gain or personal enrichment at the expense of the Company, or (C) your engaging in any conduct relating to the business of the Company that could reasonably be expected to have a materially detrimental effect on the business or financial condition of the Company. For purposes hereof, you will be deemed to have committed an act if based upon the Company's investigation of the facts, it reasonably concludes that you committed such an act. 2 (b) By You. You may terminate your employment with the Company at any time during the Term, with or without Good Reason, upon written notice by you to the Company, and your employment will terminate on the date such notice is given. For purposes of this letter agreement, "Good Reason" means the assignment to you of duties and responsibilities not commensurate with your status as a senior executive of the Company, the failure of the Company to provide compensation and benefits to you at the levels required herein or the failure of the Company to adhere in any substantial manner to any of its other covenants herein. 5. Severance Payment. (a) Without Cause and Good Reason Termination. If during the Term the Company terminates your employment without Cause or you terminate your employment for Good Reason, all compensation payable to you under paragraph 3 hereof will cease as of the effective date of notice of such termination (the "Termination Date") and the Company will pay to you, subject to paragraph 6, the following sums: 1) Your Base Salary on the Termination Date for the greater of 24 months or the remainder of the Term, payable 50% in 12 equal installments at the end of each of the 12 months following the Termination Date, and 50% in a lump sum on the anniversary of the Termination Date. If, however, prior to the anniversary of the Termination Date, you violate the noncompetition provisions of paragraph 6(b)(A), then the Company will have no obligation to make any of the payments that remain payable by the Company under this paragraph 5(a)(1) on or after the date of such violation. 2) All previously earned and accrued entitlements and benefits from the Company, including any such entitlements and benefits under the Company's pension, disability and life insurance plans, policies and programs. 3) Continued participation for eighteen months under the Company's welfare benefit plans in which you participated immediately prior to the Termination Date. 4) The reasonable costs of outplacement services until such time as you accept new employment. 3 5) Any awards due to you under the terms of the Company's "Career Incentive Plan" (Long Term Incentive) or any plan as may have been hereafter adopted by the Company. Upon such payment, all of your rights under all such plans will then terminate. 6) All benefits payable to you under the terms and conditions of the Company's Executive Benefits Program, if any. All of the amounts and benefits to be provided pursuant to clauses (3), (4), (5) and (6) above shall be provided without duplication for the amounts and benefits to be provided pursuant to clause (2) above. (b) For Cause Termination -- Nonperformance. 1) If your employment is terminated by the Company for Cause based on Nonperformance, as determined by the current CEO (Albert R. Gamper, Jr.), you will promptly receive the amounts and benefits specified in paragraphs 5(a)(2), (3) and (4) above. In addition, you will receive an amount equal to your Base Salary on the Termination Date for 12 months, payable in 12 equal installments at the end of each of the 12 months following the Termination Date. 2) If your employment is terminated by the Company for Cause based on Nonperformance, as determined by the CEO (if other than Albert R. Gamper, Jr.), you will promptly receive the amounts and benefits specified in paragraph 5(a)(2), (3) and (4) above. In addition, yon will receive an amount equal to your Base Salary on the Termination Date for 24 months, payable 50% in 12 equal installments at the end of each of the 12 months following the Termination Date, and 50% in a lump sum on the anniversary of the Termination Date. (c) For Cause Termination -- Malfeasance or Termination By You Without Good Reason. If your employment is terminated by the Company for Cause based on Malfeasance or if you terminate your employment for any reason other than Good Reason, you will receive only the amounts specified in paragraph 5(a)(2). 4 (d) Death or Disability. In the event of your death or your disability due to physical or mental illness or other disability which renders you unable, on other than a temporary basis, to perform the duties of your employment, the Employment Term will terminate as of the date of your death or disability and you will receive the benefits specified in paragraph 5(a)(2) and (6) plus an amount equal to your Base Salary on such date for one year. Disability will be determined by the CEO or pursuant to his delegation in a manner consistent with the Company's Long Term Disability Plan. 6. Confidentiality and Competitive Activity. (a) You acknowledge that you have acquired and will continue to acquire during the Term, confidential information regarding the business of the Company, Dai-Ichi Kangyo Bank (DKB), Chase Manhattan Corporation (CMC) and their respective subsidiaries and affiliates. Accordingly, you agree that, without the written consent of the Board, you will not, at any time, disclose to any unauthorized person or otherwise use any such confidential information. For this purpose, confidential information means nonpublic information concerning the financial data, business strategies, product development (and proprietary product data), customer lists, marketing plans, and other proprietary information concerning the Company, DKB or CMC and their respective subsidiaries and affiliates, except for specific items which have become publicly available other than as a result of your breach of this letter agreement. (b) During the Term and, if you resign with or without Good Reason or your employment is terminated by the Company with or without Cause prior to the end of the Term, then for one year after the Termination Date, in the case of clause (A) below, and for two years after the Termination Date, in the case of clause (B) below, you will not, without the written consent of the Board, directly or indirectly, (A) knowingly engage or be interested in (as owner, partner, stockholder, employee, director, officer, agent, consultant or otherwise), with or without compensation, any business in the New York metropolitan area which is in competition with any line of business actively being conducted on the Termination Date by the Company or any of its subsidiaries; provided that if your employment has been terminated by the Company without Cause or you have terminated your employment with the Company for Good Reason, you may so compete in which event you shall forfeit your right to receive future severance payments pursuant to paragraph 5(a)(1) hereof and (B) whether or not your termination of employment occurred without Cause or for Good Reason, hire any person who was employed by the Company or any of its subsidiaries or affiliates (other than persons employed in a clerical or other nonprofessional position) within the six-month period preceding the date of such hiring or solicit, entice, persuade or induce any person or entity doing business with the Company, DKB or CMC and their respective subsidiaries and affiliates, to terminate such relationship or to refrain from extending or renewing the same. Nothing herein, however, will prohibit you from acquiring or holding not more than one percent of any class of publicly traded securities of any such business; provided that such securities entitle you to no more than one percent of the total outstanding votes entitled to be cast by security holders of such business in matters on which such securityholders are entitled to vote. 5 (c) Remedy for Breach. You hereby acknowledge that the provisions of this paragraph 6 are reasonable and necessary for the protection of the Company, DKB, CMC and their respective subsidiaries and affiliates. In addition, you further acknowledge that the Company, DKB, CMC and their respective subsidiaries and affiliates will be irrevocably damaged if such covenants are not specifically enforced. Accordingly, you agree that, in addition to any other relief to which the Company may be entitled, the Company will be entitled to seek and obtain injunctive relief (without the requirement of any bond) from a court of competent jurisdiction for the purposes of restraining you from any actual or threatened breach of such covenants. In addition, and without limiting the Company's other remedies, in the event of any breach by you of such covenants, the Company will have no obligation to pay any of the amounts that remain payable by the Company under paragraph 5(a)(1). 7. Change of Control . (a) Contract Extension. 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. (b) Special Payment. 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, 1998, 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 day 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 extent 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) 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 noncompetition or confidentiality covenant under Section 6 of the Employment Agreement. For purposes of this Paragraph (b) 6 "Special Payment", 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. (c) Change of Control Defined. 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 CMC 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 persons 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 CMC shall not require the extension of the Term hereunder. 8. Miscellaneous. (a) Survival; Notices. The obligations of the Company in paragraph 5 and your obligations in paragraph 6 will survive the termination of this letter agreement. Any notice, consent or other communication made or given in connection with this letter agreement will be in writing and will be deemed to have been duly given when delivered or five days after mailed by United States registered or certified mail, return receipt requested, to the parties at the address set forth on the first page of this letter agreement (attention: General Counsel, if to the Company). (b) Entire Agreement. This letter agreement supersedes any and all existing agreements between you and the Company or any of its subsidiaries or affiliates relating to the terms of your employment. (c} Amendments and Waivers. No provisions of this letter agreement may be amended, modified, waived or discharged except as agreed to in writing by you and the Company. The failure of a party to insist upon strict adherence to any term of this letter agreement on any occasion will not be considered a waiver thereof or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this letter agreement. 7 (d) Successors. This letter agreement shall be binding upon and inure to the benefit of you and the Company and its successors and permitted assigns. Neither this letter agreement nor any of the rights of the parties hereunder may be assigned by either party hereto except that the Company may assign its rights and obligations hereunder to a corporation or other entity that acquires substantially all of its assets. Any assignment or transfer of this letter agreement in violation of the foregoing provisions will be void. (e) Governing Law. 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. (f) Legal Counsel; Offsets and Reductions. In the event you obtain legal counsel to enforce your rights under this letter agreement, the Company will pay you reasonable legal fees if you recover any amount on such claim. Except as provided in paragraph 6, if your employment is terminated by the Company, your severance shall not be subject to any offsets or reductions for your subsequently earned income or reduction by reason of any claim by the Company. (g) Severability. If the provision of this letter agreement is invalid or unenforceable, the balance of this letter agreement will remain in effect, and if such provision is inapplicable to any person or circumstance, it will nevertheless remain applicable to all other persons and circumstances. (h) Withholding. The Company is authorized to withhold from any benefit provided or payment due hereunder the amount of withholding taxes due any federal, state, or local authority in respect of such benefit or payment and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such withholding taxes. If you are in agreement with the terms of this letter, please so indicate by signing and returning the enclosed copy of this letter, whereupon this letter shall constitute a binding agreement between you and the Company. Very truly yours, THE CIT GROUP HOLDINGS, INC. By: /s/ Albert R. Gamper, Jr. ------------------------ Name: Albert R. Gamper, Jr. Title: President & CEO Agreed: /s/ Nikita Zdanow EX-12 3 EXHIBIT 12 EXHIBIT 12 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Year Ended December 31, ----------------------------------- 1996 1995 1994 -------- -------- ------ Dollar Amounts in Millions Net income $ 260.1 $ 225.3 $201.1 Provision for income taxes 155.7 139.8 123.9 -------- -------- ------ Earnings before provision for income taxes 415.8 365.1 325.0 -------- -------- ------ Fixed Charges: Interest and debt expenses on indebtedness 848.3 831.5 614.0 Interest factor--one third of rentals on real and personal properties 8.1 7.9 7.9 -------- -------- ------ Total fixed charges 856.4 839.4 621.9 -------- -------- ------ Total earnings before provisions for income taxes and fixed charges $1,272.2 $1,204.5 $946.9 ======== ======== ====== Ratios of Earnings to Fixed Charges 1.49 1.44 1.52
EX-21 4 EXHIBIT 21 EXHIBIT 21 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT December 31, 1996 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. 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/Capital Transportation, Inc. Delaware The CIT Group/Commercial Services (Asia), Ltd. Hong Kong 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 THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT (Continued) December 31, 1996 Jurisdiction of Name of Subsidiary Incorporation ------------------ ------------ Bunga Bebaru, Ltd. Bermuda CIT Leasing (Bermuda), Ltd. Bermuda The CIT Group/Corporate Aviation, Inc. Delaware Arctic Shipping Co., Inc. Delaware Atlantic Shipping Co., Inc. Delaware Baltic Shipping Co., Inc. Delaware Indian Shipping Co., Inc. Delaware Mediterranean Shipping Co., Inc. Delaware Bering Shipping Co., Inc. Delaware Ross Shipping Co., Inc. Delaware Sargasso Shipping Co., Inc. Delaware Caspian Shipping Co., Inc. Delaware Baffin Shipping Co., Inc. Delaware Caribbean Shipping Co., Inc. Delaware Tasman Shipping Co., Inc. Delaware Sulu Shipping Co., Inc. Delaware Hudson Shipping Co., Inc. Delaware Arabian Shipping Co., Inc. Delaware C.I.T. Leasing Corporation Delaware CIT FSC Six, Ltd. Bermuda CIT FSC Eight, Ltd. Bermuda Kelbourne, Ltd. Ireland The CIT Group, Inc. Delaware 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 GP Corporation Illinois GFSC Aircraft Acquisition Financing Corp. Delaware The CIT Group Securitization Corporation IV Delaware The CIT GP Corporation II Delaware The CIT GP Corporation V Delaware The CIT GP Corporation VI Delaware Crestpointe Financial Corporation Delaware The CIT Group GP Corporation III Delaware The CIT Group Securitization Corporation III Delaware EX-23 5 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. 33-58107, No. 33-58418, No. 33-85224, No. 33-64309 and No. 333-07249 on Form S-3 of The CIT Group Holdings, Inc. of our report dated January 17, 1997, except as to Note 21 which is as of February 21, 1997, relating to the consolidated balance sheets of The CIT Group Holdings, Inc. and subsidiaries as of December 31, 1996 and 1995, 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, 1996, which report appears in the December 31, 1996 Annual Report on Form 10-K of The CIT Group Holdings, Inc. KPMG PEAT MARWICK LLP Short Hills, New Jersey March 4, 1997 EX-27 6 FDS --
5 1,000,000 12-MOS 12-MOS DEC-31-1995 DEC-31-1996 DEC-31-1995 DEC-31-1996 161 103 0 0 15,796 16,997 206 221 0 0 0 0 0 0 0 0 17,420 18,932 0 0 7,465 8,779 0 0 0 0 250 250 1,664 1,825 17,420 18,932 0 0 1,714 1,890 0 0 346 393 79 122 92 111 832 848 365 416 140 156 225 260 0 0 0 0 0 0 225 260 0 0 0 0
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