================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
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Form 10-K
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(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
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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
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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
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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
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<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
Dollar Amounts in Millions
<S> <C> <C> <C> <C> <C>
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
</TABLE>
6
<PAGE>
Statistical Data
The following table presents the components of net income as a percentage
of average financing and leasing assets ("AEA").
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- ------- -------- --------
Dollar Amounts in Millions
<S> <C> <C> <C> <C> <C>
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
</TABLE>
- ----------
(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.
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<PAGE>
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.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
Dollar Amounts in Millions
<S> <C> <C> <C> <C> <C>
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
</TABLE>
8
<PAGE>
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.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
Dollar Amounts in Millions
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
9
<PAGE>
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.
<TABLE>
<CAPTION>
Balance Past Due % to
60 Days or More Average
Finance ------------------------ Net Finance
Receivables Amount Percent Credit Losses Receivables
----------- -------- ------- ----------- -----------
Dollar Amounts in Millions
<S> <C> <C> <C> <C> <C>
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%
======== ====== ==== ====== ====
</TABLE>
10
<PAGE>
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.
<TABLE>
<CAPTION>
Years Ended December 31, Increase
------------------------ -----------------
1996 1995 Amount Percent
---------- ---------- --------- -------
Dollar Amounts in Millions
<S> <C> <C> <C> <C>
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%
========== ==========
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Years Ended December 31,
Dollar Amounts in Millions
----------------------------------------------------
1996 1995
Amount % AEA % ASA Amount % AEA % ASA
------ ---- ---- ------ ---- ----
<S> <C> <C> <C> <C> <C> <C>
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%
====== ==== ==== ====== ==== ====
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
December 31 Increase (Decrease)
--------------------- -------------------
1996 1995 Amount Percent
-------- -------- --------- -------
Dollar Amounts in Millions
<S> <C> <C> <C> <C>
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%
========= ========= ======== ====
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
1996 Percent 1995 Percent
-------- -------- ------- -------
Dollar Amounts in Millions
<S> <C> <C> <C> <C>
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%
========== ===== ========== =====
</TABLE>
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.
<TABLE>
<CAPTION>
At December 31, 1996 At December 31, 1995
--------------------- --------------------
Amount Percent Amount Percent
-------- --------- ------- --------
Dollar Amounts in Millions
<S> <C> <C> <C> <C>
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%
========= ===== ========= =====
</TABLE>
14
<PAGE>
Industry Composition
The following table presents financing and leasing assets by major industry
class.
<TABLE>
<CAPTION>
At December 31, 1996 At December 31, 1995
----------------------- -----------------------
Amount Percent Amount Percent
---------- --------- ----------- --------
Dollar Amounts in Millions
<S> <C> <C> <C> <C>
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%
======== ==== ======== ====
</TABLE>
- ----------
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------------
1996 1995
--------------------------------------- ----------------------------------------
Before After Before After
------------------- ------------------ ------------------ -------------------
Dollar Amounts in Millions
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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%
========= ========= ========= =========
</TABLE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Years Ended December 31, Increase
------------------------------ ----------------------
1995 1994 Amount Percent
---------- ---------- --------- -------
Dollar Amounts in Millions
<S> <C> <C> <C> <C>
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%
======== ========
</TABLE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
December 31, Increase
----------------------------- --------------------------
1995 1994 Amount Percent
--------- --------- ---------- ----------
Dollar Amounts in Millions
<S> <C> <C> <C> <C>
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%
======== ======== ======= ====
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
1995 Percent 1994 Percent
-------- ------- ------- -------
Dollar Amounts in Millions
<S> <C> <C> <C> <C>
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%
======== ===== ======= =====
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1996 1995 1994
--------- --------- --------
Amounts in Millions
<S> <C> <C> <C>
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
========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
Amounts in Millions
<S> <C> <C> <C>
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
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
Amounts in Millions
<S> <C> <C> <C>
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
</TABLE>
See accompanying notes to consolidated financial statements
30
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------------- ----------------------
Amount Percent Amount Percent
---------- ------- --------- -------
Dollar Amounts in Millions
<S> <C> <C> <C> <C>
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%
========= ====== ========= ======
</TABLE>
34
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
Amounts in Millions
<S> <C> <C> <C>
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%
====== ====== ======
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
1996 1995 1994
--------- ---------- ---------
Dollar Amounts in Millions
<S> <C> <C> <C>
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%
</TABLE>
37
<PAGE>
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.
<TABLE>
<CAPTION>
Commercial Variable rate 1996 1995
paper senior notes Total Total
---------- ------------ ----- -----
Amounts in Millions
<S> <C> <C> <C> <C>
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
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Fixed Rate Notes 1996 1995
Senior Subordinated Total Total
---------- ------------ ----- -----
Amounts in Millions
<S> <C> <C> <C> <C>
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
======== ======== ======== ========
</TABLE>
- ----------
(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
<PAGE>
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.
<TABLE>
<CAPTION>
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
-------- ------- ---- -------- ------- ---- ------- ------ ----
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
===== ===== ===== ===== ===== =====
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------
1996 1995 1994
------- ------- -------
Amounts in Millions
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
A December 31,
---------------------------
1996 1995 1994
------ ------ ------
Amounts in Millions
<S> <C> <C> <C>
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
====== ====== =====
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------
1996 1995 1994
----- ----- ----
Amounts in Millions
<S> <C> <C> <C>
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
==== ==== ====
</TABLE>
The following assumptions were used for calculating the APBO shown in the
preceding tables.
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
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%
</TABLE>
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
<PAGE>
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
<PAGE>
THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The accompanying table summarizes the contractual amounts of credit-related
commitments.
<TABLE>
<CAPTION>
Due to expire
---------------------- Total Total
Within After outstanding outstanding
At December 31, one year one year 1996 1995
- -------------- -------- -------- ---------- -----------
Amounts in Millions
<S> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
1996 1995
-------------------------- -------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
---------- --------- ---------- ---------
Asset Asset Asset Asset
(Liability) (Liability) (Liability) (Liability)
---------- --------- ---------- ---------
Amounts in Millions
<S> <C> <C> <C> <C>
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)
</TABLE>
- ----------------
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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)
<TABLE>
<CAPTION>
1996
------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------ ------- ------ ------ -------
Amounts in Millions
<S> <C> <C> <C> <C> <C>
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
------------------------------------------------------------------
</TABLE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
49
<PAGE>
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.
<TABLE>
<CAPTION>
Other Positions/Offices
Current Positions/Offices Held During the Past Five Years
Name and Age and Date of Appointment and Date of Appointment
- ----------------------- -------------------------------------------- ----------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
Other Positions/Offices
Current Positions/Offices Held During the Past Five Years
Name and Age and Date of Appointment and Date of Appointment
- ----------------------- -------------------------------------------- ----------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
- ----------
(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
<PAGE>
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
<TABLE>
<CAPTION>
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)
- ------------------ ---- ------ ----- ------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
- ----------
(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
<PAGE>
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
<TABLE>
<CAPTION>
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)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
- ----------
(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
<PAGE>
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
<TABLE>
<CAPTION>
Final
Average Annual Benefits Based on Years of Credited Service (1)
Salary of -------------------------------------------------------------------------------
Employee 15 20 25 30 35 40
- ----------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
$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
</TABLE>
- ----------
(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
<PAGE>
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
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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.
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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
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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
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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
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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
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.
<PAGE>
(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
<PAGE>
(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
<PAGE>
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
<PAGE>
(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
<PAGE>
(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
<PAGE>
"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
<PAGE>
(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
EXHIBIT 12
THE CIT GROUP HOLDINGS, INC. AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1996 1995 1994
-------- -------- ------
Dollar Amounts in Millions
<S> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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
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
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<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996
<CASH> 161 103
<SECURITIES> 0 0
<RECEIVABLES> 15,796 16,997
<ALLOWANCES> 206 221
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 17,420 18,932
<CURRENT-LIABILITIES> 0 0
<BONDS> 7,465 8,779
0 0
0 0
<COMMON> 250 250
<OTHER-SE> 1,664 1,825
<TOTAL-LIABILITY-AND-EQUITY> 17,420 18,932
<SALES> 0 0
<TOTAL-REVENUES> 1,714 1,890
<CGS> 0 0
<TOTAL-COSTS> 346 393
<OTHER-EXPENSES> 79 122
<LOSS-PROVISION> 92 111
<INTEREST-EXPENSE> 832 848
<INCOME-PRETAX> 365 416
<INCOME-TAX> 140 156
<INCOME-CONTINUING> 225 260
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 225 260
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
