<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 26, 1997
REGISTRATION STATEMENT NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-2
------------------------
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
THE CIT GROUP, INC.
(FORMERLY THE CIT GROUP HOLDINGS, INC.)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 6159 13-2994534
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) NO.)
1211 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
(212) 536-1390
</TABLE>
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S AGENT FOR SERVICE AND PRINCIPAL EXECUTIVE OFFICES)
------------------------
ERNEST D. STEIN, ESQ.
EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL & SECRETARY
THE CIT GROUP, INC.
1211 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
(212) 536-1390
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S AND CO-REGISTRANT'S AGENT FOR SERVICE)
------------------------
PLEASE SEND COPIES TO:
<TABLE>
<S> <C>
PAUL N. ROTH, ESQ. RICHARD J. SANDLER, ESQ.
ANDRE WEISS, ESQ. DAVIS POLK & WARDWELL
SCHULTE ROTH & ZABEL LLP 450 LEXINGTON AVENUE
900 THIRD AVENUE NEW YORK, NEW YORK 10017
NEW YORK, NEW YORK 10022
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE OFFERED ON
A DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE SECURITIES ACT OF
1933, CHECK THE FOLLOWING BOX. [ ]
IF THE REGISTRANT ELECTS TO DELIVER ITS LATEST ANNUAL REPORT TO SECURITY
HOLDERS, OR A COMPLETE AND LEGIBLE FACSIMILE THEREOF, PURSUANT TO ITEM 11(A)(1)
OF THIS FORM, CHECK THE FOLLOWING BOX. [ ]
IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN OFFERING
PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND
LIST THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF EARLIER EFFECTIVE
REGISTRATION STATEMENTS FOR THE SAME OFFERING. [ ]
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(C)
UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT
REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT
FOR THE SAME OFFERING. [ ]
IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434,
PLEASE CHECK THE FOLLOWING BOX. [ ]
CALCULATION OF REGISTRATION FEE
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=========================================================================================================
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED(1) PER UNIT OFFERING PRICE(2) FEE
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Class A Common Stock, $.01 par
value per share................ $100,000,000 $30,304.00
=========================================================================================================
</TABLE>
(1) Includes shares of Class A Common Stock which the Underwriters have the
option to purchase to cover over-allotments, if any. The shares of Class A
Common Stock are not being registered for the purpose of sales outside the
United States.
(2) Estimated solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectuses, one to be used
in connection with an offering in the United States and Canada (the "U.S.
Prospectus") and one to be used in connection with a concurrent international
offering outside the United States and Canada (the "International Prospectus").
The U.S. Prospectus and the International Prospectus will be identical in all
respects except for certain alternate pages which follow the U.S. Prospectus.
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
Subject to Completion
Dated September 26, 1997
PROSPECTUS
Shares
THE CIT GROUP, INC.
Class A Common Stock
(par value $0.01 per share)
All of the shares of Class A Common Stock offered hereby are being offered by
The CIT Group, Inc. (the "Company"), which is an 80% owned subsidiary of The
Dai-Ichi Kangyo Bank, Limited ("DKB"). Upon completion of the Offerings, DKB
will own 100% of the outstanding shares of Class B Common Stock of the Company
(which has five votes per share), a class of common stock separate from the
Class A Common Stock (which has one vote per share). Following the Offerings,
the shares offered hereby will represent % of the combined voting
power of all classes of voting stock and % of the economic interest (or rights
of holders of common equity to participate in distributions in respect of the
common equity) in the Company. The remainder of the voting power and economic
interest in the Company will be beneficially held by DKB. See "Risk
Factors--Control By and Relationship with DKB," "Relationship with DKB" and
"Description of Capital Stock."
Of the shares of Class A Common Stock offered hereby, shares are being
offered initially in the United States and Canada by the U.S. Underwriters (the
"U.S. Underwriters") and shares are being offered initially outside the
United States and Canada in a concurrent offering by the International Managers
(the "International Managers" and, together with the U.S. Underwriters, the
"Underwriters"). See "Underwriting."
Prior to the Offerings, there has been no public market for the Class A Common
Stock. It is currently anticipated that the initial public offering price will
be between $ and $ per share. See "Underwriting" for information
relating to the factors considered in determining the initial public offering
price of the Class A Common Stock. Application will be made to list the Class A
Common Stock on The New York Stock Exchange, Inc. (the "New York Stock
Exchange") under the symbol "CIT."
Shares of Class A Common Stock are being reserved for sale to certain directors,
officers and employees of the Company and certain related persons at the initial
public offering price. See "Underwriting." All such persons are expected to
purchase, in the aggregate, not more than % of the Class A Common Stock
offered in the Offerings.
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR CERTAIN INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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- --------------------------------------------------------------------------------------------------------
PRICE TO PROCEEDS TO
PUBLIC UNDERWRITING COMPANY(2)
DISCOUNT(1)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- --------------------------------------------------------------------------------------------------------
Total(3) $ $ $
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
See "Underwriting."
(2) Before deducting expenses of the Offerings payable by the Company estimated
at .
(3) The Company has granted the Underwriters options, exercisable within 30 days
after the date of this Prospectus, to purchase up to an additional shares
of Class A Common Stock on the same terms and conditions as set forth above,
solely to cover over-allotments, if any. If such over-allotment options are
exercised in full, the total Price to Public, Underwriting Discount and Proceeds
to Company will be $ , $ and $ , respectively.
The shares of Class A Common Stock are being offered by the U.S. Underwriters,
subject to prior sale, when, as and if delivered to and accepted by the U.S.
Underwriters, and subject to approval of certain legal matters by Davis Polk &
Wardwell, counsel for the Underwriters. It is expected that delivery of the
shares of Class A Common Stock will be made against payment therefor on or about
, 1997, at the offices of J.P. Morgan Securities Inc., 60 Wall
Street, New York, New York.
J.P. MORGAN & CO. GOLDMAN, SACHS & CO.
Joint Lead Managers
MORGAN STANLEY DEAN WITTER
CREDIT SUISSE FIRST BOSTON
LEHMAN BROTHERS
MERRILL LYNCH & CO.
SALOMON BROTHERS INC
UBS SECURITIES
, 1997
<PAGE> 4
[PHOTOGRAPHS, TOGETHER WITH DESCRIPTIVE CAPTIONS, TO APPEAR HERE.]
<PAGE> 5
CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERINGS,
AND MAY BID FOR, AND PURCHASE, SHARES OF THE CLASS A COMMON STOCK IN THE OPEN
MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus, and if given or
made, such information or representation must not be relied upon as having been
authorized by the Company or by any of the Underwriters. This Prospectus does
not constitute an offer to sell, or a solicitation of an offer to buy, the Class
A Common Stock in any jurisdiction to any person to whom it is unlawful to make
such offer or solicitation. Neither the delivery of this Prospectus nor any sale
made hereunder shall, under any circumstances, create any implication that there
has been no change in the affairs of the Company since the date hereof.
No action has been or will be taken by the Company or any Underwriter that would
permit a public offering of the Class A Common Stock or possession or
distribution of this Prospectus in any jurisdiction where action for that
purpose is required, other than in the United States. Persons into whose
possession this Prospectus comes are required by the Company and the
Underwriters to inform themselves about and to observe any restrictions as to
the offering of the Class A Common Stock and the distribution of this
Prospectus.
TABLE OF CONTENTS
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PAGE
<S> <C>
Available Information....................... 4
Incorporation of Certain Documents by
Reference................................. 4
Prospectus Summary.......................... 5
Risk Factors................................ 12
The Company................................. 16
Use of Proceeds............................. 16
Dividend Policy............................. 16
Capitalization.............................. 17
Selected Financial Information.............. 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 20
Business.................................... 40
Risk Management............................. 61
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PAGE
<S> <C>
Management.................................. 67
Relationship with DKB....................... 78
Certain Relationships and Related
Transactions.............................. 80
History of Ownership of Common Stock........ 80
Shares Available for Future Sale............ 80
Description of Capital Stock................ 81
Certain United States Tax Consequences to
Non-United States Holders................. 86
Underwriting................................ 88
Legal Matters............................... 91
Experts..................................... 91
Glossary.................................... 92
Index to Consolidated Financial
Statements................................ F-1
</TABLE>
The Company intends to furnish its stockholders with annual reports containing
consolidated financial statements audited by its independent public accountants
and with quarterly reports containing unaudited consolidated financial
statements for each of the first three quarters of each fiscal year.
3
<PAGE> 6
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission"). Such reports and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at: Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549; Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661; and Seven World Trade Center, 13th Floor, New York, New
York 10048. Copies of such material also can be obtained from the Public
Reference Section of the Commission, at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of such site is http://www.sec.gov. Certain of the Company's securities are
listed on the New York Stock Exchange and application will be made to list the
Class A Common Stock on the New York Stock Exchange. Accordingly, reports and
other information concerning the Company can also be inspected at the offices of
The New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a Registration Statement on Form S-2
(together with all amendments, exhibits, schedules and supplements thereto, the
"Registration Statement"), under the Securities Act of 1933, as amended (the
"Securities Act"), and the rules and regulations thereunder, for the
registration of the shares of Class A Common Stock offered hereby. This
Prospectus, which forms a part of the Registration Statement, does not contain
all of the information set forth in the Registration Statement, certain portions
of which have been omitted as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the shares
of Class A Common Stock offered hereby, reference is made to the Registration
Statement, including the exhibits thereto. Statements contained in this
Prospectus as to the contents of any contract or other document referred to
herein are not necessarily complete and, where such contract or other document
is an exhibit to the Registration Statement, each such statement is qualified in
all respects by the provisions of such exhibit, to which reference is hereby
made. The Registration Statement may be inspected without charge and copied upon
payment of prescribed fees at the public reference facilities maintained by the
Commission at the address set forth above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by the Company with the Commission are
incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the year ended December 31,
1996;
2. The Company's Quarterly Reports on Form 10-Q for the quarterly periods ended
March 31, 1997 and June 30, 1997; and
3. The Company's Current Reports on Form 8-K dated January 23, 1997 (as amended
by a Form 8-K/A dated February 14, 1997), February 13, 1997, April 17, 1997,
July 14, 1997 and July 17, 1997.
Any statement contained in a document incorporated or deemed to be incorporated
by reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide, without charge to each person to whom a Prospectus is
delivered, upon written or oral request of such person, a copy of any and all of
the documents that have been referenced in this Prospectus other than exhibits
to such documents. Requests for such copies should be directed to Joseph M.
Leone, Chief Financial Officer, The CIT Group, Inc., 1211 Avenue of the
Americas, New York, New York 10036, telephone (212) 536-1390.
4
<PAGE> 7
PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in this
Prospectus. Reference is made to, and this summary is qualified in its entirety
by, the more detailed information and financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. Unless the context otherwise
requires, (i) the "Company" means The CIT Group, Inc. and its consolidated
subsidiaries and (ii) "DKB" means The Dai-Ichi Kangyo Bank, Limited and its
consolidated subsidiaries. Unless otherwise defined herein, capitalized terms
used in this summary have the meanings ascribed to them elsewhere in this
Prospectus. For a description of certain terms and phrases used in this
Prospectus, see "Glossary." Unless otherwise indicated, all information set
forth herein assumes that the Underwriters' over-allotment option is not
exercised. Prospective investors should carefully consider the information set
forth under the heading "Risk Factors."
THE COMPANY
The Company is a leading diversified finance organization offering secured
commercial and consumer financing primarily in the United States to smaller,
middle-market and larger businesses and to individuals through a nationwide
distribution network. The Company commenced operations in 1908 and has developed
a broad array of "franchise" strategic business units that focus on specific
industries, asset types and markets which are balanced by client, industry and
geographic diversification. The Company believes that its strong credit risk
management expertise and long-standing commitment to its markets and its
customers provide it with a competitive advantage.
The Company operates through two business segments: (i) commercial, which is
comprised of the Equipment Financing (equipment financing and leasing), Capital
Finance (commercial aircraft and rail financing and leasing), Commercial
Services (factoring), Business Credit (secured financing to middle-market and
larger-sized businesses) and Credit Finance (secured financing to smaller-sized
and middle-market businesses) strategic business units, and (ii) consumer, which
is comprised of the Consumer Finance (home equity) and Sales Financing
(recreation vehicle, manufactured housing and recreational boat financing)
strategic business units. These strategic business units offer products and
services designed to satisfy the financing needs of specific customers,
industries and markets.
The Company believes that in 1996 it had the largest factoring operation and the
fourth largest equipment financing and leasing operation in the United States.
The Company also has a leading market position in recreation vehicle lending and
has significant operations in commercial finance, sales finance and home equity
lending. In addition, the Company has significant operations financing the
aerospace, construction, transportation, machine tool manufacturing and railroad
industries.
At June 30, 1997, the Company had total assets of $20.0 billion and
stockholders' equity of $2.2 billion. Net income totaled a record $163.8 million
for the six months ended June 30, 1997 and a record $260.1 million for the year
ended December 31, 1996. Over the five years ended December 31, 1996, the
Company's net income grew at a compound annual rate of 11.6%, while total
financing and leasing assets and managed assets grew at compound annual rates of
9.7% and 11.4%, respectively. Over the three years ended December 31, 1996, net
income grew at a compound annual rate of 12.6%, and total financing and leasing
assets and managed assets grew at compound annual rates of 11.1% and 13.4%,
respectively. Such growth resulted from expansion into new lines of business,
the introduction of new products, increased profitability of existing businesses
and acquisitions.
5
<PAGE> 8
The following table sets forth commercial and consumer financing and leasing
assets and consumer finance receivables previously securitized and currently
managed by the Company at December 31 of each of the five years ended December
31, 1996 and at June 30, 1997. "Financing and leasing assets" are comprised of
finance receivables, operating lease equipment, consumer finance receivables
held for sale and certain investments.
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AT AT DECEMBER 31,
JUNE 30, ---------------------------------------------------------
1997 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Dollars in millions
Financing and leasing assets:
Commercial $15,287.6 $15,159.7 $14,564.6 $13,689.0 $11,937.1 $10,822.5
Consumer(1) 4,050.2 3,355.3 2,455.9 2,042.0 1,589.3 1,411.8
Other 53.1 53.0 41.6 34.4 21.6 12.0
--------- --------- --------- --------- --------- ---------
Total $19,390.9 $18,568.0 $17,062.1 $15,765.4 $13,548.0 $12,246.3
Consumer finance receivables previously
securitized and currently managed by the
Company 1,446.7 1,437.4 916.5 306.7 175.6 43.8
--------- --------- --------- --------- --------- ---------
Total managed assets $20,837.6 $20,005.4 $17,978.6 $16,072.1 $13,723.6 $12,290.1
========= ========= ========= ========= ========= =========
</TABLE>
- ---------------
(1) Includes consumer finance receivables held for sale of $950.1 million,
$116.3 million, $112.0 million, $68.7 million, $150.4 million and $0.0 million
at June 30, 1997 and December 31, 1996, 1995, 1994, 1993 and 1992, respectively.
For the five year period ended December 31, 1996, commercial financing and
leasing assets grew at a compound annual rate of 8.2% and consumer managed
assets grew at a compound annual rate of 27.5%. The compound annual growth rates
over such five year period for total financing and leasing assets and total
managed assets were 9.7% and 11.4%, respectively.
STRATEGY
The Company has delivered consistent growth in earnings and assets over the past
five years. The Company believes that its financial performance is a product of
its core strengths, which include its array of "franchise" businesses, strong
credit risk management expertise and long-standing commitment to its markets.
The following fundamental operating principles are significant to the Company's
past success and the execution of its business strategy in the future:
- - Maintain and build leadership positions in selected markets and industries,
focusing on the United States.
- - Offer a broad selection of collateral-based credit products through multiple
channels of distribution.
- - Preserve "best in class" credit culture, coupled with collateral management
expertise.
- - Maintain a relationship-based approach to customers and business partners.
- - Practice disciplined expense management, on-going efficiency improvement and
technology investment.
- - Maintain access to multiple funding sources with strong debt ratings.
- - Retain experienced management team with long tenure in the industry and with
the Company.
- - Utilize performance-based incentive systems.
- - Encourage a corporate culture that emphasizes quality in performance and
service to customers, employees and business partners and values service to
the community.
- - Pursue growth through selective acquisitions of businesses and assets.
6
<PAGE> 9
Using its proven strengths and capabilities, the Company pursues the following
strategies to continue its earnings and asset growth:
Leverage its existing market leadership positions to expand into new markets,
industries and products
The Company has developed a broad array of "franchise" strategic business units
within its two business segments, each with broad geographic reach and multiple
distribution channels. The Company is seeking further growth and profitability
by: (i) building additional manufacturer and dealer/distributor relationships;
(ii) expanding its sales force and marketing reach; (iii) adding complementary
products that enhance existing business segments or products; (iv) identifying
new markets that have synergy with or that add to the Company's existing
strengths and capabilities; and (v) improving marketplace presence and "brand
name" recognition in consumer finance.
Maintain "best in class" credit quality and strong balance sheet
The Company has demonstrated the effectiveness of its credit risk management
system and strong credit culture. From 1990 through 1996, including the
1991-1992 economic recession, net credit losses have averaged 0.72% of average
finance receivables. The Company's strong performance has been the result of:
(i) sophisticated systems and policies which identify target markets and risk
acceptance criteria for each market; (ii) decentralized credit approval
authorities capable of responding quickly to shifting customer needs and
changing economic and market conditions; and (iii) oversight systems that
monitor credits from origination throughout the entire lending cycle. In
addition, the Company adjusts its pricing to achieve higher yields for greater
risk. The Company believes that its strong credit risk management systems and
strong credit culture will continue to support long-term profitable asset
growth.
Grow the consumer businesses
The Company believes that opportunities exist to grow its consumer assets and
earnings by (i) leveraging its existing capabilities and expertise, (ii)
expanding its franchise into new markets and products, as it has done with home
equity and recreational boat lending, and (iii) establishing direct to consumer
lending capabilities across its recreation vehicle, manufactured housing and
recreational boat product lines. For example, in 1997, the Company began the
wholesale financing of inventories for dealers of manufactured housing and
recreational boats. Wholesale financing provides dealers with necessary floor
plan financing and will provide the Company with greater access to retail
financing opportunities through its existing dealer relationships. The Company
plans to pursue further growth of its wholesale financing operations by offering
this product to other dealers and manufacturers with whom it has strong
relationships.
In late 1992, the Company entered the home equity lending market. The Company
had $2.2 billion in home equity finance receivables at June 30, 1997,
establishing it as a significant market participant. These results were achieved
by utilizing a multi-channel delivery system with both direct and indirect
origination capabilities through a 28 office distribution network that provides
national coverage for the Company's products. The Company will seek further
consumer asset growth and improved profitability by expanding its sales office
network by adding new offices (including five offices during late 1997),
improving operating efficiencies, capitalizing on economies of scale and
expanding its consumer product offerings into new and existing markets.
Improve operating efficiency through increased scale, continued process
improvement and technology investments
The Company has developed a strong culture attuned to expense control,
continuous process improvement and investment in technology. The Company seeks
to become a low cost producer by building scale in businesses in which it has
significant positions and believes that it already has a competitive advantage
as a "low cost producer" in its factoring and equipment financing and leasing
businesses. The Company intends to maintain its focus on expense control and
efficiency through continuous process improvement and technology investments and
by utilizing its proven expense control and efficiency expertise to expand. The
Company believes the existing infrastructure of most of its strategic business
units can support further growth.
Invest in businesses that leverage existing capabilities and complement the
Company's core strengths
Over the past few years, the Company has acquired various businesses and
portfolios of finance receivables and has successfully integrated the acquired
assets, operations and personnel while leveraging the Company's proven strengths
and expertise. The Company intends to continue to actively pursue strategic
acquisition opportunities of both businesses and portfolios of assets that it
believes will enhance growth and profitability and that can be integrated into
its core franchises.
7
<PAGE> 10
THE OFFERINGS
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CLASS A COMMON STOCK OFFERED(1):
United States Offering.................. shares of Class A Common Stock
International Offering.................. shares of Class A Common Stock
Total Offerings......................... shares of Class A Common Stock
COMMON STOCK OUTSTANDING AFTER THE
OFFERINGS(1)(2):........................... shares of Class A Common Stock
shares of Class B Common Stock
Total Shares Outstanding................ shares of Common Stock
USE OF PROCEEDS.............................. The proceeds to the Company from the offering of the Class
A Common Stock in the United States and Canada (the "U.S.
Offering") and the concurrent offering outside the United
States and Canada (the "International Offering" and,
together with the U.S. Offering, the "Offerings"), after
the deduction of underwriting discounts and before the
deduction of expenses payable by the Company, are
estimated to be $ million ($ assuming
exercise in full of the Underwriters' over-allotment
option). Substantially all of such proceeds will be used
to acquire from DKB its option to purchase the 20%
interest in the Company currently owned by CBC Holding
(Delaware) Inc. ("CBC Holding"), an indirect wholly-owned
subsidiary of The Chase Manhattan Corporation ("Chase"),
and to purchase such interest from CBC Holding. If the
Underwriters' over-allotment options are exercised, the
proceeds thereof are expected to be used for general
corporate purposes and for potential acquisitions.
DIVIDENDS; VOTING RIGHTS; CONVERSION......... The holders of Class A Common Stock and Class B Common
Stock (collectively, "Common Stock") share ratably on a
per share basis in all dividends and other distributions
declared by the Board of Directors. See "Dividend Policy."
The holders of Class A Common Stock are entitled to one
vote per share and holders of Class B Common Stock are
entitled to five votes per share. See "Description of
Capital Stock--Common Stock--Voting Rights." Under certain
circumstances, shares of Class B Common Stock are
convertible into an equivalent number of shares of Class A
Common Stock. See "Description of Capital Stock--Common
Stock--Conversion."
CONTROLLING STOCKHOLDER...................... For information regarding the Company's controlling
stockholder, see "Relationship with DKB."
RISK FACTORS................................. For a discussion of certain considerations relevant to an
investment in the Class A Common Stock, see "Risk
Factors."
NEW YORK STOCK EXCHANGE TRADING SYMBOL FOR
CLASS A COMMON STOCK....................... "CIT"
</TABLE>
- ---------------
(1) Excludes up to shares and shares subject to
over-allotment options granted by the Company to the U.S. Underwriters and the
International Managers, respectively. See "Underwriting."
(2) Excludes shares of restricted Class A Common Stock and options to
purchase shares of Class A Common Stock to be granted upon
consummation of the Offerings. Also excludes shares of Class A Common
Stock reserved for future issuance under employee benefit plans. See
"Management -- Employee Compensation Plans -- Long-Term Equity Compensation
Plan."
8
<PAGE> 11
DIVIDEND POLICY
The Company's Board of Directors intends to declare and pay quarterly dividends
on the Common Stock. It is expected that the dividend in respect of the quarter
ending March 31, 1998, which will be the first full quarter following the
consummation of the Offerings, will be $ per share (a rate of
$ annually) and will be paid in . The declaration
and payment of dividends by the Company are subject to the discretion of the
Board of Directors and no assurance can be given that the Company will pay such
dividend or any further dividends. The determination as to the payment of
dividends will depend upon, among other things, general business conditions, the
Company's financial results, contractual, legal and regulatory restrictions
regarding the payment of dividends by the Company, the credit ratings of the
Company and such other factors as the Board of Directors may consider to be
relevant. See "Risk Factors--Limitations Upon Payment of Dividends."
RELATIONSHIP WITH DKB
Upon consummation of the Offerings, DKB will own 100% of the outstanding shares
of Class B Common Stock, each of which has five votes per share but is otherwise
identical in all material respects to the Class A Common Stock (which has one
vote per share). Upon consummation of the Offerings, the Class B Common Stock
owned by DKB will represent in the aggregate approximately % of the
combined voting power of all of the outstanding Common Stock. For as long as DKB
continues to own shares of Common Stock representing more than 50% of the
combined voting power of the Class A Common Stock and Class B Common Stock, DKB
will be able to direct the election of all of the members of the Company's Board
of Directors and exercise a controlling influence over the business and affairs
of the Company. See "Risk Factors--Control By and Relationship with DKB."
DKB has advised the Company that it currently intends to continue to hold all of
the Class B Common Stock owned by it following the Offerings. However, DKB is
not subject to any contractual obligation to retain its controlling interest,
except that DKB has agreed not to sell or otherwise dispose of any shares of
Class B Common Stock for a period of 180 days after the date of this Prospectus
without the prior written consent of J.P. Morgan Securities Inc. See
"Underwriting." As a result, there can be no assurance concerning the period of
time during which DKB will maintain its ownership of Common Stock owned by it
immediately following the Offerings. See "Risk Factors--Control By and
Relationship with DKB," "Risk Factors--Shares Eligible for Future Sale" and
"Relationship With DKB." From time to time, the Company and DKB have entered
into, and can be expected to continue to enter into, certain agreements and
business transactions in the ordinary course of their respective businesses, and
the Company's Restated Certificate of Incorporation includes certain provisions
relating to the Company's relationship with DKB. The Company has entered into an
agreement with DKB pursuant to which the Company has agreed not to engage in any
activities or enter into any transactions without obtaining approvals or giving
notices required by DKB under applicable U.S. and Japanese banking laws. See
"Relationship With DKB" and "Description of Capital Stock--Certain Certificate
of Incorporation and By-Law Provisions--Corporate Opportunities."
9
<PAGE> 12
SUMMARY FINANCIAL INFORMATION
The summary results of operations and balance sheet data presented below for the
six months ended June 30, 1997 and 1996 and as of June 30, 1997 and 1996,
respectively, were derived from the unaudited consolidated financial statements
of the Company set forth herein. The summary results of operations and balance
sheet data presented below for each of the years in the three-year period ended
December 31, 1996 and as of December 31, 1996 and 1995, respectively, were
derived from the audited consolidated financial statements of the Company and
notes thereto set forth herein. The summary results of operations and balance
sheet data presented below for each of the years in the two-year period ended
December 31, 1993 and as of December 31, 1994, 1993 and 1992, respectively, were
derived from audited consolidated financial statements and the related notes
thereto not presented herein. The data presented below should be read in
conjunction with the consolidated financial statements and the related notes
thereto set forth herein. The data for the six month period ended June 30, 1997
is not necessarily indicative of operating results that may be expected for a
full year.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE YEARS ENDED DECEMBER 31,
Dollars in millions, except per 30, ---------------------------------------------------------
share data 1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net finance income $432.3 $392.7 $797.9 $697.7 $649.8 $603.9 $539.5
Total operating revenue 597.4(1) 518.6 1,042.0 882.4 824.2 737.7 653.3
Salaries and general operating
expenses 210.5 193.5 393.1 345.7 337.9 282.2 261.6
Provision for credit losses 56.0 54.4 111.4 91.9 96.9 104.9 103.2
Net income 163.8 132.2 260.1 225.3 201.1 182.3 162.3
Pro forma net income per share(2)
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
AT DECEMBER 31,
AT JUNE 30, ---------------------------------------------------------
Dollars in millions 1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Finance receivables:
Commercial $13,714.6 $13,247.9 $13,757.6 $13,451.5 $12,821.2 $11,185.2 $10,359.7
Consumer 3,100.1 2,698.6 3,239.0 2,344.0 1,973.2 1,438.9 1,411.8
--------- --------- --------- --------- --------- --------- ---------
Total finance receivables $16,814.7 $15,946.5 $16,996.6 $15,795.5 $14,794.4 $12,624.1 $11,771.5
Reserve for credit losses 221.9 211.9 220.8 206.0 192.4 169.4 158.5
Operating lease equipment, net 1,573.0 1,237.6 1,402.1 1,113.0 867.9 751.9 462.8
Total assets 19,953.6 17,791.5 18,932.5 17,420.3 15,959.7 13,725.0 13,026.1
Commercial paper 6,377.8 5,573.3 5,827.0 6,105.6 5,660.2 6,516.1 6,173.5
Variable-rate senior notes 3,261.5 4,197.5 3,717.5 3,827.5 3,812.5 1,686.5 1,477.8
Fixed-rate senior notes 5,360.5 3,798.1 4,761.2 3,337.0 2,619.4 2,389.0 2,476.6
Subordinated fixed-rate notes 300.0 300.0 300.0 300.0 300.0 200.0 200.0
Company-obligated mandatorily
redeemable preferred securities
of subsidiary trust holding
solely debentures of the Company 250.0 -- -- -- -- -- --
Stockholders' equity 2,190.6 1,986.0 2,075.4 1,914.2 1,793.0 1,692.2 1,601.1
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
AT OR FOR THE SIX AT OR FOR THE YEARS ENDED DECEMBER 31,
MONTHS ENDED JUNE 30, ---------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED DATA AND RATIOS
PROFITABILITY(3)
Net interest margin as a
percentage of average earning
assets ("AEA")(4) 4.84% 4.87% 4.82% 4.54% 4.77% 4.93% 4.73%
Return on average stockholders'
equity 15.36% 13.55% 13.04% 12.13% 11.49% 11.02% 10.36%
Return on AEA(4) 1.83% 1.64% 1.57% 1.46% 1.48% 1.49% 1.42%
Ratio of earnings to fixed charges 1.55x 1.51x 1.49x 1.44x 1.52x 1.60x 1.49x
Salaries and general operating
expenses as a percentage of
AEA(4) 2.36% 2.40% 2.38% 2.25% 2.48% 2.30% 2.30%
Salaries and general operating
expenses as a percentage of
average serviced assets
("ASA")(5) 2.13% 2.17% 2.15% 2.13% 2.40% 2.28% 2.29%
Dividend payout ratio 30% 46%(6) 38%(6) 46%(6) 50% 50% 50%
CREDIT QUALITY
60+ days contractual delinquency
as a percentage of finance
receivables 1.69% 1.58% 1.72% 1.67% 1.20% 1.71% 2.85%
Net credit losses as a percentage
of average finance
receivables(3) 0.67% 0.62% 0.62% 0.50% 0.61% 0.77% 0.84%
Reserve for credit losses as a
percentage of finance
receivables 1.32% 1.33% 1.30% 1.30% 1.30% 1.34% 1.35%
Ratio of reserve for credit losses
to current period net credit
losses(3) 2.00x 2.16x 2.18x 2.67x 2.29x 1.79x 1.61x
LEVERAGE
Total debt to stockholders' equity
and Company-obligated
mandatorily redeemable preferred
securities of subsidiary trust
holding solely debentures of the
Company 6.27x 6.98x 7.04x 7.09x 6.91x 6.38x 6.45x
Total debt to stockholders'
equity(7) 7.10x 6.98x 7.04x 7.09x 6.91x 6.38x 6.45x
OTHER
Total managed assets (in
millions)(8) $20,837.6 $18,451.7 $20,005.4 $17,978.6 $16,072.1 $13,723.6 $12,290.1
Employees 2,925 2,900 2,950 2,750 2,700 2,400 2,400
</TABLE>
- ---------------
(1) Includes a gain of $58.0 million on the sale of an equity interest acquired
in connection with a loan workout.
(2) Based upon shares of Common Stock to be outstanding upon
consummation of the Offerings. Excludes shares of Class A Common Stock
reserved for future issuance under employee benefit plans.
(3) Six month data and ratios calculated on an annualized basis.
(4) "AEA" reflects the average of finance receivables, operating lease
equipment, consumer finance receivables held for sale and certain investments,
less credit balances of factoring clients.
(5) "ASA" reflects average earning assets plus the average of consumer finance
receivables previously securitized and currently managed by the Company and
consumer finance receivables serviced for third parties.
(6) In 1995, the Company operated under a dividend policy requiring the payment
of dividends equal to and not exceeding 50% of operating earnings. The actual
ratio for 1995, however, fell below 50% due to the deferral of the declaration
and payment of dividends on December 1995 earnings into the first quarter of
1996.
(7) Total debt includes, and stockholders' equity excludes, $250.0 million of
Company-obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely debentures of the Company issued in February 1997.
(8) "Managed assets" include (i) financing and leasing assets and (ii)
off-balance sheet consumer finance receivables previously securitized and
currently managed by the Company.
11
<PAGE> 14
RISK FACTORS
Prospective investors should carefully consider, in addition to the other
information contained in this Prospectus, the following factors before
purchasing the Class A Common Stock offered hereby.
ECONOMIC FACTORS
Risk of Economic Slowdown or Downturn
The Company's results of operations and financial position may be affected by
various economic factors. Unfavorable economic conditions may make it more
difficult for the Company to maintain both its new business origination volume
and the credit quality thereof at levels previously attained and may adversely
affect margins on new finance receivables. In adverse economic conditions,
growth in finance receivables and leases may not be attainable and
non-performing assets and loan charge-offs are likely to increase. The Company's
growth rate has differed between its commercial and consumer businesses and,
over time, the Company expects that its consumer business will grow at a more
rapid rate than its commercial business. As a result of such growth, the Company
will become more susceptible to economic factors that may adversely affect the
demand for the Company's products and services by consumers. There can be no
assurance that the growth rates experienced by the Company in the recent past
will continue.
The Company is also subject to industry-specific economic and other factors that
may affect the demand for its products. At June 30, 1997, 11.4% of the Company's
total financing and leasing assets related to home equity obligations, 10.3%
related to commercial airline obligations, 8.6% related to construction
obligations and 8.3% related to obligations of retailers. An economic downturn
or slowdown in these or other industries or markets could have a material
adverse effect on the Company's results of operations or financial position.
Although the Company maintains a consolidated reserve for credit losses on
finance receivables in an amount which it believes is sufficient to provide
adequate protection against potential credit losses in its portfolios, this
reserve could prove to be insufficient. Adverse economic conditions may cause
declines in the realizable value of certain collateral securing the Company's
finance receivables, or in the value of equipment subject to lease agreements.
Adverse economic conditions, including those affecting demand for commercial
aircraft and railcars, which represent a substantial portion of the Company's
leased assets, may impair the Company's ability to re-lease or remarket such
equipment and fully realize the carrying value of its leased assets and/or the
estimated lease residual values. See "--Leasing Transactions and Equipment Risk"
and "--Reserve for Credit Losses."
Interest Rate Risk
Although the Company has an active and comprehensive approach to managing its
interest rate risk, including matching the maturities of its interest rate
sensitive assets and interest rate sensitive liabilities and closely monitoring
product pricing to stay responsive to changing market interest rates,
significant increases in market interest rates, or the perception that an
increase may occur, could adversely affect both the Company's ability to
originate new finance receivables and its ability to grow. Conversely, a
decrease in interest rates could result in an acceleration in the prepayment of
owned and serviced finance receivables. In addition, changes in market interest
rates or in the relationships between short-term and long-term market interest
rates or between different interest rate indices (i.e., basis risk) could affect
the interest rates charged on interest-earning assets differently than the
interest rates paid on interest-bearing liabilities, which could result in an
increase in interest expense relative to finance income. An increase in market
interest rates also could adversely impact the ability of the Company's
floating-rate borrowers to meet their higher payment obligations, which could
result in an increase in non-performing assets and net credit losses. See "Risk
Management--Asset/Liability Management--Interest Rate Risk Management."
An economic slowdown or downturn, or significant change in interest rates, could
contribute to a downgrading of the Company's credit ratings, which is likely to
increase the Company's funding costs and could decrease its net finance income,
limit its access to the capital markets or result in a decision by the lenders
under the Company's existing credit facilities not to extend such credit
facilities after their expiration. There can be no assurance that a decline in
economic conditions or increase in interest rates will not have a material
adverse effect on the Company's results of operations or financial position.
LEASING TRANSACTIONS AND EQUIPMENT RISK
The Company maintains ownership of various types of equipment and leases this
equipment to customers through two distinct types of transactions: (i) direct
financing leases; and (ii) operating leases. A direct financing lease is usually
long-term in nature, passes substantially all of the risks and rewards of the
related equipment to the customer and is accounted for as a
12
<PAGE> 15
financing by the Company. The Company structures its direct financing leasing
transactions so that a material portion of the underlying equipment's cost at
the inception of the lease (approximately 90%) is recovered over the initial
term of the lease. The Company expects to assume equipment risk on the
equipment's estimated residual value at the end of the initial lease term. An
operating lease, however, is typically of a shorter duration, with periodic
rentals recorded as income, and depreciation on related equipment recorded as an
expense by the Company. The shorter-term nature of operating leases inherently
increases the risk that the Company may not recover its investment in the
related equipment due to several factors, including the Company's inability to
remarket the equipment and obsolescence.
The initial establishment, ongoing review and ultimate realization of direct
financing lease residual values, as well as the realization of operating lease
equipment values, are important elements of the Company's leasing business.
Residual values are recorded upon acquisition of the equipment purchased for
direct financing leasing transactions based upon the estimated future value of
the equipment at the time the Company expects to dispose of the equipment. The
estimates are derived by the Company from, among other things, market
information on sales of used equipment and estimated future obsolescence trends.
Periodic depreciation expense on equipment purchased for operating lease
transactions is also derived through the use of estimates that include the
equipment's useful life and the future value of the equipment at the end of this
life. Because such values are heavily influenced by estimates, there can be no
assurance that such values will be realized by the Company upon disposition of
equipment owned by the Company and returned by lessees upon termination of their
leases. At June 30, 1997, the Company had finance leases of $3.9 billion,
including recorded estimated lease residual values of $839.8 million, and
operating lease equipment with a book value of $1.6 billion, net of
depreciation. To the extent that the Company fails to realize its direct
financing lease residual values and operating lease equipment values, the
Company's results of operations and financial position could be materially
adversely affected.
RESERVE FOR CREDIT LOSSES
The Company maintains a consolidated reserve for credit losses on finance
receivables at an amount which it believes is sufficient to provide adequate
protection against potential credit losses in its portfolios. The level of the
consolidated reserve for credit losses is determined principally on the basis of
(i) the current credit quality of the portfolio and trends, (ii) the current mix
of finance receivables and (iii) historical loss experience. The consolidated
reserve for credit losses reflects management's judgment of the loss potential,
after considering factors such as the nature and characteristics of obligors,
economic conditions and trends, charge-off experience, delinquencies and the
value of underlying collateral and guarantees, including recourse to dealers and
manufacturers. Although the consolidated reserve for credit losses in the
Company's balance sheet as of June 30, 1997 is considered adequate by the
Company's management, there can be no assurance that this consolidated reserve
for credit losses will prove to be adequate over time to cover credit losses in
the Company's portfolios. This consolidated reserve for credit losses may prove
to be inadequate if unanticipated adverse changes in the economy or discrete
events adversely affect specific customers, industries or markets, or if credit
losses arising out of the seasoning of the Company's consumer portfolio exceed
those anticipated by the Company. The Company's results of operations and
financial position could be materially adversely affected to the extent that the
Company's consolidated reserve for credit losses is insufficient to cover such
changes or events. See "--Economic Factors--Risk of Economic Slowdown or
Downturn," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Risk Management--Credit Risk Management--Loan Loss
Reserves and Credit Losses."
COMPETITION
The Company's markets are highly competitive and are characterized by
competitive factors that vary based upon product and geographic region. The
Company's competitors include captive and independent finance companies,
commercial banks and thrift institutions, industrial banks, leasing companies,
manufacturers and vendors. Substantial national financial services networks have
been formed by insurance companies and bank holding companies that compete with
the Company. On a local level, community banks and smaller independent finance
and/or mortgage companies are a competitive force. Some competitors have
substantial local market positions. Many of the competitors of the Company are
large companies that have substantial capital, technological and marketing
resources, and some of these competitors are larger than the Company and may
have access to capital at a lower cost than the Company. Also, the Company's
competitors include businesses that are not related to bank holding companies
and, accordingly, may engage in activities, for example, aircraft rental and
servicing, currently prohibited to the Company. Competition has been enhanced in
recent years by an improving economy and growing marketplace liquidity. The
markets for most of the Company's products are characterized by a large number
of competitors. However, with respect to some of the Company's products,
competition is more concentrated. See "Business--Additional Information
Regarding the Company--Competition."
13
<PAGE> 16
The Company competes primarily on the basis of pricing, terms and structure in
many of its markets. From time to time, competitors of the Company seek to
compete aggressively on the basis of these factors and the Company may lose
market share to the extent it is unwilling to match its competitors' pricing,
terms and structure in order to maintain its interest margins or to maintain its
credit discipline. To the extent that the Company matches competitors' pricing,
terms or structure, it may experience lower interest margins and/or increased
credit losses. In addition, demand for the Company's products with respect to
certain industries, such as the commercial airline industry, will be affected by
demand for such industry's services and products and by industry regulations.
See "Business--Additional Information Regarding the Company--Competition."
LIMITATIONS UPON LIQUIDITY AND CAPITAL RAISING
The Company's primary sources of funds are cash flow from operations, commercial
paper borrowings, medium-term notes, other term debt securities and asset-backed
securitizations. At June 30, 1997, commercial paper borrowings were $6.4 billion
and amounts due on term debt within one year were $3.8 billion. A downgrade in
the Company's credit ratings could result in an increase in the Company's
interest expense and could have an adverse impact on the Company's ability to
access the commercial paper market or the public and private debt markets, which
could have a material adverse effect on the Company's results of operations or
financial position. If the Company is unable to access such markets on
acceptable terms, it could utilize its bank credit lines and cash flow from
operations and portfolio liquidations to satisfy its liquidity needs. At June
30, 1997, the Company had committed revolving bank credit lines totaling $5.0
billion, representing 81% of operating commercial paper outstanding (commercial
paper outstanding less interest-bearing deposits). The Company believes that
such credit lines should provide sufficient additional liquidity to the Company
under foreseeable conditions. However, there can be no assurance that the
Company's committed revolving bank credit lines would provide adequate liquidity
to the Company following a downgrade in its credit ratings or other adverse
conditions or that these bank credit lines will be renewed.
The Company funds its operations independently of DKB and believes that the
business of and the outlook for DKB is not necessarily closely related to the
business of and the outlook for the Company. However, there can be no assurance
that a future downgrading of DKB's credit ratings would not have an adverse
impact on the Company's credit ratings. Therefore, while DKB maintains a
controlling interest in the Company, a deterioration in the financial condition
of DKB could result in increased borrowing costs to the Company and could impair
its access to the public and private capital markets, which could have a
material adverse effect on the Company's results of operations or financial
position.
If DKB chooses to maintain its percentage ownership of the Company, the Company
may be constrained in its ability to raise common or preferred equity capital in
the future. DKB is not under any obligation to make future capital contributions
to the Company or to agree to allow the Company to raise additional common or
preferred equity capital. See "Relationship with DKB."
CONTROL BY AND RELATIONSHIP WITH DKB
Upon consummation of the Offerings, DKB will beneficially own 100% of the
outstanding Class B Common Stock, which will, in the aggregate, represent %
of the combined voting power of all of the outstanding Common Stock. For as long
as DKB continues to beneficially own shares of Common Stock representing more
than 50% of the combined voting power of the Class A Common Stock and Class B
Common Stock, DKB will be able to direct the election of all of the members of
the Company's Board of Directors and exercise a controlling influence over the
business and affairs of the Company, including any determinations with respect
to (i) mergers or other business combinations involving the Company, (ii) the
acquisition or disposition of assets by the Company, (iii) the incurrence of
indebtedness by the Company, (iv) the issuance of any additional Common Stock or
other equity securities and (v) the payment of dividends with respect to the
Common Stock. See "--Limitations Upon Liquidity and Capital Raising." Similarly,
DKB will have the power to (i) determine matters submitted to a vote of the
Company's stockholders without the consent of the Company's other stockholders,
(ii) prevent or cause a change in control of the Company or (iii) take other
actions that might be favorable to DKB. In the foregoing situations or
otherwise, various conflicts of interest between the Company and DKB could
arise. Ownership interests of directors or officers of the Company in common
stock of DKB or service as a director or officer or other employee of both the
Company and DKB could create or appear to create potential conflicts of interest
when directors and officers and employees are faced with decisions that could
have different implications for the Company and DKB. The Company's Amended and
Restated Certificate of Incorporation will include certain provisions relating
to the allocation of business opportunities that may be suitable for both the
Company and DKB. The Company has entered into an agreement with DKB pursuant to
which the Company has agreed not to engage in any activities or enter into any
transactions without obtaining approvals or giving notices required by DKB under
applicable U.S. and Japanese banking laws. See "Relationship with DKB" and
"Description of Capital Stock--Certain Certificate of Incorporation and By-Law
Provisions--Corporate Opportunities."
14
<PAGE> 17
REGULATION
The Company is subject to extensive federal and state regulation and supervision
in the jurisdictions in which it operates. Such regulation and supervision are
primarily for the benefit and protection of the Company's customers, and not for
the benefit of investors, and could limit the Company's discretion in operating
its businesses. For example, state laws often establish maximum allowable
finance charges for certain consumer and commercial loans. Noncompliance with
applicable statutes or regulations could result in the suspension or revocation
of any license or registration at issue, as well as the imposition of civil
fines and criminal penalties. No assurance can be given that applicable laws or
regulations will not be amended or construed differently, that new laws and
regulations will not be adopted or that interest rates that the Company charges
will not rise to state maximum levels, the effect of any of which could be to
adversely affect the business or results of operations of the Company. See
"Business--Additional Information Regarding the Company--Regulation."
Because the Company is a subsidiary of DKB, the Company and its subsidiaries,
and their respective activities, are subject to examination and regulation by
the Board of Governors of the Federal Reserve System (the "Federal Reserve").
Under certain circumstances, the Federal Reserve has the authority to issue
orders which could restrict the ability of the Company to engage in new
activities or to acquire additional assets or businesses outside of the normal
course of business. See "Business-- Additional Information Regarding the
Company--Regulation."
LIMITATIONS UPON PAYMENT OF DIVIDENDS
As a holding company, the Company's ability to pay dividends to stockholders
will depend primarily upon the receipt of dividends and other distributions by
the Company from its subsidiaries. The right of the Company to participate in
any distribution of assets of any subsidiary upon such subsidiary's liquidation
or reorganization or otherwise (and thus the ability of holders of the Class A
Common Stock to benefit from such distribution) will be subject to the prior
claims of creditors of that subsidiary, except to the extent that any claims of
the Company as a creditor of such subsidiary may be recognized as such. As of
June 30, 1997, the Company's subsidiaries had approximately $ billion of
indebtedness and other liabilities, in addition to other contractual obligations
for sale under the federal securities laws.
The Company believes that maintaining its debt to equity ratio within certain
parameters is an important factor in maintaining its existing credit ratings.
Accordingly, under certain circumstances, the Company may limit its payment of
dividends in order to allow for portfolio growth and to maintain debt to equity
ratios within parameters considered appropriate by the Company.
The declaration and payment of dividends by the Company are subject to the
discretion of the Board of Directors and no assurance can be given that the
Company will pay dividends. The Company may at any time cease to pay dividends.
The determination as to the payment of dividends will depend upon, among other
things, general business conditions, the Company's financial results,
contractual, legal and regulatory restrictions regarding the payment of
dividends by the Company, the credit ratings of the Company and such other
factors as the Board of Directors may consider to be relevant. For a discussion
of the Company's dividend policy and certain related matters, see "Dividend
Policy."
SHARES ELIGIBLE FOR FUTURE SALE
Subject to applicable federal securities laws and the restrictions described
below, after completion of the Offerings, DKB may sell any and all of the shares
of Common Stock owned by it. The Company has granted to DKB registration rights
enabling DKB to demand the registration for sale under the federal securities
laws of its Common Stock and certain other securities of the Company and to
require such securities to be included in registration statements under the
federal securities laws proposed to be filed with the Commission. See
"Relationship with DKB--Registration Rights Agreement." Sales or distribution by
DKB of substantial amounts of Common Stock in the public market, or the
perception that such sales could occur, could adversely affect prevailing market
prices for shares of Class A Common Stock. DKB has advised the Company that its
current intent is to continue to hold all of the Common Stock owned by it
immediately following the Offerings. However, DKB is not subject to any
contractual obligation to retain its controlling interest, except that DKB has
agreed not to sell or otherwise dispose of any shares of Common Stock of the
Company for a period of 180 days after the date of this Prospectus without the
prior written consent of J.P. Morgan Securities Inc. See "Underwriting." As a
result, there can be no assurance that DKB will maintain its percentage
ownership of Common Stock immediately following the Offerings for any specific
period of time. See "Control By and Relationship with DKB" and "Shares Available
for Future Sale."
NO PRIOR MARKET FOR CLASS A COMMON STOCK
Prior to the Offerings, there has been no public market for the Class A Common
Stock. The initial public offering price of the Class A Common Stock was
determined by negotiations between the Company, DKB and representatives of the
Underwriters. There can be no assurance that the initial public offering price
will correspond to the price at which the Class A Common Stock will trade in the
public market subsequent to the Offerings or that an active public market for
the Class A Common Stock will develop and continue after the Offerings. See
"Underwriting."
15
<PAGE> 18
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained herein under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and "Risk Management," including, without limitation,
those concerning (i) the Company's strategy, (ii) the Company's liquidity, (iii)
the Company's credit risk management, (iv) the Company's asset/liability risk
management, (v) the Company's operational and legal risks, (vi) the growth of
the Company's consumer business and (vii) the effects on the Company of certain
legal proceedings, constitute forward-looking statements concerning the
Company's operations, economic performance and financial condition. Because such
statements involve risks and uncertainties, actual results may differ materially
from those expressed or implied by such forward-looking statements. Factors that
could cause such differences include, but are not limited to, those discussed
under "Risk Factors" and "Risk Management."
THE COMPANY
The Company is a leading diversified finance organization offering secured
commercial and consumer financing primarily in the United States to smaller,
middle-market and larger businesses and to individuals through a nationwide
distribution network. The Company commenced operations in 1908 and has developed
a broad array of "franchise" strategic business units that focus on specific
industries, assets types and markets, which are balanced by client, industry and
geographic diversification. The Company believes that its strong credit risk
management expertise and long-standing commitment to its markets and its
customers provide it with a competitive advantage.
Prior to the consummation of the Offerings, the Company had been owned 80% by
DKB and 20% by CBC Holding. Immediately prior to the consummation of the
Offerings, the Company will reclassify its existing class of common stock into
shares of Class A Common Stock and Class B Common Stock and DKB will receive
100% of the shares of Class B Common Stock in exchange for its existing shares
of common stock. Upon consummation of the Offerings, the Class B Common Stock
owned by DKB will represent in the aggregate % of the combined voting power of
all of the outstanding Common Stock and % of the economic interest in the
Company. See "Relationship with DKB" and "Description of Capital Stock--Common
Stock--Voting Rights."
The Company's principal executive offices are located at 1211 Avenue of the
Americas, New York, New York 10036, and its telephone number is (212) 536-1390.
USE OF PROCEEDS
The proceeds of the Offerings, after the deduction of underwriting discounts and
before the deduction of expenses payable by the Company, are estimated to be
$ ($ assuming exercise in full of the Underwriters'
over-allotment options). Substantially all of such proceeds will be used to
acquire from DKB its option to purchase the 20% interest in the Company
currently owned by CBC Holding and to purchase such interest from CBC Holding.
If the Underwriters' over-allotment options are exercised, the proceeds from
such exercises are expected to be used for general corporate purposes and for
potential acquisitions.
DIVIDEND POLICY
The holders of the Class A Common Stock and Class B Common Stock share ratably
on a per share basis in all dividends and other distributions declared by the
Company's Board of Directors. The Company's Board of Directors intends to
declare and pay quarterly dividends. It is expected that the dividend in respect
of the quarter ending March 31, 1998, which will be the first full quarter
following the completion of the Offerings, will be $ per share (a rate of $
annually) and will be paid on . The declaration and payment of
dividends by the Company are subject to the discretion of the Board of Directors
and no assurance can be given that the Company will pay such dividend or any
further dividends. The determination as to the payment of dividends will depend
upon, among other things, general business conditions, the Company's financial
results, contractual, legal and regulatory restrictions regarding the payment of
dividends by the Company, the credit ratings of the Company and such other
factors as the Board of Directors may consider to be relevant. See "Risk
Factors--Limitations Upon Payment of Dividends."
16
<PAGE> 19
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June 30,
1997 and on a pro forma basis giving effect to the reclassification of the
common stock of the Company into shares of Class A Common Stock and Class B
Common Stock and the consummation of the Offerings. The information set forth
below assumes that the Class A Common Stock offered hereby will be sold in the
Offerings at $ per share (the midpoint of the range set forth on the cover
page of this Prospectus). This table should be read in conjunction with the
consolidated financial statements and the related notes thereto set forth
herein.
<TABLE>
<CAPTION>
-------------------------
AS OF JUNE 30, 1997
Dollars in millions ACTUAL AS ADJUSTED
--------- -----------
<S> <C> <C>
Debt:
Commercial paper $ 6,377.8 $ 6,377.8
Variable-rate senior notes 3,261.5 3,261.5
Fixed-rate senior notes 5,360.5 5,360.5
Subordinated fixed-rate notes 300.0 300.0
--------- ---------
Total debt $15,299.8 $15,299.8
Company-obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely debentures of the Company 250.0 250.0
Stockholders' equity:
Common stock, 1,000 shares authorized, issued and
outstanding 250.0 --
Class A common stock, par value $.01 per share, shares
authorized and shares issued and outstanding(1) --
Class B common stock, par value $.01 per share, shares
authorized and shares issued and outstanding --
Paid-in capital 573.3
Retained earnings 1,367.3 1,367.3
--------- ---------
Total stockholders' equity $ 2,190.6 $
--------- ---------
Total capitalization $17,740.4 $
========= =========
</TABLE>
- ---------------
(1) Excludes shares of restricted Class A Common Stock and options to
purchase shares of Class A Common Stock to be granted upon
consummation of the Offerings. Also excludes shares of Class A Common
Stock reserved for future issuance under employee benefit plans. See
"Management--Employee Compensation Plans--Long-Term Equity Compensation Plan."
17
<PAGE> 20
SELECTED FINANCIAL INFORMATION
The results of operations and balance sheet data presented below for the six
months ended June 30, 1997 and 1996 and as of June 30, 1997 and 1996,
respectively, were derived from the unaudited consolidated financial statements
of the Company set forth herein. The results of operations and balance sheet
data presented below for each of the years in the three-year period ended
December 31, 1996 and as of December 31, 1996 and 1995, respectively, were
derived from the audited consolidated financial statements of the Company and
notes thereto set forth herein. The results of operations and balance sheet data
presented below for each of the years in the two-year period ended December 31,
1993 and as of December 31, 1994, 1993 and 1992, respectively, were derived from
the audited consolidated financial statements and the related notes thereto not
presented herein. The data presented below should be read in conjunction with
the consolidated financial statements and the related notes thereto set forth
herein. The data for the six month period ended June 30, 1997 is not necessarily
indicative of operating results that may be expected for a full year.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE YEARS ENDED DECEMBER 31,
Dollars in millions, except per 30, ---------------------------------------------------------
share data 1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net finance income $432.3 $392.7 $797.9 $697.7 $649.8 $603.9 $539.5
Total operating revenue 597.4(1) 518.6 1,042.0 882.4 824.2 737.7 653.3
Salaries and general operating
expenses 210.5 193.5 393.1 345.7 337.9 282.2 261.6
Provision for credit losses 56.0 54.4 111.4 91.9 96.9 104.9 103.2
Net income 163.8 132.2 260.1 225.3 201.1 182.3 162.3
Pro forma net income per share(2)
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
AT DECEMBER 31,
AT JUNE 30, ---------------------------------------------------------
Dollars in millions 1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Finance receivables:
Commercial $13,714.6 $13,247.9 $13,757.6 $13,451.5 $12,821.2 $11,185.2 $10,359.7
Consumer 3,100.1 2,698.6 3,239.0 2,344.0 1,973.2 1,438.9 1,411.8
--------- --------- --------- --------- --------- --------- ---------
Total finance receivables $16,814.7 $15,946.5 $16,996.6 $15,795.5 $14,794.4 $12,624.1 $11,771.5
Reserve for credit losses 221.9 211.9 220.8 206.0 192.4 169.4 158.5
Operating lease equipment, net 1,573.0 1,237.6 1,402.1 1,113.0 867.9 751.9 462.8
Total assets 19,953.6 17,791.5 18,932.5 17,420.3 15,959.7 13,725.0 13,026.1
Commercial paper 6,377.8 5,573.3 5,827.0 6,105.6 5,660.2 6,516.1 6,173.5
Variable-rate senior notes 3,261.5 4,197.5 3,717.5 3,827.5 3,812.5 1,686.5 1,477.8
Fixed-rate senior notes 5,360.5 3,798.1 4,761.2 3,337.0 2,619.4 2,389.0 2,476.6
Subordinated fixed-rate notes 300.0 300.0 300.0 300.0 300.0 200.0 200.0
Company-obligated mandatorily
redeemable preferred securities
of subsidiary trust holding
solely debentures of the Company 250.0 -- -- -- -- -- --
Stockholders' equity 2,190.6 1,986.0 2,075.4 1,914.2 1,793.0 1,692.2 1,601.1
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
AT OR FOR THE SIX AT OR FOR THE YEARS ENDED DECEMBER 31,
MONTHS ENDED JUNE 30, -------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED DATA AND RATIOS
PROFITABILITY(3)
Net interest margin as a percentage
of AEA(4) 4.84% 4.87% 4.82% 4.54% 4.77% 4.93% 4.73%
Return on average stockholders'
equity 15.36% 13.55% 13.04% 12.13% 11.49% 11.02% 10.36%
Return on AEA(4) 1.83% 1.64% 1.57% 1.46% 1.48% 1.49% 1.42%
Ratio of earnings to fixed charges 1.55x 1.51x 1.49x 1.44x 1.52x 1.60x 1.49x
Salaries and general operating
expenses as a percentage of AEA(4) 2.36% 2.40% 2.38% 2.25% 2.48% 2.30% 2.30%
Salaries and general operating
expenses as a percentage of ASA(5) 2.13% 2.17% 2.15% 2.13% 2.40% 2.28% 2.29%
Dividend payout ratio 30% 46%(6) 38%(6) 46%(6) 50% 50% 50%
CREDIT QUALITY
60+ days contractual delinquency as
a percentage of finance
receivables 1.69% 1.58% 1.72% 1.67% 1.20% 1.71% 2.85%
Net credit losses as a percentage of
average finance receivables(3) 0.67% 0.62% 0.62% 0.50% 0.61% 0.77% 0.84%
Reserve for credit losses as a
percentage of finance receivables 1.32% 1.33% 1.30% 1.30% 1.30% 1.34% 1.35%
Ratio of reserve for credit losses
to current period net credit
losses(3) 2.00x 2.16x 2.18x 2.67x 2.29x 1.79x 1.61x
LEVERAGE
Total debt to stockholders' equity
and Company-obligated mandatorily
redeemable preferred securities of
subsidiary trust holding solely
debentures of the Company 6.27x 6.98x 7.04x 7.09x 6.91x 6.38x 6.45x
Total debt to stockholders'
equity(7) 7.10x 6.98x 7.04x 7.09x 6.91x 6.38x 6.45x
OTHER
Total managed assets (in
millions)(8) $20,837.6 $18,451.7 $20,005.4 $17,978.6 $16,072.1 $13,723.6 $12,290.1
Employees 2,925 2,900 2,950 2,750 2,700 2,400 2,400
</TABLE>
- ---------------
(1) Includes a gain of $58.0 million on the sale of an equity interest acquired
in connection with a loan workout.
(2) Based upon shares of Common Stock to be outstanding upon
consummation of the Offerings. Excludes shares of Class A Common Stock
reserved for future issuance under employee benefit plans.
(3) Six month data and ratios calculated on an annualized basis.
(4) "AEA" reflects the average of finance receivables, operating lease
equipment, consumer finance receivables held for sale and certain investments,
less credit balances of factoring clients.
(5) "ASA" reflects average earning assets plus the average of consumer finance
receivables previously securitized and currently managed by the Company and
consumer finance receivables serviced for third parties.
(6) In 1995, the Company operated under a dividend policy requiring the payment
of dividends equal to and not exceeding 50% of operating earnings. The actual
ratio for 1995, however, fell below 50% due to the deferral of the declaration
and payment of dividends on December 1995 earnings into the first quarter of
1996.
(7) Total debt includes, and stockholders' equity excludes, $250.0 million of
Company-obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely debentures of the Company issued in February 1997.
(8) "Managed assets" include (i) financing and leasing assets and (ii)
off-balance sheet consumer finance receivables previously securitized and
currently managed by the Company.
19
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis provides information that management
believes to be relevant to understanding the Company's consolidated financial
condition and results of operations. This discussion should be read in
conjunction with the consolidated financial statements and the related notes
thereto contained in the Company's consolidated financial statements included in
this Prospectus. The following discussion includes certain forward-looking
statements. For a discussion of important factors that may cause actual results
to differ materially from such forward-looking statements, see "Risk Factors."
See also "Risk Management" for certain factors that have in the past and may in
the future affect the financial performance of the Company.
The Company is engaged in the commercial and consumer finance businesses,
providing secured financing and leasing products on both a fixed and floating
interest rate basis. The Company's revenues principally consist of finance
income and fees and other income, which include factoring commissions,
commitment, facility, servicing, letter of credit and syndication fees, and
gains and losses from sales of equipment and other investments and sales and
securitizations of finance receivables. The Company's primary expenses are (i)
interest expense related to funding its finance receivables and operating lease
equipment, (ii) salaries and general operating expenses, (iii) provision for
credit losses and (iv) depreciation on operating lease equipment. Comparability
of results among quarterly periods may be affected by the timing of several
events, primarily consisting of equipment sales, securitizations and the sales
of venture capital investments. The Company's business requires significant
funds to originate finance receivables and purchase leasing equipment, and the
Company consequently requires substantial liquidity to finance its operations.
See "--Liquidity."
The Company's commercial segment includes equipment financing and leasing,
factoring and commercial finance. The Company's consumer segment includes
consumer finance and sales financing. The Company entered the home equity
lending business in late 1992 and the recreational boat market in 1993. The
Company has been growing the assets of its consumer segment at a faster rate
than that of its commercial segment. The contribution of the Company's consumer
segment to its profitability is significantly lower in relation to its financing
and leasing assets than that of the commercial segment. This reflects the
Company's relatively recent entry into the home equity lending business and the
continuing significant investment in building the infrastructure of this
business.
SIX MONTHS ENDED JUNE 30, 1997 VS. SIX MONTHS ENDED JUNE 30, 1996
Overview
For the six months ended June 30, 1997, net income totaled a record $163.8
million compared with $132.2 million for the same period in 1996, an increase of
23.9%. Return on average earning assets for the six months in 1997 increased to
1.83%, compared with 1.64% for the same period in 1996. The improvement resulted
from growth in finance income less interest expense ("net finance income") from
a higher level of financing and leasing assets and a gain on the sale of an
equity interest acquired in a loan workout.
Financing and leasing assets totaled a record $19.4 billion at June 30, 1997, an
increase of 4.4% over $18.6 billion at December 31, 1996. This increase is the
result of strong new business originations across all units, particularly in the
areas of consumer and small to medium ticket equipment financing, and growth in
the operating lease portfolio, partially offset by paydowns. The Company
securitized $139.1 million of recreational boat finance receivables in the first
six months of 1997, as compared to $250.0 million of recreation vehicle finance
receivables during the first six months of 1996. Managed assets, comprised of
financing and leasing assets and finance receivables previously securitized and
currently managed by the Company, totaled $20.8 billion at June 30, 1997, an
increase of 4.2% over $20.0 billion at December 31, 1996. Additionally, in July
1997, the Company securitized $500.0 million of home equity finance receivables.
20
<PAGE> 23
Net Finance Income
A comparison of net finance income for the first six months of 1997 and 1996 is
set forth below.
<TABLE>
<CAPTION>
-------------------------------------------------
SIX MONTHS ENDED JUNE
30, INCREASE
1997 1996 AMOUNT PERCENT
--------- --------- --------- -------
<S> <C> <C> <C> <C>
Dollars in millions
Finance income $ 889.0 $ 806.5 $ 82.5 10.2%
Interest expense 456.7 413.8 42.9 10.4
--------- --------- -------- ----
Net finance income $ 432.3 $ 392.7 $ 39.6 10.1%
========= ========= ======== ====
AEA $17,870.0 $16,146.3 $ 1,723.7 10.7%
Net finance income as a percentage of AEA 4.84% 4.87%
</TABLE>
Finance income totaled $889.0 million for the six months ended June 30, 1997, up
$82.5 million or 10.2% over the comparable period in 1996. As a percentage of
AEA, finance income (excluding interest income relating to short-term interest-
bearing deposits) was 9.87% for the six months ended June 30, 1997 and 9.94% for
the comparable period in 1996. Commercial segment finance income as a percentage
of commercial AEA was 9.98% for the six months ended June 30, 1997, compared to
9.96% for the comparable period during 1996, and consumer segment finance income
as a percentage of consumer AEA was 9.54% for the six months ended June 30,
1997, compared to 9.87% for the comparable period during 1996. The decline in
consumer finance income as a percentage of consumer AEA primarily reflects the
purchase of a lower yielding variable rate home equity credit line portfolio in
December 1996 and the sale of certain higher yielding high loan-to-value loans
during the second quarter of 1997. Interest expense totaled $456.7 million in
the six months ended June 30, 1997, up $42.9 million or 10.4% over the
comparable period in 1996. As a percentage of AEA, interest expense (excluding
interest expense relating to short-term interest-bearing deposits) in the six
months ended June 30, 1997 decreased to 5.03% from 5.07% in the comparable
period in 1996.
The changes in net finance income reflect increases in AEA (comprised of
financing and leasing assets less credit balances of factoring clients) offset
by lower yields due to pricing pressures in a highly competitive marketplace.
A comparative analysis of the weighted average principal outstanding and
interest rates paid on the Company's debt for the six month periods ended June
30, 1997 and 1996, before and after giving effect to interest rate swaps, is
shown in the following table.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
1997 1996
------------------------------------- -------------------------------------
BEFORE SWAPS AFTER SWAPS BEFORE SWAPS AFTER SWAPS
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dollars in millions
Commercial paper and variable-rate
senior notes $ 9,811.4 5.55% $ 6,456.4 5.48% $10,044.4 5.49% $ 7,073.3 5.44%
Fixed-rate senior and subordinated
notes 5,040.6 6.57 8,395.6 6.52 3,505.7 6.94 6,476.8 6.75
--------- --------- --------- ---------
Composite $14,852.0 5.90% $14,852.0 6.07% $13,550.1 5.86% $13,550.1 6.06%
========= ========= ========= =========
</TABLE>
The Company's interest rate swaps principally convert floating-rate debt to
fixed-rate debt and resulted in lowered variable and fixed rates during both
periods. The weighted average composite rate increases, however, because a
larger proportion of the Company's debt, after giving effect to interest rate
swaps, is subject to a fixed rate. The Company does not enter into derivative
financial instruments for trading or speculative purposes. The weighted average
interest rates before the effect of swap hedging activity do not necessarily
reflect the interest expense that would have been incurred had the Company
chosen to manage interest rate risk without the use of such swaps.
21
<PAGE> 24
Fees and Other Income
For the six months ended June 30, 1997, fees and other income totaled $107.1
million, a decrease of $18.8 million over the comparable 1996 period. The
following table sets forth the components of fees and other income:
<TABLE>
<CAPTION>
-----------------
SIX MONTHS ENDED
JUNE 30,
1997 1996
------ ------
<S> <C> <C>
Dollars in millions
Commissions, fees and other $ 78.5 $ 82.7
Gains on equipment and other investment sales(1) 27.1 34.7
Gains on sales and on securitizations of consumer finance receivables 1.5 8.5
------ ------
$107.1 $125.9
====== ======
</TABLE>
- ---------------
(1) Includes $9.5 million and $16.2 million in 1997 and 1996, respectively, from
sales of venture capital investments.
Gain On Sale Of Equity Interest Acquired In Loan Workout
The Company originated a loan in the 1980's to a telecommunications company that
subsequently went into default. Pursuant to a workout agreement, the stock of
that company was transferred to the Company and a co-lender. In 1991, the
Company received all amounts due and retained an equity interest in such
company, which was sold in 1997 for a pretax gain to the Company of $58.0
million.
Salaries and General Operating Expenses
Salaries and general operating expenses increased $17.0 million or 8.8% to
$210.5 million in the first six months of 1997 from $193.5 million in the
comparable period in 1996. Salaries and employee benefits rose $14.2 million, or
13.0%, while general operating expenses rose $2.8 million, or 3.3%. Personnel
increased to 2,925 at June 30, 1997 from 2,900 at June 30, 1996.
The increases in salaries and employee benefits were primarily attributable to a
continuing investment in expanding consumer origination and servicing
capabilities and higher performance-based incentive accruals. The increase in
general operating expenses resulted from a provision for vacant leased office
space recorded in the second quarter of 1997.
Management monitors productivity via the relationship of salaries and general
operating expenses to both AEA and ASA. ASA is comprised of average earning
assets plus the average of consumer finance receivables previously securitized
and currently managed by the Company and consumer finance 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>
---------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
1997 1996
AMOUNT % AEA % ASA AMOUNT % AEA % ASA
------ ----- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Dollars in millions
Salaries and employee benefits $123.3 1.38% 1.24% $109.1 1.35% 1.22%
General operating expenses 87.2 0.98 0.89 84.4 1.05 0.95
------ ----- ----- ------ ----- -----
Total $210.5 2.36% 2.13% $193.5 2.40% 2.17%
====== ===== ===== ====== ===== =====
</TABLE>
The Company manages expenditures using a comprehensive budgetary process.
Expenses are monitored closely by business unit management and are reviewed
monthly with senior management of the Company. To ensure overall 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.
22
<PAGE> 25
Provision and Reserve For Credit Losses
The provision for credit losses for the first six months of 1997 was $56.0
million, compared with $54.4 million for the same period of 1996. Comparative
net credit loss experience is provided in the following table.
<TABLE>
<CAPTION>
--------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
1997 1996
------------------------------ -----------------------------
TOTAL COMMERCIAL CONSUMER TOTAL COMMERCIAL CONSUMER
------- ---------- -------- ------ ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Dollars in millions
Net credit losses $55.5 $38.2 $17.3 $49.1 $39.4 $ 9.7
Net credit losses as a percentage of average
finance receivables, excluding consumer finance
receivables held for sale 0.67% 0.57% 1.09% 0.62% 0.59% 0.78%
</TABLE>
The increase in total net credit losses was attributable to higher consumer net
credit losses due to portfolio seasoning.
The consolidated reserve for credit losses increased to $221.9 million (1.32% of
finance receivables) at June 30, 1997 from $220.8 million (1.30% of finance
receivables) at December 31, 1996. The consolidated 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
consolidated 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. The consolidated reserve for credit losses is intended to provide
for future events, which by their nature are uncertain. Therefore, changes in
economic conditions or other discrete events adversely affecting specific
obligors or industries may necessitate additions to the reserve for credit
losses.
Operating Lease Equipment
Depreciation on operating lease equipment for the first six months of 1997 was
$66.0 million, up from $56.3 million for the same period in 1996, reflecting
growth in the operating lease portfolio.
From time to time, financial or operating difficulties may adversely affect
future payments to the Company related to operating lease equipment. At June 30,
1997, operators of certain aircraft assets and operations at an oil refinery
were subject to such difficulties. The approximate aggregate carrying values of
these assets were $95.5 million. The Company does not believe that these
difficulties will have a material effect on its consolidated financial position
or results of operations.
Income Taxes
For the first six months of 1997, the effective tax rate was 36.6%, compared
with 38.3% for the comparable period in 1996. The decrease is the result of
lower state and local income taxes.
23
<PAGE> 26
Financing and Leasing Assets
Financing and leasing assets increased $822.9 million, or 4.4%, to $19.4
billion, as presented in the following table:
<TABLE>
<CAPTION>
--------------------------------------------------
AT JUNE 30, AT DECEMBER 31, CHANGE
1997 1996 AMOUNT PERCENT
----------- --------------- --------- -------
<S> <C> <C> <C> <C>
Dollars in millions
COMMERCIAL
Equipment Financing and Leasing
Finance receivables
Capital Finance(1) $ 2,529.5 $ 4,302.7 $(1,773.2) (41.2)%
Equipment Financing(1) 7,121.2 5,616.8 1,504.4 26.8
--------- --------- --------- ------
9,650.7 9,919.5 (268.8) (2.7)
--------- --------- --------- ------
Operating lease equipment, net
Capital Finance(1) 1,101.3 975.5 125.8 12.9
Equipment Financing(1) 471.7 426.6 45.1 10.6
--------- --------- --------- ------
1,573.0 1,402.1 170.9 12.2
--------- --------- --------- ------
Total Equipment Financing and Leasing 11,223.7 11,321.6 (97.9) (0.9)
--------- --------- --------- ------
Factoring
Commercial Services 1,894.4 1,804.7 89.7 5.0
--------- --------- --------- ------
Commercial Finance
Business Credit 1,357.2 1,235.6 121.6 9.8
Credit Finance 812.3 797.8 14.5 1.8
--------- --------- --------- ------
Total Commercial Finance 2,169.5 2,033.4 136.1 6.7
--------- --------- --------- ------
Total commercial 15,287.6 15,159.7 127.9 0.1
--------- --------- --------- ------
CONSUMER
Consumer Finance(2) 2,202.2 2,005.5 196.7 9.8
Sales Financing(3) 1,848.0 1,349.8 498.2 36.9
--------- --------- --------- ------
Total consumer 4,050.2 3,355.3 694.9 20.7
--------- --------- --------- ------
CORPORATE AND OTHER 53.1 53.0 0.1 0.2
--------- --------- --------- ------
Total financing and leasing assets 19,390.9 18,568.0 822.9 4.4
Consumer finance receivables previously securitized and
currently managed by the Company 1,446.7 1,437.4 9.3 0.6
--------- --------- --------- ------
Total managed assets $20,837.6 $20,005.4 $ 832.2 4.2 %
========= ========= ========= ======
</TABLE>
- ---------------
(1) On January 1, 1997, $1,519.2 million of financing and leasing assets were
transferred from Capital Finance to Equipment Financing.
(2) Consists of home equity finance receivables.
(3) Consists of finance receivables secured by manufactured housing, recreation
vehicles and recreational boats.
Commercial financing and leasing assets were relatively unchanged from December
31, 1996 due to continued paydowns and a highly competitive marketplace. The
growth in operating lease equipment occurred primarily in commercial aircraft
and railroad equipment. The increase in consumer financing and leasing assets is
mainly due to the growth by over 40% in new business originations by Sales
Financing, primarily in respect of recreational boats and manufactured housing
products. Substantially all recreational boat, recreation vehicle and home
equity finance receivables originated in 1997 are classified as held for sale at
June 30, 1997.
24
<PAGE> 27
Financing and Leasing Assets Composition
The Company's ten largest financing and leasing asset accounts at June 30, 1997
in the aggregate represented 4.5% of the Company's total financing and leasing
assets. All ten of such accounts are commercial accounts and are secured by
equipment, accounts receivable or inventory.
Geographic Composition. The following table presents financing and leasing
assets by customer location.
<TABLE>
<CAPTION>
-----------------------------------------------------
AT JUNE 30, 1997 AT DECEMBER 31, 1996
AMOUNT PERCENT AMOUNT PERCENT
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Dollars in millions
United States
West $ 4,683.4 24.1% $ 4,599.4 24.8%
Northeast 4,348.2 22.4 4,279.4 23.0
Midwest 4,088.4 21.1 3,727.1 20.1
Southeast 2,806.2 14.5 2,814.1 15.1
Southwest 2,242.4 11.6 2,036.6 11.0
Foreign (principally commercial aircraft) 1,222.3 6.3 1,111.4 6.0
--------- ----- --------- -----
Total $19,390.9 100.0% $18,568.0 100.0%
========= ===== ========= =====
</TABLE>
The Company's financing and leasing asset portfolio is diversified by state. At
June 30, 1997, with the exception of California (12.6%), New York (7.9%) and
Texas (7.6%), no state represented more than 5% of financing and leasing assets.
Industry Composition. The following table presents financing and leasing assets
by major industry class.
<TABLE>
<CAPTION>
-----------------------------------------------------
AT JUNE 30, 1997 AT DECEMBER 31, 1996
AMOUNT PERCENT AMOUNT PERCENT
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Dollars in millions
Manufacturing(1) (none greater than 4.8%) $ 4,533.0 23.4% $ 4,472.8 24.0%
Home mortgage 2,202.2 11.4 2,005.5 10.8
Commercial airline(2) 1,998.3 10.3 1,910.0 10.3
Construction equipment 1,668.8 8.6 1,683.1 9.1
Retail 1,617.6 8.3 1,651.1 8.9
Transportation(3) 1,108.7 5.7 1,184.5 6.4
Manufactured housing(4) 963.6 5.0 790.3 4.3
Other (none greater than 3.6%)(5) 5,298.7 27.3 4,870.7 26.2
--------- ----- --------- -----
Total $19,390.9 100.0% $18,568.0 100.0%
========= ===== ========= =====
</TABLE>
- ---------------
(1) Includes manufacturers of steel and metal products, textiles and apparel,
printing and paper products and other industries.
(2) See "-- Concentrations" below for a discussion of the commercial airline
portfolio.
(3) Includes rail, bus, over-the-road trucking and business aircraft industries.
(4) Excludes securitized finance receivables of $381.0 million and $412.2
million at June 30, 1997 and December 31, 1996, respectively.
(5) Excludes securitized recreation vehicle finance receivables of $638.8
million and $746.8 million at June 30, 1997 and December 31, 1996, respectively,
and recreational boat finance receivables of $426.9 million and $278.4 million
at June 30, 1997 and December 31, 1996, respectively.
Concentrations
Commercial Airline Industry. Commercial airline financing and leasing assets
totaled $2.0 billion or 10.3% of total financing and leasing assets at June 30,
1997, up slightly from $1.9 billion at December 31, 1996. The portfolio is
secured by commercial aircraft and related equipment. The Company has determined
to grow this portfolio, but will continue to monitor the size of the portfolio
relative to the Company's total financing and leasing assets.
25
<PAGE> 28
The following table presents information about the commercial airline industry
portfolio. See also "-- Operating Lease Equipment."
<TABLE>
<CAPTION>
---------------------------------
AT JUNE 30, AT DECEMBER 31,
1997 1996
----------- ---------------
<S> <C> <C>
Dollars in millions
Finance receivables:
Amount outstanding(1) $ 1,271.6 $ 1,286.0
Number of obligors 50 54
Operating lease equipment, net
Net carrying value $ 726.7 $ 624.0
Number of obligors 34 32
Total $ 1,998.3 $ 1,910.0
Number of obligors(2) 67 72
Number of aircraft(3) 228 239
</TABLE>
- ---------------
(1) Includes accrued rents on operating leases that are classified as finance
receivables in the Company's Consolidated Balance Sheets.
(2) Certain obligors are obligors under both finance receivable and operating
lease transactions.
(3) 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 June 30, 1997, the portfolio
consisted of Stage III aircraft of $1,839.7 million (92.1%) and Stage II
aircraft of $126.9 million (6.3%), versus Stage III aircraft of $1,733.2 million
(90.7%) and Stage II aircraft of $149.1 million (7.8%) at year-end 1996.
Foreign Outstandings. Financing and leasing assets to foreign obligors,
primarily to the commercial airline industry, are all U.S. dollar denominated
and totaled $1.2 billion at June 30, 1997. The largest exposures at June 30,
1997 were to obligors in France, $129.2 million (0.67% of financing and leasing
assets), the United Kingdom, $116.6 million (0.60%), and Mexico, $108.4 million
(0.56%). The remaining foreign exposure was geographically dispersed, with no
other individual country representing more than 0.51% of financing and leasing
assets.
At December 31, 1996, financing and leasing assets to foreign obligors totaled
$1.1 billion. The largest exposures at December 31, 1996 were to obligors in
Mexico, $141.5 million (0.76%), France, $130.4 million (0.70%), and the United
Kingdom, $126.9 million (0.68%). The remaining foreign exposure was
geographically dispersed, with no other individual country representing more
than 0.51% of financing and leasing assets.
Highly Leveraged Transactions. Highly-leveraged transactions ("HLTs") totaled
less than 2.0% of financing and leasing assets at June 30, 1997 and December 31,
1996, respectively. The Company'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 $142.4
million at June 30, 1997 compared with $144.1 million at year-end 1996.
26
<PAGE> 29
Past Due and Nonaccrual Finance Receivables and Assets Received in Satisfaction
of Loans
The following table sets forth certain information concerning past due and
nonaccrual finance receivables and assets received in satisfaction of loans at
June 30, 1997 and December 31, 1996.
<TABLE>
<CAPTION>
----------------------------------
AT JUNE 30, AT DECEMBER 31,
1997 1996
------------ ---------------
<S> <C> <C>
Dollars in millions
Finance receivables, past due 60 days or more $284.1 $292.3
Finance receivables, past due 60 days or more, as a percentage of
finance receivables 1.69% 1.72%
Finance receivables on nonaccrual status $107.1 $119.6
Assets received in satisfaction of loans(1) 44.5 47.9
---------- --------
Total nonperforming assets $151.6 $167.5
========== ========
Total nonperforming assets as a percentage of finance receivables 0.90% 0.99%
</TABLE>
- ---------------
(1) Consists primarily of cruise line vessels.
Recent Accounting Pronouncements
The Company 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 and addresses
the accounting for servicing rights on financial assets in addition to mortgage
loans. 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.
In accordance with the transition rules set forth in SFAS 125, the Company, on
January 1, 1997, reclassified the portion of previously recognized excess
servicing assets that did not exceed contractually specified servicing fees to
servicing assets which are included in other assets in the Company's
Consolidated Balance Sheets. The remaining balances of previously recognized
excess servicing assets are included in other assets in the Consolidated Balance
Sheets and are classified as available-for-sale investment securities subject to
the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". The
amortized cost approximates the current fair market value of such assets.
The adoption of SFAS 125 did not have a significant impact on the Company's
financial position, results of operations or liquidity.
Additionally, in February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128 "Earnings Per Share" ("SFAS
128"). SFAS 128 establishes standards for the presentation and disclosure for
earnings per share ("EPS"). It also simplifies the standards for computing EPS,
and makes them comparable to international EPS standards. SFAS 128 replaces the
presentation of primary and fully diluted EPS with basic and diluted EPS,
respectively, and requires the reconciliation of the numerator and denominator
of basic EPS with that of diluted EPS. SFAS 128 is effective for financial
statements for both interim and annual periods ending after December 15, 1997.
Earlier application is not permitted. After adoption, all prior period EPS is
required to be restated to conform with SFAS 128.
YEAR ENDED DECEMBER 31, 1996 VS. YEAR ENDED DECEMBER 31, 1995
Overview
For the year ended December 31, 1996, net income totaled $260.1 million, an
increase of 15.5% from $225.3 million for the same period in 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 and higher fees and other income, partially offset
by an increase in operating expenses.
Financing and leasing assets totaled a record $18.6 billion, an increase of 8.8%
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 paydowns. Additionally, the Company continued its
27
<PAGE> 30
securitization activity, securitizing $774.9 million of recreation vehicle and
recreational boat finance receivables during 1996, compared with securitizations
of recreation vehicle and manufactured housing finance receivables of $723.2
million in 1995. Managed assets totaled $20.0 billion, an increase of 11.3% over
$18.0 billion 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
--------- --------- -------- -------
<S> <C> <C> <C> <C>
Dollars in millions
Finance income $ 1,646.2 $ 1,529.2 $ 117.0 7.7%
Interest expense 848.3 831.5 16.8 2.0
--------- --------- -------- ----
Net finance income $ 797.9 $ 697.7 $ 100.2 14.4%
========= ========= ======== ====
AEA $16,543.1 $15,377.5 $1,165.6 7.6%
Net finance income as a percentage 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.
Commercial segment finance income as a percentage of commercial AEA was 9.93%
for each of 1996 and 1995 and consumer segment finance income as a percentage of
consumer AEA was 9.85% for 1996 compared to 9.79% for 1995. 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.
A comparative analysis of the weighted average principal outstanding and
interest rates paid on the Company's debt, before and after giving effect to
interest rate swaps, is shown in the following table.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1996 1995
------------------------------------ ------------------------------------
BEFORE SWAPS AFTER SWAPS BEFORE SWAPS AFTER SWAPS
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dollars in millions
Commercial paper and variable-rate
senior notes $ 9,952.2 5.48% $ 6,774.3 5.42% $ 9,785.4 6.03% $ 7,226.0 6.02%
Fixed-rate senior and subordinated notes 3,917.0 6.83 7,094.9 6.68 3,194.5 7.09 5,753.9 6.78
--------- --------- --------- ---------
Composite $13,869.2 5.86% $13,869.2 6.06% $12,979.9 6.29% $12,979.9 6.36%
========= ========= ========= =========
</TABLE>
The Company's interest-rate swaps principally convert floating-rate debt to
fixed-rate debt and resulted in lowered variable and fixed rates during both
periods. The increases in the composite interest rates after the effect of
hedging activity reflect the greater proportion of debt effectively paying fixed
interest rates. The weighted average interest rates before the effect of swap
hedging activity do not necessarily reflect the interest expense that would have
been incurred had the Company chosen to manage interest rate risk without the
use of such swaps.
28
<PAGE> 31
Fees and Other Income
Fees and other income improved $59.4 million to $244.1 million during 1996,
primarily due to higher gains from equipment sales and venture capital
investment transactions and, to a lesser extent, increased servicing fees
associated with the Company's managed third party portfolio and higher factoring
commissions.
The following table sets forth the components of fees and other income.
<TABLE>
<CAPTION>
-----------------------
YEARS ENDED DECEMBER
31,
1996 1995
------ ------
<S> <C> <C>
Dollars in millions
Commissions, fees and other $165.2 $147.9
Gains on equipment and other investment sales 54.6(1) 10.5
Gains on sales and securitizations of finance receivables 24.3 26.3
------ ------
$244.1 $184.7
====== ======
</TABLE>
- ---------------
(1) Includes a $16.2 million gain resulting from the sale of venture capital
investments.
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.
The increase in expenses from 1995 to 1996 is primarily due to strong new
business originations and 12.6% growth in ASA, and the Company's continued
investment in its consumer-related infrastructure.
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,
1996 1995
-------------------------- --------------------------
AMOUNT % AEA % ASA AMOUNT % AEA % ASA
------ ----- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Dollars in millions
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>
Provision and Reserve for Credit Losses
Net credit losses were $101.5 million in 1996 compared with $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. Information concerning the provisions for credit losses
is summarized in the following table.
<TABLE>
<CAPTION>
-------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1996 1995
-------------------------------- -------------------------------
TOTAL COMMERCIAL CONSUMER TOTAL COMMERCIAL CONSUMER
------ ---------- -------- ----- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Dollars in millions
Net credit losses $101.5 $ 80.4 $ 21.1 $77.2 $ 67.1 $ 10.1
Net credit losses as a percentage of average
finance receivables, excluding consumer
finance receivables held for sale 0.62% 0.59% 0.75% 0.50% 0.51% 0.44%
</TABLE>
The reserve for credit losses increased to $220.8 million (1.30% of finance
receivables) at December 31, 1996, from $206.0 million (1.30% of finance
receivables) at December 31, 1995, primarily reflecting growth in finance
receivables.
29
<PAGE> 32
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. From time
to time, certain operators of leased equipment may experience financial or
operational difficulties that may affect their ability to meet their contractual
obligations with the Company. At December 31, 1996, commercial aircraft with an
approximate carrying value of $30.9 million were subject to agreements with an
operator that is experiencing such difficulties. The Company does not believe
these difficulties will have a material effect on its consolidated financial
position or results of operations.
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 lower
state and local income taxes.
Financing and Leasing Assets
Financing and leasing assets rose $1.5 billion (8.8%) to $18.6 billion in 1996
as presented in the following table.
<TABLE>
<CAPTION>
------------------------------------------------------
AT DECEMBER 31, CHANGE
1996 1995 AMOUNT PERCENT
------------ ------------ -------- -------
<S> <C> <C> <C> <C>
Dollars in millions
COMMERCIAL
Equipment Financing and Leasing
Finance receivables
Capital Finance $ 4,302.7 $ 4,548.7 $ (246.0) (5.4)%
Equipment Financing 5,616.8 4,929.9 686.9 13.9
--------- --------- -------- ------
9,919.5 9,478.6 440.9 4.7
--------- --------- -------- ------
Operating lease equipment, net
Capital Finance 975.5 750.0 225.5 30.1
Equipment Financing 426.6 363.0 63.6 17.5
--------- --------- -------- ------
1,402.1 1,113.0 289.1 26.0
--------- --------- -------- ------
Total Equipment Financing and Leasing 11,321.6 10,591.6 730.0 6.9
--------- --------- -------- ------
Factoring
Commercial Services 1,804.7 1,743.3 61.4 3.5
--------- --------- -------- ------
Commercial Finance
Business Credit 1,235.6 1,471.0 (235.4) (16.0)
Credit Finance 797.8 758.7 39.1 5.2
--------- --------- -------- ------
Total Commercial Finance 2,033.4 2,229.7 (196.3) (8.8)
--------- --------- -------- ------
Total commercial 15,159.7 14,564.6 595.1 4.1
--------- --------- -------- ------
CONSUMER
Consumer Finance(1) 2,005.5 1,039.0 966.5 93.0
Sales Financing(2) 1,349.8 1,416.9 (67.1) (4.7)
--------- --------- -------- ------
Total consumer 3,355.3 2,455.9 899.4 36.6
--------- --------- -------- ------
CORPORATE AND OTHER 53.0 41.6 11.4 27.4
--------- --------- -------- ------
Total financing and leasing assets 18,568.0 17,062.1 1,505.9 8.8
Consumer finance receivables previously securitized and
currently managed by the Company 1,437.4 916.5 520.9 56.8
--------- --------- -------- ------
Total managed assets $ 20,005.4 $ 17,978.6 $2,026.8 $ 11.3%
========= ========= ======== ======
</TABLE>
- ---------------
(1) Consists of home equity finance receivables.
(2) Consists of finance receivables secured by manufactured housing, recreation
vehicles and recreational boats.
30
<PAGE> 33
Commercial financing and leasing assets grew 4.1% due to strong growth in
equipment financing, particularly in small to medium ticket originations, and an
increased level of operating lease equipment. These increases were offset by
high customer paydowns reducing outstanding balances in the commercial financing
sector. Consumer financing and leasing assets increased $899.4 million from
December 31, 1995 due to higher home equity originations and recreational boat
originations and $468.7 million in home equity finance receivables portfolio
purchases.
Financing and Leasing Assets Composition
Geographic Composition. The following table presents financing and leasing
assets by customer location.
<TABLE>
<CAPTION>
-----------------------------------------------
AT DECEMBER 31,
1996 1995
--------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Dollars in millions
United States
West $ 4,599.4 24.8% $ 4,018.1 23.5%
Northeast 4,279.4 23.0 4,117.6 24.1
Midwest 3,727.1 20.1 3,227.9 18.9
Southeast 2,814.1 15.1 2,653.2 15.6
Southwest 2,036.6 11.0 1,959.4 11.5
Foreign (principally commercial aircraft) 1,111.4 6.0 1,085.9 6.4
--------- ------ --------- ------
Total $18,568.0 100.0% $17,062.1 100.0%
========= ====== ========= ======
</TABLE>
Industry Composition. The following table presents financing and leasing assets
by major industry class.
<TABLE>
<CAPTION>
-----------------------------------------------
AT DECEMBER 31,
1996 1995
--------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Dollars in millions
Manufacturing(1) (none greater than 3.9%) $ 4,472.8 24.0% $ 4,385.7 25.7%
Home mortgage 2,005.5 10.8 1,039.0 6.1
Commercial airline(2) 1,910.0 10.3 1,911.6 11.2
Construction equipment 1,683.1 9.1 1,463.9 8.6
Retail 1,651.1 8.9 1,519.3 8.9
Transportation(3) 1,184.5 6.4 1,043.1 6.1
Manufactured housing(4) 790.3 4.3 561.5 3.3
Other (none greater than 4.1%)(5) 4,870.7 26.2 5,138.0 30.1
--------- ------ --------- ------
Total $18,568.0 100.0% $17,062.1 100.0%
========= ====== ========= ======
</TABLE>
- ---------------
(1) Includes manufacturers of steel and metal products, textiles and apparel,
printing and paper products and other industries.
(2) See "--Concentrations" below for a discussion of the commercial airline
portfolio.
(3) Includes rail, bus, over-the-road trucking and business aircraft.
(4) Excludes securitized finance receivables of $412.2 million and $470.8
million at December 31, 1996 and 1995, respectively.
(5) Excludes securitized recreation vehicle finance receivables of $746.8
million and $445.7 million at December 31, 1996 and 1995, respectively, and
recreational boat finance receivables of $278.4 million at December 31, 1996.
Concentrations
Commercial Airline Industry. Commercial airline financing and leasing assets
totaled $1.9 billion (10.3% of total financing and leasing assets) at December
31, 1996, compared with $1.9 billion (11.2%) in 1995. The portfolio is secured
by commercial aircraft and related equipment.
31
<PAGE> 34
The following table presents information about the commercial airline industry
portfolio.
<TABLE>
<CAPTION>
---------------------
AT DECEMBER 31,
1996 1995
-------- --------
<S> <C> <C>
Dollars in millions
Finance receivables
Amount outstanding(1) $1,286.0 $1,412.2
Number of obligors 54 51
Operating lease equipment, net
Net carrying value $ 624.0 $ 499.4
Number of obligors 32 24
Total $1,910.0 $1,911.6
Number of obligors(2) 72 68
Number of aircraft(3) 239 256
</TABLE>
- ---------------
(1) Includes accrued rents on operating leases which are classified as finance
receivables in the Company's Consolidated Balance Sheets.
(2) Certain obligors are obligors under both finance receivable and operating
lease transactions.
(3) 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.
Foreign Outstandings. Financing and leasing assets to foreign obligors,
primarily to the commercial airline industry, are all U.S. dollar denominated
and totaled $1.1 billion at December 31, 1996. The largest exposures at December
31, 1996 were to obligors in Mexico, $141.5 million (0.76% of financing and
leasing assets), France, $130.4 million (0.70%), and the United Kingdom, $126.9
million (0.68%). The remaining foreign exposure was geographically dispersed
with no other individual country representing more than 0.51% of financing and
leasing assets.
At December 31, 1995, financing and leasing assets to foreign obligors totaled
$1.1 billion. The largest exposures at December 31, 1995 were to obligors in the
United Kingdom, $145.5 million (0.85%), France, $122.0 million (0.72%), Mexico,
$115.8 million (0.68%), and Australia, $97.0 million (0.57%). The remaining
foreign exposure was geographically dispersed with no other individual country
representing more than 0.51% of financing and leasing assets.
Highly Leveraged Transactions. The Company uses the following criteria to
classify a buyout financing or recapitalization which equals or exceeds $20
million as an HLT:
- - The transaction at least doubles the borrower's liabilities and results in a
leverage ratio (as defined) higher than 50%, or
- - The transaction results in a leverage ratio higher than 75%, or
- - The transaction is designated as an HLT by a syndication agent.
A transaction originally reported as an HLT can be removed from this
classification ("delisted") if the leveraged company has demonstrated the
ability to operate successfully as a highly leveraged entity for at least two
years after the original financing and meets one of the following criteria:
- - The original financing has been repaid using cash flow from operations,
planned asset sales or a capital infusion, or
- - The debt has been serviced without undue reliance on unplanned asset sales,
and certain leverage ratios (related to the original criteria under which the
financing qualified as an HLT) have been maintained.
HLTs which the Company originated and in which it participated totaled $321.4
million (1.7% of financing and leasing assets) at December 31, 1996, down from
$412.6 million (2.4%) 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, partially offset by new HLT
fundings. The Company'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.
32
<PAGE> 35
At December 31, 1996, the HLT portfolio consisted of 27 obligors in 3 different
industry groups, with 29.5% of the outstandings located in the Northeast region
of the United States and 23.8% 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
The following table sets forth certain information concerning past due and
nonaccrual finance receivables and assets received in satisfaction of loans at
December 31, 1996 and 1995.
<TABLE>
<CAPTION>
-----------------
AT DECEMBER 31,
1996 1995
------ ------
<S> <C> <C>
Dollars in millions
Finance receivables, past due 60 days or more $292.3 $263.9
Finance receivables, past due 60 days or more, as a percentage of finance receivables 1.72% 1.67%
Finance receivables on nonaccrual status $119.6 $139.5
Assets received in satisfaction of loans 47.9 42.0
------ ------
Total nonperforming assets $167.5 $181.5
====== ======
Total nonperforming assets as a percentage of finance receivables 0.99% 1.15%
</TABLE>
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 these transfers, offset by the sale of an equity interest in a building
supply retailer. The Company has remarketed a majority of the oceangoing
carriers and is in the process of remarketing the remaining carriers and cruise
line vessels.
The following table summarizes by type assets received in satisfaction of loans.
<TABLE>
<CAPTION>
---------------
AT DECEMBER 31,
1996 1995
----- -----
<S> <C> <C>
Dollars in millions
Transportation(1) $33.6 $ 8.9
Property, equipment and other 14.3 9.0
Retail merchandise, property and accounts receivable(2) -- 24.1
------ ------
Total $47.9 $42.0
====== ======
</TABLE>
- ---------------
(1) Transportation includes oceangoing carriers and cruise line vessels in 1996
and oceangoing carriers in 1995.
(2) Retail merchandise, property and accounts receivable included an equity
interest in a building supply retailer.
YEAR ENDED DECEMBER 31, 1995 VS. YEAR ENDED DECEMBER 31, 1994
Overview
For the year ended December 31, 1995, net income totaled $225.3 million, an
increase of 12.0% 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 results reflect increased finance income from a higher level of
financing and leasing assets, improved fees and other income, and lower net
credit losses, offset by an increase in borrowing costs.
Financing and leasing assets, totaled a record $17.1 billion, an increase of
8.2% over 1994. Manufactured housing and recreation vehicle receivables of
$723.2 million were securitized during 1995, compared to $198.7 million in 1994.
Managed assets totaled $18.0 billion, an increase of 11.9% over 1994.
33
<PAGE> 36
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
--------- --------- -------- -------
<S> <C> <C> <C> <C>
Dollars in millions
Finance income $ 1,529.2 $ 1,263.8 $ 265.4 21.0%
Interest expense 831.5 614.0 217.5 35.4
--------- --------- -------- -----
Net finance income $ 697.7 $ 649.8 $ 47.9 7.4%
========= ========= ======== =====
Average earning 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. Commercial segment finance income as a percentage of commercial AEA was
9.93% for 1995, compared to 9.18% for 1994, and consumer segment finance income
as a percentage of consumer AEA was 9.79% for 1995, compared to 9.28% for 1994,.
The increase in both commercial and consumer finance income as a percentage of
their respective AEA's was the result of increased origination volume and rising
market interest rates. 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 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.
A comparative analysis of the weighted average principal outstanding and
interest rates paid on the Company's debt, before and after giving effect to
interest rate swaps, is shown in the following table.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
1995 YEARS ENDED DECEMBER 31, 1994
BEFORE SWAPS AFTER SWAPS BEFORE SWAPS AFTER SWAPS
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dollars in millions
Commercial paper and variable
rate senior notes $ 9,785.4 6.03% $ 7,226.0 6.02% $ 8,847.5 4.46% $ 6,865.7 4.41%
Fixed rate senior and
subordinated notes 3,194.5 7.09 5,753.9 6.78 2,525.8 7.24 4,507.6 6.70
--------- --------- --------- ---------
Composite $12,979.9 6.29% $12,979.9 6.36% $11,373.3 5.07% $11,373.3 5.32%
========= ========= ========= =========
</TABLE>
The Company's interest-rate swaps principally convert floating-rate debt to
fixed-rate debt and resulted in lowered variable and fixed rates during both
periods. The increases in the composite interest rates after the effect of
hedging activity reflect the greater proportion of debt effectively paying fixed
interest rates. The weighted average interest rates before the effect of swap
hedging activity do not reflect the interest expense that would have been
incurred had the Company chosen to manage interest rate risk without the use of
such swaps.
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 recreation
vehicle receivables, offset by lower factoring commissions due to the weak
retailing environment.
34
<PAGE> 37
The following table sets forth the components of fees and other income.
<TABLE>
<CAPTION>
-------------------------
YEARS ENDED DECEMBER 31,
1995 1994
------ ------
<S> <C> <C>
Dollars in millions
Commissions, fees and other $147.9 $148.3
Gains on equipment and other investment sales 10.5 10.1
Gains on sales and securitizations of finance receivables 26.3 16.0
------ ------
$184.7 $174.4
====== ======
</TABLE>
Salaries and General Operating Expenses
Salaries and general operating expenses increased $7.8 million or 2.3% to $345.7
million in 1995 from $337.9 million in 1994, reflecting significant productivity
achievements during a year of 12.8% AEA 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.
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,
1995 1994
-------------------------- --------------------------
AMOUNT % AEA % ASA AMOUNT % AEA % ASA
------ ----- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Dollars in millions
Salaries and employee benefits $193.4 1.26% 1.19% $185.8 1.36% 1.32%
General operating expenses 152.3 0.99 0.94 152.1 1.12 1.08
------ ----- ----- ------ ----- -----
Total $345.7 2.25% 2.13% $337.9 2.48% 2.40%
====== ===== ===== ====== ===== =====
</TABLE>
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.
Information concerning the provisions for credit losses is summarized in the
following table.
<TABLE>
<CAPTION>
-------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1995 1994
----------------------------- -----------------------------
TOTAL COMMERCIAL CONSUMER TOTAL COMMERCIAL CONSUMER
----- ---------- -------- ----- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Dollars in millions
Net credit losses $77.2 $67.1 $10.1 $84.2 $ 74.8 $ 9.4
Net credit losses as a percentage of average
finance receivables, excluding consumer finance
receivables held for sale 0.50% 0.51% 0.44% 0.61% 0.62% 0.55%
</TABLE>
The reserve for credit losses increased to $206.0 million (1.30% of finance
receivables) at December 31, 1995, from $192.4 million (1.30% of finance
receivables) at December 31, 1994, primarily reflecting growth in finance
receivables.
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.
35
<PAGE> 38
Financing and Leasing Assets
Financing and leasing assets rose $1.3 billion (8.2%) to $17.1 billion in 1995
as presented in the following table.
<TABLE>
<CAPTION>
------------------------------------------------
AT DECEMBER 31, CHANGE
1995 1994 AMOUNT PERCENT
--------- --------- -------- -------
<S> <C> <C> <C> <C>
Dollars in millions
COMMERCIAL
Equipment Financing and Leasing
Finance receivables
Capital Finance $ 4,548.7 $ 4,493.5 $ 55.2 1.2%
Equipment Financing 4,929.9 4,269.7 660.2 15.5
--------- --------- -------- -----
9,478.6 8,763.2 715.4 8.2
--------- --------- -------- -----
Operating lease equipment, net
Capital Finance 750.0 648.7 101.3 15.6
Equipment Financing 363.0 219.2 143.8 65.6
--------- --------- -------- -----
1,113.0 867.9 245.1 28.2
--------- --------- -------- -----
Total Equipment Financing and Leasing 10,591.6 9,631.1 960.5 10.0
--------- --------- -------- -----
Factoring
Commercial Services 1,743.3 1,896.2 (152.9) (8.1)
Commercial Finance
Business Credit 1,471.0 1,442.1 28.9 2.0
Credit Finance 758.7 719.6 39.1 5.4
--------- --------- -------- -----
Total Commercial Finance 2,229.7 2,161.7 68.0 3.1
--------- --------- -------- -----
Total commercial 14,564.6 13,689.0 875.6 6.4
--------- --------- -------- -----
CONSUMER
Consumer Finance(1) 1,039.0 570.8 468.2 82.0
Sales Financing(2) 1,416.9 1,471.2 (54.3) (3.7)
--------- --------- -------- -----
Total consumer 2,455.9 2,042.0 413.9 20.3
--------- --------- -------- -----
CORPORATE AND OTHER 41.6 34.4 7.2 20.9
--------- --------- -------- -----
Total financing and leasing assets 17,062.1 15,765.4 1,296.7 8.2
Consumer finance receivables previously securitized and
currently managed by the Company 916.5 306.7 609.8 198.8
--------- --------- -------- -----
Total managed assets $17,978.6 $16,072.1 $1,906.5 11.9%
========= ========= ======== =====
</TABLE>
- ---------------
(1) Consists of home equity finance receivables.
(2) Consists of finance receivables secured by manufactured housing, recreation
vehicles and recreational boats.
Total commercial financing and leasing assets rose 6.4% due to growth in small
and medium ticket originations, partially offset by lower factoring finance
receivables as a result of weakness in the retail industry. Consumer financing
and leasing assets grew 20.3% from December 31, 1994 due to higher home equity,
recreational vehicle and manufactured housing originations.
36
<PAGE> 39
Financing and Leasing Assets Composition
Concentrations
Commercial Airlines. Commercial airline financing and leasing assets totaled
$1.9 billion (11.2% of total financing and leasing assets) at December 31, 1995,
compared with $1.9 billion (12.0%) in 1994. The portfolio is secured by
commercial aircraft and related equipment. The following table presents
information about the commercial airline industry portfolio.
<TABLE>
<CAPTION>
--------------------
AT DECEMBER 31,
1995 1994
-------- --------
<S> <C> <C>
Dollars in millions
Finance receivables:
Amount outstanding(1) $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(2) 68 62
Number of aircraft(3) 256 272
</TABLE>
- ---------------
(1) Includes accrued rents on operating leases which are classified as finance
receivables in the Company's Consolidated Balance Sheets.
(2) Certain obligors are obligors under both finance receivable and operating
lease transactions.
(3) 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.
Foreign Outstandings. Financing and leasing assets to foreign obligors,
primarily to the commercial airline industry, are all U.S. dollar denominated
and totaled $1.1 billion at December 31, 1995. The largest exposures at December
31, 1995 were to obligors in the United Kingdom, $145.5 million (0.85% of
financing and leasing assets), France, $122.0 million (0.72%), Mexico, $115.8
million (0.68%), and Australia, $97.0 million (0.57%). The remaining foreign
exposure was geographically dispersed with no other individual country
representing more than 0.56% of financing and leasing assets.
At December 31, 1994, financing and leasing assets to foreign obligors totaled
$1.1 billion. The largest exposures at December 31, 1994 were to obligors in the
United Kingdom, $177.2 million (1.12%), Mexico, $140.0 million (0.89%), France,
$120.2 million (0.76%), and $99.7 million (0.63%) to obligors in Australia. The
remaining foreign exposure was geographically dispersed, with no other
individual country representing more than 0.56% of financing and leasing assets.
Highly Leveraged Transactions. HLTs totaled $412.6 million (2.42% of financing
and leasing assets) at December 31, 1995, down from $436.1 million (2.77%) 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 Company'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 three
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.
37
<PAGE> 40
Past Due and Nonaccrual Finance Receivables and Assets Received in Satisfaction
of Loans
The following table sets forth certain information concerning past due and
nonaccrual finance receivables and assets received in satisfaction of loans at
December 31, 1995 and 1994.
<TABLE>
<CAPTION>
-----------------
AT DECEMBER 31,
1995 1994
------ ------
<S> <C> <C>
Dollars in millions
Finance receivables, past due 60 days or more $263.9 $176.9
Finance receivables, past due 60 days or more, as a percentage of finance receivables 1.67% 1.20%
Finance receivables on nonaccrual status $139.5 $110.2
Assets received in satisfaction of loans 42.0 86.5
----- -----
Total nonperforming assets $181.5 $196.7
===== =====
Total nonperforming assets as a percentage of finance receivables 1.15% 1.33%
</TABLE>
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 following table summarizes by type assets received in satisfaction of loans.
<TABLE>
<CAPTION>
---------------
AT DECEMBER 31,
1995 1994
----- -----
<S> <C> <C>
Dollars in millions
Retail merchandise, property and accounts receivable(1) $24.1 $32.3
Transportation(2) 8.9 4.4
Property, equipment and other 9.0 13.8
Commercial aircraft -- 36.0
----- -----
Total $42.0 $86.5
===== =====
</TABLE>
- ---------------
(1) Retail merchandise, property and accounts receivable includes an equity
interest in a building supply retailer.
(2) Transportation includes oceangoing carriers in 1995 and buses in 1994.
LIQUIDITY
The Company manages liquidity by monitoring the relative maturities of assets
and liabilities and by borrowing funds, primarily in the U.S. money and capital
markets. Such cash is used to fund asset growth (including the bulk purchase of
finance 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, medium-
term notes, other term debt securities and securitizations.
During the first six months of 1997, commercial paper borrowings increased
$550.8 million from $5.8 billion at December 31, 1996 to $6.4 billion at June
30, 1997. Commercial paper outstanding decreased $278.6 million to $5.8 billion
at December 31, 1996 from $6.1 billion at December 31, 1995.
During the first six months of 1997, the Company issued $1.0 billion of
prime-based variable-rate term debt. During the years 1996 and 1995, the Company
issued $2.3 billion and $2.6 billion, respectively, of variable-rate term debt.
During the six months ended June 30, 1997, the Company issued $0.9 billion of
fixed-rate debt and during the years 1996 and 1995 the Company issued $2.5
billion and $1.2 billion of fixed-rate debt, respectively.
Repayments of debt totaled $1.8 billion during the six months ended June 30,
1997. During the years 1996 and 1995, the Company repaid $3.5 billion and $3.0
billion of debt, respectively.
At June 30, 1997, $9.1 billion of registered, but unissued, debt securities
remained available under shelf registration statements.
The Company'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, Duff & Phelps and Standard & Poor's.
38
<PAGE> 41
At June 30, 1997, commercial paper borrowings were supported by $5.0 billion of
committed revolving credit-line facilities, a decrease of $145.0 million from
December 31, 1996. At June 30, 1997, such credit-line facilities represented 81%
of operating commercial paper outstanding (commercial paper outstanding less
interest-bearing deposits), as compared to 90.2% at December 31, 1996. No
borrowings have been made under credit lines supporting commercial paper since
1970.
As part of the Company's continuing program of accessing the public and private
asset-backed securitization markets as an additional liquidity source,
recreational boat finance receivables of $139.1 million were securitized by the
Company during the first six months of 1997. The Company securitized recreation
vehicle finance receivables and recreational boat finance receivables of $774.9
million in 1996 and manufactured housing and recreation vehicle finance
receivables of $723.2 million in 1995.
During July 1997, home equity finance receivables totaling $500.0 million were
securitized. After giving effect to that securitization, the Company had $700.0
million of registered, but unissued, securities at July 31, 1997 relating to the
Company's asset-backed securitization program available under shelf registration
statements.
In February 1997, CIT Capital Trust I, a wholly-owned subsidiary of the Company,
issued $250.0 million of 7.70% Preferred Capital Securities, the proceeds of
which were invested in Junior Subordinated Debentures of the Company having
identical rates and payment dates.
Through March 31, 1996, the Company operated under a dividend policy requiring
the payment of dividends by the Company 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 Company was changed to require the payment
of dividends by the Company of 30% of net operating earnings on a quarterly
basis. During the first six months of 1997, $48.6 million of regular cash
dividends were paid and, during 1996 and 1995, regular cash dividends of $98.9
million and $104.1 million, respectively, were paid. On December 24, 1996, with
the consent of the Company's stockholders, the Company paid a special dividend
in the aggregate amount of $165.0 million to its stockholders. DKB and CBC
Holding immediately contributed an aggregate amount of $165.0 million to the
paid-in-capital of the Company in proportion to their respective 80% and 20%
ownership interests.
During the third quarter of 1997, $ million of regular cash dividends
were paid. In connection with the Offerings, the Company will terminate its
current dividend policy in favor of a new policy beginning with the payment of a
dividend for the first quarter of 1998. See "Dividend Policy." By agreement of
DKB and CBC Holding, the final cash dividend under the Company's current policy
will be paid to DKB and CBC Holding for the fourth quarter of 1997 prior to the
consummation of the Offerings. The amount of the fourth quarter dividend will
not exceed the amount of the Company's 1997 third quarter dividend.
39
<PAGE> 42
BUSINESS
OVERVIEW
The Company is a leading diversified finance organization offering secured
commercial and consumer financing primarily in the United States to smaller,
middle-market and larger businesses and to individuals through a nationwide
distribution network. The Company commenced operations in 1908 and has developed
a broad array of "franchise" strategic business units that focus on specific
industries, asset types and markets, which are balanced by client, industry and
geographic diversification. The Company believes that its strong credit risk
management expertise and long-standing commitment to its markets and its
customers provides it with a competitive advantage.
The Company believes that in 1996 it had the largest factoring operation and the
fourth largest equipment financing and leasing operation in the United States.
The Company also has a leading market position in recreation vehicle lending and
has significant operations in commercial finance, sales finance and home equity
lending. In addition, the Company has significant operations financing the
aerospace, construction, transportation, machine tool manufacturing and railroad
industries.
At June 30, 1997, the Company had total assets of $20.0 billion and
stockholders' equity of $2.2 billion. Net income totaled a record $163.8 million
for the six months ended June 30, 1997 and a record $260.1 million for the year
ended December 31, 1996. Over the five years ended December 31, 1996, the
Company's net income grew at a compound annual rate of 11.6%, while total
financing and leasing assets and managed assets grew at compound annual rates of
9.7% and 11.4%, respectively. Over the three years ended December 31, 1996, net
income grew at a compound annual rate of 12.6%, and total financing and leasing
assets and managed assets grew at compound annual rates of 11.1% and 13.4%,
respectively. Such growth resulted from expansion into new lines of business,
the introduction of new products, increased profitability of existing businesses
and acquisitions.
The following table presents the Company's net income and return on average
equity for each of the years in the five-year period ended December 31, 1996.
[BAR GRAPH THAT PRESENTS THE COMPANY'S NET INCOME AND RETURN ON AVERAGE EQUITY
FOR EACH OF THE YEARS IN THE FIVE-YEAR PERIOD ENDED DECEMBER 31, 1996.]
40
<PAGE> 43
The commercial and consumer business segments of the Company, its strategic
business units, the industries and markets served and its principal product
offerings and origination structures are set forth in the following chart.
[CHART ILLUSTRATING THE COMMERCIAL AND CONSUMMER BUSINESS SEGMENTS OF THE
COMPANY, ITS STRATEGIC BUSINESS UNITS, THE INDUSTRIES AND MARKETS SERVED AND
ITS PRINCIPAL OFFERINGS AND ORIGINATION STRUCTURES.]
41
<PAGE> 44
The following table sets forth certain information concerning financing and
leasing assets as well as consumer finance receivables previously securitized
and currently managed by the Company at December 31 of each of the five years
ended December 31, 1996 and at June 30, 1997. "Financing and leasing assets" are
comprised of finance receivables, operating lease equipment, consumer finance
receivables held for sale and certain investments.
<TABLE>
<CAPTION>
---------------------------------------------------------------------
AT AT DECEMBER 31,
JUNE 30, ---------------------------------------------------------
1997 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Dollars in millions
Financing and leasing assets:
Commercial $15,287.6 $15,159.7 $14,564.6 $13,689.0 $11,937.1 $10,822.5
Consumer(1) 4,050.2 3,355.3 2,455.9 2,042.0 1,589.3 1,411.8
Other 53.1 53.0 41.6 34.4 21.6 12.0
--------- --------- --------- --------- --------- ---------
Total financing and leasing assets $19,390.9 $18,568.0 $17,062.1 $15,765.4 $13,548.0 $12,246.3
Consumer finance receivables previously
securitized and currently managed by the
Company 1,446.7 1,437.4 916.5 306.7 175.6 43.8
--------- --------- --------- --------- --------- ---------
Total managed assets $20,837.6 $20,005.4 $17,978.6 $16,072.1 $13,723.6 $12,290.1
========= ========= ========= ========= ========= =========
</TABLE>
- ---------------
(1) Includes consumer finance receivables held for sale of $950.1 million,
$116.3 million, $112.0 million, $68.7 million, $150.4 million and $0.0 million
at June 30, 1997 and December 31, 1996, 1995, 1994, 1993 and 1992, respectively.
For the five year period ended December 31, 1996, commercial financing and
leasing assets grew at a compound annual rate of 8.2% and consumer financing and
leasing assets grew at a compound annual rate of 18.7%. The compound annual
growth rates over such five year period for total financing and leasing assets
and total managed assets were 9.7% and 11.4%, respectively.
STRATEGY
The Company has delivered consistent growth in earnings and assets over the past
five years. The Company believes that its financial performance is a product of
its core strengths, which include its array of "franchise" businesses, strong
credit risk management expertise and long-standing commitment to its markets.
The following fundamental operating principles are significant to the Company's
past success and the execution of its business strategy in the future:
- - Maintain and build leadership positions in selected markets and industries,
focusing on the United States.
- - Offer a broad selection of collateral-based credit products through multiple
channels of distribution.
- - Preserve "best in class" credit culture, coupled with collateral management
expertise.
- - Maintain a relationship-based approach to customers and business partners.
- - Practice disciplined expense management, on-going efficiency improvement and
technology investment.
- - Maintain access to multiple funding sources with strong debt ratings.
- - Retain experienced management team with long tenure in the industry and with
the Company.
- - Utilize performance-based incentive systems.
- - Encourage a corporate culture that emphasizes quality in performance and
service to customers, employees and business partners and values service to
the community.
- - Pursue growth through selective acquisitions of businesses and assets.
Using its proven strengths and capabilities, the Company will pursue the
following strategies to continue its earnings and assets growth:
Leverage its existing market leadership positions to expand into new markets,
industries and products
The Company has developed an array of "franchise" strategic business units
within its two business segments, each with broad geographic reach and multiple
distribution channels. These strategic business units focus on specific
industries, asset types
42
<PAGE> 45
and markets. The Company believes that its industry expertise and long-standing
commitment to its markets and customers are competitive advantages.
The Company has expanded its equipment financing and leasing business, including
its railroad equipment and business aircraft operations, and plans to seek
further growth and profitability by: (i) building additional manufacturer and
dealer/distributor relationships; (ii) expanding its sales force and marketing
reach; (iii) adding complementary products that enhance existing business
segments or products; (iv) identifying new markets that have synergy with or add
to the Company's existing strengths and capabilities; and (v) improving
marketplace presence and "brand name" recognition in consumer finance.
Maintain "best in class" credit quality and strong balance sheet
The Company has demonstrated the effectiveness of its credit risk management
system and strong credit culture. From 1990 through 1996, including the
1991-1992 economic recession, net credit losses have averaged 0.72% of average
finance receivables. The Company's strong performance has been the result of:
(i) sophisticated systems and policies which identify target markets and risk
acceptance criteria for each market; (ii) decentralized credit approval
authorities capable of responding quickly to shifting customer needs and
changing economic and market conditions; and (iii) oversight systems that
monitor credits from origination throughout the entire lending cycle. From 1992
to June 30, 1997, nonperforming assets declined from $328.0 million (2.79% of
finance receivables) to $151.6 million (0.90%). While this decline clearly is a
result of the improving economy during that period, the Company believes that
its credit discipline also contributed to this trend. Further, at June 30, 1997,
the consolidated reserve for credit losses was two times the prior year's net
credit losses. In addition, the Company adjusts its pricing to achieve higher
yields for greater risk. The Company believes that its strong credit risk
management systems and strong credit culture will continue to support long-term
profitable asset growth.
Grow the consumer businesses
The Company believes that opportunities exist to grow its consumer earnings and
assets by (i) leveraging its existing capabilities and expertise, (ii) expanding
its franchise into new markets and products, as it has done with home equity and
recreational boat lending, and (iii) establishing direct to consumer lending
capabilities across its recreation vehicle, manufactured housing and
recreational boat product lines.
In 1993, the Company entered the recreational boat market, leveraging its
ability to build dealer and manufacturer relationships, its strong credit risk
management skills and its servicing and asset management capabilities. Based
upon 1996 originations, the Company has significant operations in the $8.6
billion U.S. recreational boats market. The Company in 1997 began the wholesale
financing of inventories for dealers of manufactured housing and recreational
boats. Wholesale financing provides dealers with necessary floor plan financing
and will provide the Company with greater access to retail financing
opportunities through its existing dealer relationships. The Company plans to
pursue further growth of its wholesale financing operations by offering this
product to other dealers and manufacturers with whom it has strong
relationships.
In late 1992, the Company entered the home equity lending market. The Company
had $2.2 billion in home equity finance receivables at June 30, 1997,
establishing it as a significant market participant. These results were achieved
by utilizing a multi-channel delivery system with both direct and indirect
origination capabilities through a 28 office distribution network that provides
national coverage for the Company's products. The Company will seek further
consumer asset growth and improved profitability by expanding its sales office
network through the addition of new offices (including five new offices during
late 1997), improving operating efficiencies, capitalizing on economies of scale
and expanding its consumer product offerings into new and existing markets.
Improve operating efficiency through increased scale, continued process
improvement and technology investments
The Company has developed a strong culture attuned to expense control,
continuous process improvement and investment in technology. During the past
five years, the Company has controlled the growth of its operating expenses
relative to revenue growth. The Company improved its efficiency ratio from 41.1%
in 1992 to 40.1% in the first six months of 1997 while growing its managed
assets at a 11.1% annual rate and making substantial investments in its consumer
lending operations.
The Company seeks to become a low cost producer by building scale in businesses
in which it has significant positions and believes that it already has a
competitive advantage as a "low cost producer" in its factoring and equipment
financing and leasing businesses. Additionally, the Company seeks to increase
turnaround and efficiency with its existing manufacturer relationships through
electronic back office to back office linkages. The Company intends to maintain
its focus on expense control and efficiency through continuous process
improvement and technology investments and by utilizing its proven expense
control and efficiency expertise to expand. The Company believes the existing
infrastructure of most of its strategic business units can support further
growth.
43
<PAGE> 46
Invest in businesses that leverage existing capabilities and complement the
Company's core strengths
Over the past few years, the Company has acquired various businesses and
portfolios of finance receivables and has successfully integrated the acquired
assets, operations and personnel while leveraging the Company's proven strengths
and expertise. The Company intends to continue to actively pursue strategic
acquisition opportunities of both businesses and portfolios of assets that it
believes will enhance growth and profitability and that can be integrated into
its core franchises. A summary of the Company's key acquisitions is presented in
the table immediately below.
Dollars in millions
<TABLE>
<CAPTION>
FINANCING AND LEASING
ACQUISITION (YEAR) ASSETS ACQUIRED DESCRIPTION
- ------------------------------------------ --------------------- ------------------------------------------
<S> <C> <C>
Fidelcor Business Credit (1991) $474.8 Acquisition of business and existing
commercial finance receivables (renamed
"The CIT Group/ Credit Finance").
Chase Business Aircraft (1991) $128.4 Portfolio of business aircraft loans and
leases.
L B Credit (1993) $269.4 Portfolio of commercial loans and leases
secured by various types of equipment.
Barclays Commercial
Corporation -- Factoring Operations
(1994) $674.8 Acquisition of business and existing
factoring receivables (merged into The CIT
Group/Commercial Services).
Home Equity Portfolio (1996) $357.8 Portfolio of home equity closed-end loans
and home equity lines of credit.
</TABLE>
During June 1997, the Company also entered into an arrangement with Chase
pursuant to which the Company provides servicing for Chase's recreation vehicle
and recreational boat finance receivables portfolio of $1.3 billion. The Company
commenced providing portfolio services under that arrangement during August
1997. The Company also acquired the origination capabilities related to Chase's
recreation vehicle and recreational boat dealer relationships.
PRODUCT INITIATIVES
In order to improve profitability and diversify its portfolio, the Company
engages on an ongoing basis in the introduction of new products and the
expansion of its existing product offerings into new markets and industries.
These internal growth and expansion initiatives permit the Company to leverage
efficiently its existing management, expertise and infrastructure to seek
further growth and profitability. The following table presents the principal
internal growth and expansion initiatives undertaken by the Company from 1992 to
June 30, 1997.
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
- ----------------------------------- ---------------------------------------------------------------------
<S> <C>
Home equity 1992--started de novo; $2.2 billion in finance receivables at June
30, 1997.
Manufactured housing 1993--leveraged existing origination and servicing capabilities to
grow annual originations; $1.3 billion of managed assets at June 30,
1997.
Recreational boats 1993--began retail financing of new product; has $546.6 million of
managed assets at June 30, 1997.
Rail equipment 1994--separate rail group established; now generally recognized as an
established industry source of leasing general service railcars.
Wholesale inventory 1997--started de novo; offering inventory financing to manufactured
housing and recreational boat dealers.
</TABLE>
COMMERCIAL
The Company's commercial operations are diverse and provide a wide range of
financing and leasing products to small, mid-size and larger companies across a
wide variety of industries, including aerospace, retailing, construction, rail,
machine tools, business aircraft, apparel, textiles, electronics and technology,
chemicals, manufacturing and transportation. The secured lending, leasing and
factoring products of the Company's commercial operations include direct loans
and leases, operating leases, leveraged and single investor leases, secured
revolving lines of credit and term loans, credit protection, accounts receivable
collection, import and export financing and factoring, debtor-in-possession and
turnaround financing and acquisition and expansion financing.
44
<PAGE> 47
The Company believes that it had the largest factoring operation and the fourth
largest equipment financing and leasing operation in the United States. The
Company also has a leading market position in recreational vehicle lending and
has significant operations financing the aerospace, construction,
transportation, machine tool manufacturing and railroad industries.
The following table sets forth the financing and leasing assets of the Company's
commercial segment at December 31 of each of the years in the five-year period
ended December 31, 1996 and at June 30, 1997.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
AT DECEMBER 31,
AT JUNE 30, -----------------------------------------------------------------
1997 1996 1995 1994 1993 1992
----------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Dollars in millions
Equipment Financing and Leasing $11,223.7 $11,321.6 $10,591.6 $ 9,631.1 $ 9,027.4 $ 7,986.0
Factoring 1,894.4 1,804.7 1,743.3 1,896.2(1) 981.9 1,010.2
Commercial Finance 2,169.5 2,033.4 2,229.7 2,161.7 1,927.8 1,826.3
--------- --------- --------- --------- --------- ---------
$15,287.6 $15,159.7 $14,564.6 $13,689.0 $11,937.1 $10,822.5
========= ========= ========= ========= ========= =========
</TABLE>
- ---------------
(1) The increase in financing and leasing assets at December 31, 1994 as
compared to December 31, 1993 was primarily attributable to the acquisition by
the Company during 1994 of the factoring operations and receivables of Barclays
Commercial Corporation. See "--Strategy."
The Company's commercial operations generate transactions through direct calling
efforts with borrowers, lessees, equipment end-users, manufacturers and
distributors and through referral sources and other intermediaries. In addition,
the Company's strategic business units also refer or cross-sell transactions to
other Company units to best meet customers' overall financing needs. The
Company's marketing efforts are supplemented by its Multi-National Marketing
Group, which promotes the Company's products to the U.S. subsidiaries of foreign
corporations in need of asset-based financing, developing business through
referrals from DKB and through direct calling efforts. The Company also buys and
sells participations in and syndications of finance receivables and/or lines of
credit. In addition, from time to time in the normal course of business, the
Company purchases finance receivables in bulk to supplement its own originations
and sells selected finance receivables and equipment under operating leases for
risk management and/or other balance sheet management purposes.
The Company believes that the key factors in the growth and profitability of its
commercial operations are: (i) the broad market coverage and industry
specialization provided by its strategic business units and specialty marketing
group; (ii) its strong credit discipline and culture; (iii) its long-standing
commitments to its markets and its customers; and (iv) its employees, who
possess extensive experience and knowledge in the industries served, credit risk
management, deal structure and management of underlying collateral and
equipment.
EQUIPMENT FINANCING AND LEASING
The Company's Equipment Financing and Leasing operations had total financing and
leasing assets of $11.2 billion at June 30, 1997, representing 57.9% of the
Company's total financing and leasing assets. The Company's Equipment Financing
and Leasing operations are conducted through two strategic business units: (i)
The CIT Group/Equipment Financing ("Equipment Financing"), which focuses on the
broad distribution of its products through manufacturers, dealer/distributors,
intermediaries and direct calling primarily with the construction,
transportation and machine tools industries; and (ii) The CIT Group/Capital
Finance ("Capital Finance"), which focuses on the direct marketing of customized
transactions relating primarily to commercial aircraft and rail equipment. The
average Equipment Financing outstanding per customer account is $152,000 and the
average Capital Finance outstanding per customer account is $6.2 million.
Equipment Financing and Capital Finance provide substantial value to their
customers by arranging financing terms that meet customers' individual needs.
Such financing situations may include, for example, a customer's need for
varying as opposed to fixed payment terms in order to better match its cash
flow, as well as off-balance sheet financing (where the customer treats the
financing as a lease for financial reporting or tax purposes) versus on-balance
sheet financing (where the customer owns the equipment for financial reporting
or tax purposes).
Equipment Financing and Capital Finance personnel have extensive expertise in
managing equipment over its full life cycle, including, in the case of Capital
Finance, the expertise to repossess commercial aircraft, if necessary, to obtain
required maintenance and repairs for such aircraft, and to recertify such
aircraft with appropriate authorities. Equipment Financing's and Capital
Finance's equipment and industry expertise enable them to evaluate effectively
residual value risk and to manage equipment and residual value risks by locating
alternative equipment users and/or purchasers in order to minimize such risk
and/or the risk of equipment remaining idle for extended periods of time or in
amounts that could materially impact
45
<PAGE> 48
profitability. For example, beginning in 1991, the aerospace industry
experienced a series of commercial airline bankruptcies, which included several
customers of Capital Finance. However, Capital Finance was able to effectively
manage its equipment and residual value risk, including the use of short-term
operating leases, to minimize the losses in its aircraft portfolio. During the
1990s, net credit losses to Capital Finance's aircraft portfolio have totalled
approximately $500,000. In each year from 1992 through 1996, Equipment Financing
and Capital Finance have realized at least the aggregate booked residual value
in connection with equipment sales.
The following table sets forth certain information concerning the financing and
leasing assets of Equipment Financing and Leasing at December 31 of each of the
years in the five-year period ended December 31, 1996 and at June 30, 1997.
<TABLE>
<CAPTION>
------------------------------------------------------------------
AT AT DECEMBER 31,
JUNE 30, ------------------------------------------------------
1997 1996 1995 1994 1993 1992
--------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Dollars in millions
Finance receivables--loans $ 5,712.4 $ 6,357.5 $ 6,383.4 $5,852.6 $5,607.3 $5,037.3
Finance receivables--leases 3,938.3 3,562.0 3,095.2 2,910.6 2,668.2 2,485.9
Operating lease equipment, net 1,573.0 1,402.1 1,113.0 867.9 751.9 462.8
--------- --------- --------- -------- -------- --------
Total financing and leasing assets $11,223.7 $11,321.6 $10,591.6 $9,631.1 $9,027.4 $7,986.0
========= ========= ========= ======== ======== ========
</TABLE>
On January 1, 1997, $1,519.2 million of financing and leasing assets and related
marketing and servicing operations were transferred from Capital Finance to
Equipment Financing. The transferred financing and leasing assets and operations
were considered more complementary to the Equipment Financing business and the
transfers were undertaken to increase Equipment Financing's nationwide market
reach and further utilize its existing systems and infrastructure. The transfer
has also enabled Capital Finance to focus on the specialized markets and
industries best served by its ability to handle larger customized financings of
capital equipment, particularly aerospace and rail.
Equipment Financing
Equipment Financing is the largest of the Company's strategic business units
with total financing and leasing assets of $7.6 billion at June 30, 1997,
representing 39.2% of the Company's total financing and leasing assets.
Equipment Financing offers secured equipment financing and leasing products on a
fixed- and floating-rate basis, including direct secured loans, leases,
revolving lines of credit, operating leases, sale and leaseback arrangements,
vendor financing and specialized wholesale and retail financing for distributors
and manufacturers. Equipment Financing seeks a leadership market position in
each of its key distribution channels through its experience, reputation,
financing and equipment management capabilities and long-term relationships it
has developed with its customers, manufacturers, dealers, distributors and
intermediaries.
Equipment Financing is a leading nationwide asset-based equipment lender. At
June 30, 1997, its portfolio included significant outstandings to customers in a
number of different industries, with manufacturing being the largest as a
percentage of financing and leasing assets (34%), followed by construction (22%)
and printing (8%). The Equipment Financing portfolio at June 30, 1997 included
many different types of equipment, with construction equipment comprising the
largest percentage (34%), followed by transportation (10%), machine tools (8%)
and business aircraft (8%). Equipment Financing's portfolio included
approximately 50,000 accounts. The average new financing was approximately
$214,000 with an average financing term of 62 months. At June 30, 1997, 86% of
the Equipment Financing finance receivable portfolio was based on fixed interest
rates, with the remainder based on variable interest rates. At June 30, 1997,
Equipment Financing's ten largest financings constituted less than 5% of its
portfolio.
46
<PAGE> 49
Equipment Financing has sustained excellent growth and portfolio credit quality,
as shown in the following table.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
AT OR FOR THE AT OR FOR THE YEARS ENDED DECEMBER 31,
SIX MONTHS ENDED --------------------------------------------------------
JUNE 30, 1997 1996 1995 1994 1993 1992
---------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Dollars in millions
Finance receivables--loans $4,535.6 $3,859.0 $3,657.0 $3,081.7 $2,690.0 $2,112.7
Finance receivables--leases 2,585.6 1,757.8 1,272.9 1,188.0 1,191.0 981.4
Operating lease equipment 471.7 426.6 363.0 219.2 186.2 78.5
-------- -------- -------- -------- -------- --------
Total financing and leasing assets $7,592.9(1) $6,043.4 $5,292.9 $4,488.9 $4,067.2 $3,172.6
======== ======== ======== ======== ======== ========
60+ days past due as a percentage
of finance receivables 2.03% 1.86% 1.42% 1.33% 2.48% 4.05%
Net credit losses as a percentage
of average finance receivables 0.22%(2) 0.27% 0.35% 0.46% 0.48% 0.56%
</TABLE>
- ---------------
(1) During January 1997, $1,519.2 million of financing and leasing assets and
related marketing and servicing operations were transferred from Capital Finance
to Equipment Financing.
(2) Calculated on an annualized basis.
Equipment Financing entered the operating lease business in 1991 and has grown
its operating lease portfolio to $471.7 million at June 30, 1997. Operating
lease equipment consists primarily of business aircraft, but also includes
trucks, trailers and buses, manufacturing equipment and construction equipment.
The Company believes that operating leases offer the opportunity for higher
yields from rentals as compared to standard financing arrangements or capital
leases, and for additional revenue generated from the remarketing, including
re-leasing and sale, of operating lease equipment.
Marketing and Distribution. Equipment Financing believes that a key to its
success is its ability to effectively meet the financing needs of the customers
in its different distribution channels. Equipment Financing is headquartered in
Livingston, New Jersey, with two full service business centers in Tempe, Arizona
and Atlanta, Georgia and conducts its business through a network of 33 sales
offices in cities that include Boston, Chicago, Dallas, Los Angeles, San
Francisco and Seattle. The Tempe business center originates and services the
construction, transportation, business aircraft and certain other industries on
a nationwide basis and the Atlanta business center originates and services the
printing, machine tools, manufacturing and certain other industries on a
nationwide basis. Equipment Financing supplements its sales offices with field
sales personnel throughout the United States, which provides cost effective
market coverage.
Equipment Financing originates its products through direct calling on customers
and its relationships with manufacturers, dealers/distributors and
intermediaries that have leading or significant sales or significant marketing
positions in their respective industries. This provides Equipment Financing with
efficient access to equipment end-users in many industries across a variety of
equipment types. Equipment Financing has developed approximately 60
manufacturer, 1,500 dealer/ distributor and 40 intermediary relationships. From
time to time, Equipment Financing also supplements its core direct origination
and manufacturer and dealer/distributor origination capabilities with
broker-generated business through a centralized operation. Equipment Financing
also (i) syndicates transactions with other lenders to facilitate the
origination of larger transactions, manage portfolio concentration risk and
enhance profitability, (ii) participates in financings arranged by other finance
companies, leasing companies and banks and (iii) from time to time acquires
portfolios of finance receivables.
Over 60% of Equipment Financing customers are multiple contract relationships,
versus single contract financings. Equipment Financing customers primarily range
from small- to middle-market companies in a range of industries and equipment
types. The Company believes that Equipment Financing's access to multiple
marketing channels allows it to use the most effective marketing channel for
generating new financings in each of its target industries (for example,
developing relationships with dealers and distributors in construction and
manufacturers in printing).
Servicing. Equipment Financing handles all servicing through its Tempe and
Atlanta business centers. Each business center is responsible for nationwide
customer service for the industries within its purview. Equipment Financing
believes it has developed highly efficient processes and systems that enable it
to handle increasing transaction levels very cost effectively. From 1992 through
1996, Equipment Financing improved its operating expense ratio (operating
expenses divided by average earning assets) by 30%. During that time period, the
financing and leasing assets of Equipment Financing grew from $3.2 billion to
$6.0 billion.
47
<PAGE> 50
Capital Finance
Capital Finance had financing and leasing assets of $3.6 billion at June 30,
1997, which represented 18.7% of the Company's total financing and leasing
assets. Capital Finance specializes in customized secured financing, including
leases, loans, operating leases, single investor leases, debt and equity
portions of leveraged leases and sale and leaseback arrangements relating
primarily to end-users of commercial aircraft and railcars. Typical Capital
Finance customers are middle-market to larger-sized companies. At June 30, 1997,
approximately 87% of the Capital Finance finance receivables portfolio was based
on fixed interest rates, with the remainder based on variable interest rates.
Capital Finance's experience in specialized equipment lending began in the late
1960's. Capital Finance has provided financing to commercial airlines for over
30 years. The Capital Finance aerospace portfolio includes most of the leading
U.S. and foreign commercial airlines. Capital Finance had 228 commercial
aircraft in its portfolio at June 30, 1997, including narrow body, wide body,
cargo and commuter aircraft predominantly manufactured by The Boeing Company and
McDonnell-Douglas Corp., and, to a lesser extent, Airbus Industrie, British
Aerospace and Embraer. Capital Finance has developed strong relationships with
most major airlines and all major aircraft and aircraft engine manufacturers,
the latter of which provides Capital Finance with access to technical
information, which supports customer service and provides opportunities to
finance new business.
Capital Finance has over 25 years experience in financing the rail industry,
contributing to its knowledge of asset values, industry trends, product
structuring and customer needs. To strengthen its position in the rail financing
market, Capital Finance formed a dedicated rail equipment group in 1994. The
Capital Finance rail portfolio includes all of the U.S. and Canadian Class I
railroads and numerous shippers. The Capital Finance operating lease fleet
included over 7,500 rail cars at June 30, 1997 and primarily is comprised of
covered hopper cars used to ship grain and agricultural products and plastic
pellets, gondola cars for coal, steel coil and mill service, open hopper cars
for coal and aggregates, center beam flat cars for lumber and boxcars for paper
and auto parts.
The following table sets forth certain information concerning Capital Finance at
December 31 of or for each of the years in the five year period ended December
31, 1996 and at or for the six months ended June 30, 1997.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
AT OR FOR THE AT OR FOR THE YEARS ENDED DECEMBER 31,
SIX MONTHS ENDED ------------------------------------------------------------
JUNE 30, 1997 1996 1995 1994 1993 1992
---------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Dollars in millions
Finance receivables--loans $1,176.8 $2,498.5 $2,726.4 $2,770.9 $2,917.3 $2,924.6
Finance receivables--leases 1,352.7 1,804.2 1,822.3 1,722.6 1,477.2 1,504.5
Operating lease equipment, net 1,101.3 975.5 750.0 648.7 565.7 384.3
-------- -------- -------- -------- -------- --------
Total financing and leasing
assets $3,630.8(1) $5,278.2 $5,298.7 $5,142.2 $4,960.2 $4,813.4
======== ======== ======== ======== ======== ========
60+ days past due as a
percentage of finance
receivables 0.10% 1.08% 1.84% -- 0.42% 2.25%
Net credit losses as a
percentage of average finance
receivables 1.82%(2) 0.91% 0.15% 0.26% 0.36% 0.74%
</TABLE>
- ---------------
(1) During January 1997, $1,519.2 million of financing and leasing assets and
related marketing and servicing operations were transferred from Capital Finance
to Equipment Financing.
(2) Calculated on an annualized basis.
The increase in net credit losses as a percentage of average finance receivables
was due to chargeoffs for nonaccrual loans secured by oceangoing shipping and
cruise line vessels in 1996 and for power generation project energy loans in the
first six months of 1997. The Company ceased its marketing to the oceangoing
maritime and power generation project sectors in the third quarter of 1997.
48
<PAGE> 51
The following table sets forth the financing and leasing assets of Capital
Finance by equipment type at December 31 of each of the years in the five-year
period ended December 31, 1996 and at June 30, 1997.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
AT AT DECEMBER 31,
JUNE 30, --------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Dollars in millions
Aerospace $1,990.6 $1,901.2 $1,900.3 $1,880.0 $1,894.9 $1,986.3
Rail 655.7 716.1 578.7 495.9 396.0 346.4
Other 984.5 2,660.9 2,819.7 2,766.3 2,669.3 2,480.2
------ ------ ------ ------ ------ ------
Total $3,630.8 $5,278.2 $5,298.7 $5,142.2 $4,960.2 $4,813.4
====== ====== ====== ====== ====== ======
</TABLE>
- ---------------
During January 1997, $1,519.2 million of financing and leasing assets and
related marketing and servicing operations were transferred from Capital Finance
to Equipment Financing. The remaining financing and leasing assets at June 30,
1997 consisted primarily of maritime, energy and intermodal assets. Capital
Finance ceased marketing to the maritime and energy industries during the third
quarter of 1997 and is permitting its portfolio of related financing and leasing
assets to liquidate. At June 30, 1997, Capital Finance's maritime and energy
portfolios were $331.1 million and $330.2 million, respectively. In September,
1997, Equipment Financing commenced marketing to certain sectors of the maritime
and energy industries, consisting principally of U.S. inland waterway and
energy-related equipment financing.
From 1992 through June 30, 1997, commercial airline financing and leasing assets
declined from 16.2% to 10.3% of the Company's total financing and leasing
assets. During this period, the Company limited the growth of the Capital
Finance aerospace portfolio due to weakness in the commercial airline industry,
industry overcapacity and declining equipment values. The Company has determined
that it is appropriate to grow the aerospace portfolio, but will continue to
monitor this growth relative to the Company's total financing and leasing
assets.
Capital Finance believes that additional financing opportunities exist among its
aerospace and rail clients, in addition to establishing new customer
relationships, which create the potential for additional financing
opportunities. The commercial airline industry currently is in one of the more
profitable periods in its history. The Company believes that growth and
profitability prospects for the railcar industry are favorable based on its
expectation that railroads will maintain their market share of coal and grain
shipments and will have opportunities to compete more effectively with the
trucking industry.
Marketing and Distribution. New business is generated by Capital Finance
through (i) direct calling efforts with equipment end-users and borrowers,
including major airlines, railroads and shippers, (ii) relationships with
aerospace, railcar and other manufacturers and (iii) intermediaries and other
referral sources. Capital Finance maintains relationships with the leading
commercial airline manufacturers in the world and several leading railcar
manufacturers in the United States. Capital Finance is headquartered in New York
City, with a full service office in New York City and additional sales offices
in five other cities.
Important elements of the Capital Finance operation are its product experience,
industry expertise, equipment knowledge, customized deal structuring and
equipment remarketing. Capital Finance employees are organized and focused both
by industry and by product (i.e., operating lease versus longer-term financing)
to bring focus and expertise to its customers and to meet their specific
financing needs. Many Capital Finance employees have extensive experience in
various capacities in the industries served by Capital Finance.
FACTORING
The CIT Group/Commercial Services ("Commercial Services") factoring operation
was, at December 31, 1996, the largest factoring operation in the United States
based on annual factoring volume. This business unit had total financing and
leasing assets of $1.9 billion at June 30, 1997, which represented 9.8% of the
Company's total financing and leasing assets. Commercial Services offers a full
range of domestic and international customized credit protection and lending
services that include factoring, working capital and term loans, receivable
management outsourcing, bulk purchases of accounts receivable, import and export
financing and letter of credit programs.
Commercial Services had a 21% U.S. market share, based on volume, of the $64.0
billion factoring market in 1996. The Company's three largest competitors
collectively had a 41% U.S. market share. Industry-wide factoring volume has
grown from $53.0 billion in 1992 to $64.0 billion in 1996, a compound annual
growth rate of approximately 4.5%. Commercial Services market share during the
same period grew from 14% to 21% as a result of its business development and
origination efforts and the acquisition of the factoring operations of Barclays
Commercial Corporation during February 1994.
49
<PAGE> 52
Commercial Services' client base consists of textile and apparel related
companies, furniture manufacturers, home furnishings organizations, importers,
wholesalers and distributors. For the year ended December 31, 1996,
approximately 70% of Commercial Services' clients (by factored volume) were in
the textile and apparel industries and 14% were manufacturers of furniture and
home furnishings. Commercial Services clients primarily are small- to
medium-sized companies. Commercial Services currently has over 850 clients who
generate annual sales ranging from $1.0 million to over $450.0 million.
Commercial Services collects receivables from more than 175,000 retail and
wholesale customers of its clients. Generally, the clients notify their
customers to make all payments on the receivables directly to Commercial
Services. Clients use Commercial Services' factoring product for various
purposes, including improving cash flow, mitigating or reducing the risk of bad
debt charge offs, increasing sales, improving management information and
converting the high fixed cost of operating a credit and collection department
into a lower and variable expense based on sales volume.
The following table sets forth certain information for Commercial Services at
December 31 of or for each of the years in the five-year period ended December
31, 1996 and at or for the six months ended June 30, 1997.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
AT OR FOR THE AT OR FOR THE YEARS ENDED DECEMBER 31,
SIX MONTHS ENDED ---------------------------------------------------------------
JUNE 30, 1997 1996 1995 1994 1993 1992
---------------- --------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Total financing and leasing
assets $ 1,894.4 $ 1,804.7 $ 1,743.3 $ 1,896.2(1) $ 981.9 $1,010.2
Factoring volume(2) $ 7,180.7 $13,166.8 $12,678.0 $12,890.0(1) $7,667.4 $7,382.1
60+ days past due as a
percentage of finance
receivables 1.73% 2.65% 1.89% 1.42% 4.84%(3) 6.00%(3)
Net credit losses as a
percentage of average finance
receivables 0.69%(4) 0.89% 0.72% 0.85% 2.29%(3) 2.14%(3)
</TABLE>
- ---------------
(1) The increase in financing and leasing assets primarily was attributable to
the acquisition by the Company during 1994 of the factoring operations and then
existing factoring receivables of Barclays Commercial Corporation. See
"--Strategy."
(2) Includes receivables management servicing volume.
(3) 60+ days past due as a percentage of finance receivables and net credit
losses as a percentage of average finance receivables were higher during 1992
and 1993 due to a loan to a manufacturer on non-accrual status in 1992 and 1993
which was settled in 1994.
(4) Calculated on an annualized basis.
Commercial Services generally provides financing to its clients through the
purchase of accounts receivable owed to clients by their customers, usually on a
non-recourse basis, as well as by guaranteeing amounts due under letters of
credit issued to the clients' suppliers which are collateralized by accounts
receivable and other assets. The purchase of accounts receivable is
traditionally known as "factoring" and results in the payment by the client of a
factoring fee, generally ranging from 0.3% to 2% of the factored sales volume.
On the date that Commercial Services "factors" (i.e., purchases) a customer
invoice from a client, it records the customer receivable as an asset and also
establishes a liability for the funds due to the client ("credit balances of
factoring clients"). Commercial Services also may advance funds to its clients
prior to collection of receivables, typically in an amount up to 80% of eligible
accounts receivables (as defined for that transaction), charging interest on
such advances (in addition to any factoring fees) and satisfying such advances
from receivables collections. Approximately 50% of Commercial Services' clients
obtain advances against their purchased receivables, in addition to the credit
protection, collection and management information services offered by Commercial
Services in connection with the purchase of their accounts receivable.
Commercial Services guarantees the collection of each client's pre-approved
receivables or receivables from each client's customers with pre-approved credit
lines. Payment of receivables which are credit-approved by Commercial Services
is made to the client after collection from the client's customer or, if the
receivable is not paid based solely on the customer's financial inability to
pay, payment is made to the client within a specific time after the due date of
the receivable.
All client credit balances are reduced by amounts outstanding to Commercial
Services by factoring fees charged or any outstanding advances to the client.
Interest charged on such advances is predominantly based on a spread over the
designated prime rate. In larger transactions, a spread over LIBOR is sometimes
used.
Marketing and Distribution. Commercial Services is headquartered in New York
City, with full service offices in Charlotte, Dallas, Los Angeles and New York
and sales offices in Boston, Hong Kong and Miami. Commercial Services generates
business regionally from a variety of sources, including direct calling and
referrals from existing clients and other referral sources. During 1996, the
Company added approximately 200 new client relationships through regional
marketing efforts.
50
<PAGE> 53
Servicing. Commercial Services has developed processes and systems designed to
efficiently process the very high transaction volumes related to factoring
invoices and believes that such low cost volume processing capability provides
it with a competitive advantage in the factoring business. The Company has made
efficiency improvements which utilize technology to electronically link clients
and transfer transaction data, perform basic credit surveillance routines and to
replace higher cost manual labor. Commercial Services clients can electronically
submit transactions and inquire on account status on virtually all client
orders. More than half of Commercial Services' invoices are submitted
electronically (as opposed to paper invoices or other physical means). Operating
expenses as a percent of factored volume decreased by over 27% from 1992 to
1996. Bookkeeping and collection functions are located in a service center in
Danville, Virginia.
COMMERCIAL FINANCE
At June 30, 1997, the financing and leasing assets of Commercial Finance totaled
$2.2 billion, representing 11.2% of the Company's total financing and leasing
assets. The Company's Commercial Finance operations are conducted through two
strategic business units: (i) The CIT Group/Business Credit ("Business Credit"),
which provides secured financing primarily to middle-market to larger-sized
borrowers and has an average credit facility size at origination of $22.1
million; and (ii) The CIT Group/Credit Finance ("Credit Finance"), which
provides secured financing primarily to smaller-sized to middle-market borrowers
and has an average credit facility size at origination of $8.1 million. Credit
Finance borrowers are generally smaller and cover a wider range of credit
quality than those of Business Credit. While both Business Credit and Credit
Finance offer financing secured by accounts receivables, inventories and fixed
assets, Credit Finance places a higher degree of reliance on collateral and is
generally more focused on credit monitoring in its business.
The following table sets forth financing and leasing assets of Commercial
Finance at December 31 of each of the years in the five-year period ended
December 31, 1996 and at June 30, 1997.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
AT DECEMBER 31,
AT
JUNE 30, ------------------------------------------------------------
1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Dollars in millions
Business Credit $1,357.2 $1,235.6 $1,471.0 $1,442.1 $1,282.1 $1,281.3
Credit Finance 812.3 797.8 758.7 719.6 645.7 545.0
-------- -------- -------- -------- -------- --------
Total financing and leasing assets $2,169.5 $2,033.4 $2,229.7 $2,161.7 $1,927.8 $1,826.3
======== ======== ======== ======== ======== ========
</TABLE>
BUSINESS CREDIT
Financing and leasing assets of Business Credit totaled $1.4 billion at June 30,
1997 and represented 7.0% of the Company's total financing and leasing assets.
Business Credit offers senior revolving and term loans secured by accounts
receivable, inventories and fixed assets to middle-market and larger-sized
companies. Such loans are used by clients primarily for growth, expansion,
acquisitions, refinancings and debtor-in-possession and turnaround financings.
Business Credit sells and purchases participation interests in such loans to and
from other lenders. Customers usually range in size of annual sales from $20.0
million to $2.0 billion, and conduct their business in a wide range of
industries. The average customer loan balance outstanding was $6.2 million at
June 30, 1997.
The following table sets forth certain information concerning Business Credit at
December 31 of or for each of the five years in the five-year period ended
December 31, 1996 and at or for the six months ended June 30, 1997.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
AT OR FOR
THE SIX MONTHS AT OR FOR THE YEARS ENDED DECEMBER 31,
ENDED --------------------------------------------------------------
JUNE 30, 1997 1996 1995 1994 1993 1992
---------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Dollars in millions
Total financing and leasing
assets $1,357.2 $1,235.6 $1,471.0 $1,442.1 $1,282.1 $1,281.3
60+ days past due as a
percentage of finance
receivables 1.07% 1.77% 2.81% 5.53% 2.88% 2.53%
Net credit losses as a
percentage of average finance
receivables 0.27%(1) 0.69% 1.82% 1.95% 1.70% 1.00%
</TABLE>
- ---------------
(1) Calculated on an annualized basis.
From 1992 through 1996, Business Credit's finance receivables have remained
relatively unchanged in amount, although new business originations of new credit
lines have increased each year. In response to higher delinquencies and charge
offs in
51
<PAGE> 54
1994 and 1995, management initiated a strategy in early 1996 to diversify
portfolio credit risk by decreasing individual borrower "hold" positions
(retained or owned portion), which restricted portfolio growth. The impact of
management's decision to reduce its target hold amount is reflected in the
change in the percentage of the largest ten credits to the total approved credit
lines of Business Credit. At June 30, 1997, the largest ten credit facilities
represented 32% of the total approved lines, down from 52% at June 30, 1993.
Further, the largest ten credits based on actual borrowings represented 14% of
finance receivables at June 30, 1997, down from 19% at June 30, 1993.
Business Credit has experienced a higher level of paydowns attributable to
greater availability of alternative capital and greater client liquidity due to
a strong economy, which also has restricted portfolio growth. With respect to
new originations, current market conditions have led to substantially enhanced
competition in both pricing, terms and deal structure (secured versus unsecured,
advance rates, qualifying assets, etc.) and has improved the creditworthiness of
many borrowers to the level that permits them to obtain lower cost unsecured
financing from alternative sources.
Through its variable interest rate senior revolving and term loan products,
Business Credit meets its customers' financing needs for working capital,
growth, acquisition and other financing situations otherwise not met through
bank or other unsecured financing alternatives. Business Credit typically
structures financings on a fully secured basis, though, from time to time, it
may look to a customer's cash flow to support a portion of the credit facility.
Revolving and term loans are made on a variable interest rate basis based on
published indexes such as LIBOR or a prime rate of interest. At June 30, 1997,
approximately 54% of the Business Credit portfolio of finance receivables was
based on a prime rate with the remainder based on LIBOR rates of varying terms
(e.g., 30-day and 60-day).
A credit line is arranged with each borrower establishing the maximum amount the
borrower may finance, subject to the amount of underlying eligible collateral
and corresponding advance rates. Total credit facilities to individual borrowers
range up to $300.0 million, but generally average $22.1 million at origination.
Amounts in excess of Business Credit's target credit line hold are syndicated or
participated out to other lenders. The excess of approved credit lines
outstanding over finance receivables outstanding represents potential additional
borrowings or finance receivables that borrowers may qualify for, subject to the
availability of required collateral and corresponding advance rates. Business
Credit typically advances funds (lends) up to 85% of eligible accounts
receivables and up to 60% of eligible inventories. In conjunction with its
lending operations, Business Credit also generates significant fees, including
facility line availability, collateral management, letter of credit and
syndication fees.
Marketing and Distribution. Business Credit is headquartered in New York City,
with sales and customer service offices in Atlanta, Boston, Chicago, Dallas, Los
Angeles, New York, Reston, San Francisco and Tampa. Business is originated
through direct calling efforts and intermediary and referral sources.
Approximately 70% of new business was developed through referral sources and
intermediaries during the six months ended June 30, 1997. Business Credit has
focused on increasing the proportion of direct business origination to improve
its ability to capture or retain refinancing opportunities and to enhance
finance income. As recently as 1995, approximately 90% of new business was
generated through intermediaries.
Business Credit has the capacity to respond quickly in the marketplace to
underwriting larger-sized transactions (i.e.,greater than its target hold size)
because of its restructuring and financing expertise and its syndication
capabilities, which allow it to sell down a portion of the credit facility and
reduce its credit concentration risk.
Servicing. Servicing of customer accounts is centrally performed in Business
Credit's New York office. An important competitive advantage in servicing
revolving credit facilities is the ability to handle the high transaction
volumes associated with advancing and collecting funds. Business Credit has
developed advanced servicing or "back-office" systems, providing it with a
low-cost capability to service its customers. Over half of Business Credit
borrowers communicate directly with Business Credit systems to process
transactions via its proprietary "bulletin board" interface. This allows
customers to report required transaction data electronically, to request
advances of funds and to obtain account information such as balances and
availability. Further, Business Credit borrowers typically direct the funds
collected on their own accounts receivable into lock-boxes and "blocked"
accounts controlled by Business Credit. Cleared funds are transferred directly
to Business Credit and are used to reduce the borrower's loan.
CREDIT FINANCE
Financing and leasing assets of Credit Finance totaled $812.3 million at June
30, 1997 and represented 4.2% of the Company's total financing and leasing
assets. Credit Finance offers revolving and term loans to smaller-sized and
middle-market companies secured by accounts receivable, inventories and fixed
assets. Such loans are used by clients for working capital, refinancings,
acquisitions, leveraged buyouts, reorganizations, restructurings, turnarounds
and Chapter 11 financing and confirmation plans. Credit Finance sells
participation interests in such loans to other lenders and purchases
participation interests in such loans originated by other lenders. Credit
Finance was acquired by the Company in February 1991 and has been engaged in the
commercial financing of smaller-sized and middle-market businesses for over 48
years.
52
<PAGE> 55
Credit Finance customers generally have annual revenues ranging from $10.0
million to $200.0 million. Credit Finance lends to customers in many industries,
including the metal fabrication, distribution, food and food services, lumber
and wood products and manufacturing industries. The average customer loan
balance outstanding was $4.4 million at June 30, 1997.
The following table sets forth certain information concerning Credit Finance at
December 31 of or for each of the years in the five-year period ended December
31, 1996 and at or for the six months ended June 30, 1997.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
AT OR FOR AT OR FOR THE YEARS ENDED DECEMBER 31,
THE SIX MONTHS
ENDED JUNE 30, --------------------------------------------------
1997 1996 1995 1994 1993 1992
-------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Dollars in millions
Total financing and leasing assets $ 812.3 $797.8 $758.7 $719.6 $645.7 $545.0
60+ days past due as a percentage of
finance receivables -- -- 0.07% 0.46% 0.12% --
Net credit losses (recoveries) as a
percentage of average finance
receivables (0.37)%(1) 0.13% 0.36% 0.46% 0.32% --
</TABLE>
- ---------------
(1) Represents net credit recoveries, calculated on an annualized basis.
Through its variable interest rate senior revolving and term loan products,
Credit Finance meets its customers' financing needs for working capital in
growth, acquisition and other financing situations otherwise not met through
traditional bank or other unsecured financing alternatives. Revolving and term
loans are made on a variable interest rate basis based on a prime rate of
interest, with total credit facilities to individual borrowers ranging in size
from $5.0 million to up to $15.0 million. Credit facilities are established
through contractual arrangements, are typically two to three years in length and
typically include prepayment penalties. Credit Finance also has developed a
specialty division designed to meet the needs of smaller borrowers requiring
credit facilities ranging from $750,000 to $5.0 million. Further, Credit Finance
has the capacity to respond quickly in the marketplace to larger-sized
transactions (i.e., greater than its target hold size) because of its
syndication capabilities, which allow it to sell down a portion of a credit
facility and reduce its credit concentration risk.
Marketing and Distribution. Credit Finance is headquartered in New York City,
with sales and customer service offices in Chicago, Los Angeles and New York and
loan production offices in Atlanta, Boston, Charlotte, Cleveland, Dallas, San
Francisco and St. Louis. Business is originated through the sales and regional
offices. Business also is developed through intermediaries and referral
relationships and through direct calling efforts. Credit Finance has developed
long-term relationships with selected finance companies, banks and other lenders
and with many diversified referral sources.
Servicing. Servicing of customer accounts is performed at Credit Finance's
regional service centers and national service center and includes the processing
of borrower's accounts receivable collections. Credit Finance borrowers
typically direct the funds collected on their own accounts receivable into lock
boxes controlled by Credit Finance and the funds are transferred directly to
Credit Finance to reduce the borrower's loan. As a result, Credit Finance
maintains control over such cash collections.
CONSUMER
At June 30, 1997, the Company's consumer segment financing and leasing assets
totaled $4.1 billion, representing 20.9% of the Company's total financing and
leasing assets. The consumer segments' managed assets were $5.5 billion at June
30, 1997, representing 26.4% of total managed assets. Between January 1, 1992
and December 31, 1996, the consumer segment's managed assets grew at a compound
annual rate of 27.5%.
The Company's consumer business is focused primarily on home equity lending and
retail sales financing secured by recreation vehicles, manufactured housing and
recreational boats. Home equity lending is performed by The CIT Group/Consumer
Finance ("Consumer Finance") business unit. Sales financing for products sold
through dealers is performed by The CIT Group/Sales Financing ("Sales
Financing") business unit. During 1997, Sales Financing began to provide
wholesale inventory financing to manufactured housing and recreational boat
dealers utilizing its dealer and manufacturer relationships. Sales Financing
also provides contract servicing for securitization trusts and other third
parties through a centralized Asset Service Center ("ASC"). Additionally, in the
ordinary course of business, Consumer Finance and Sales Financing purchase loans
and portfolios of loans from banks, thrifts and other originators of consumer
loans. As an additional source of liquidity, the Company has securitized home
equity, manufactured housing, recreational boat and recreation vehicle finance
receivables and expects to continue to securitize the foregoing types of finance
receivables in the future. See "--Securitization Program" for information
concerning the Company's securitization program.
53
<PAGE> 56
The following table sets forth certain information regarding the Company's
consumer business segment at December 31 of each of the years in the five-year
period ended December 31, 1996 and at June 30, 1997.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
AT
JUNE 30, AT DECEMBER 31,
1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Dollars in millions
Home equity $2,202.2(1) $2,005.5(2) $1,039.0 $ 570.8 $ 131.3 $ --
Sales financing 1,788.2 1,349.8 1,416.9 1,471.2 1,458.0 1,411.8
Wholesale inventory finance 59.8 -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total financing and leasing assets 4,050.2(1) 3,355.3 2,455.9 2,042.0 1,589.3 1,411.8
Consumer finance receivables previously
securitized and currently managed by
the Company 1,446.7 1,437.4 916.5 306.7 175.6 43.8
-------- -------- -------- -------- -------- --------
Total managed assets 5,496.9(1) 4,792.7 3,372.4 2,348.7 1,764.9 1,455.6
-------- -------- -------- -------- -------- --------
Consumer finance receivables serviced
for third parties 452.4 549.2 338.2 191.5 240.5 296.5
-------- -------- -------- -------- -------- --------
Total serviced assets $5,949.3(1) $5,341.9 $3,710.6 $2,540.2 $2,005.4 $1,752.1
======== ======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Includes the initial securitization of home equity loans totaling $500.0
million in July 1997.
(2) In 1996, the Company purchased a portfolio of $357.8 million in home equity
closed-end loans and home equity lines of credit.
CONSUMER FINANCE
Financing and leasing assets of Consumer Finance, which aggregated $2.2 billion
at June 30, 1997, represented 11.4% of the Company's total financing and leasing
assets. Consumer Finance commenced operations in December 1992. Its products
include both fixed and variable rate closed-end loans and variable rate lines of
credit. The lending activities of Consumer Finance consist primarily of
originating, purchasing and selling loans secured by first or second liens on
detached, single family residential properties. Such loans are primarily made
for the purpose of consolidating debts, refinancing an existing mortgage,
funding home improvements, paying education expenses and, to a lesser extent,
purchasing a home, among other reasons.
The following table sets forth certain information concerning Consumer Finance
at December 31 of or for each of the years in the five year period ended
December 31, 1996 and at or for the six months ended June 30, 1997.
<TABLE>
<CAPTION>
----------------------------------------------------------------------
AT OR
FOR THE
SIX MONTHS
ENDED AT OR FOR THE YEARS ENDED DECEMBER 31,
JUNE 30, -------------------------------------------------------
1997 1996 1995 1994 1993 1992
---------- -------- -------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Dollars in millions
Total financing and leasing assets $2,202.2 $2,005.5 $1,039.0 $ 570.8 $131.3 --
Number of accounts 54,615 52,617 27,122 13,200 3,496 --
Original term (months) 237 225 204 190 146 --
60+ days past due as a percentage of
finance receivables(1) 3.31% 2.10% 1.61% 0.20% 0.02% --
Net credit losses as a percentage of
average finance receivables 0.94%(2) 0.60% 0.18% 0.02% 0.11% --
</TABLE>
- ---------------
(1) Amounts include balances for which the underlying collateral currently is in
the foreclosure process.
(2) Calculated on an annualized basis.
Initially, Consumer Finance originated or purchased the majority of its home
equity loans with original terms of up to 180 months. Commencing in 1994,
Consumer Finance expanded its product offerings to include more loans with terms
of up to 360 months, as Consumer Finance believes that the longer term and
correspondingly lower monthly payment are attractive to customers who might
otherwise refinance an existing loan or obtain a new loan from a bank or other
traditional long-term
54
<PAGE> 57
lender. The increase in delinquencies and net credit losses, as highlighted in
the above table, is the result of both the seasoning of a growing portfolio and
unfavorable loss experience on certain high loan to value loans originated prior
to the establishment in the fourth quarter of 1995 of current high loan to value
underwriting guidelines. A majority of these high loan to value loans originated
prior to 1995 were sold by Consumer Finance during the second quarter of 1997.
At June 30, 1997, approximately 75% of Consumer Finance's receivables were
fixed-rate and approximately 75% of Consumer Finance's receivables were secured
by first liens.
The Company believes that its network of Consumer Finance offices, located in
most major U.S. markets, enables it to provide a competitive, extensive product
offering complemented by high levels of service delivery. Through experienced
lending professionals and advanced automation afforded by technology, Consumer
Finance provides rapid turnaround time from application to loan funding, a
characteristic considered to be critical by its broker and correspondent
relationships.
Marketing and Distribution. Consumer Finance originates loans on both a direct
and indirect basis through the channels described below. New business
originations for the first six months of 1997 were $542.4 million. New business
originations for the years ended December 1996, 1995, 1994 and 1993 were $943.9
million, $617.1 million, $481.2 million and $153.9 million, respectively.
Broker Business. Consumer Finance originates real estate loans based upon
applications received from independent mortgage brokers. Consumer Finance
directly underwrites and funds these broker loans.
At June 30, 1997, Consumer Finance has relationships with over 1,300 brokers. A
nationwide network of sales executives located in 25 area offices that are
strategically located in major market areas throughout the United States are
responsible for the development and maintenance of broker relationships as well
as coordination between the broker and Consumer Finance. Mortgage brokers
participating in this program must be approved by the Company by satisfying
established requirements pertaining to experience, financial stability and
licensing. After a broker is approved, Consumer Finance conducts regular reviews
of the relationship and the broker's performance by examining the performance of
loans originated by the broker, including reviews of seasoned and unseasoned
delinquencies, and other factors, including maintenance of required regulatory
licenses and third party credit reports.
Correspondent Lending. Consumer Finance also purchases real estate loans
through its correspondent lending program on an individual basis based upon
applications that it has previously approved, or Consumer Finance may approve
the purchase of groups of such loans.
At June 30, 1997, Consumer Finance has relationships with over 250
correspondents. Consumer Finance establishes certain requirements that each
correspondent must meet pertaining to the correspondent's experience, financial
stability and licensing, and has agreements with all correspondents governing
the nature of such relationships. Substantially all loans acquired from
correspondents conform to the underwriting criteria used by Consumer Finance in
its direct marketing originations. Correspondent relationships are managed
through three regional offices that are strategically located in major market
areas throughout the United States.
Direct Marketing. Direct marketing to consumers in 44 states is performed
centrally through the Company's National Home Equity Sales Center ("NHEC")
located in Chicago. Utilizing a staff of marketing professionals, Consumer
Finance markets real estate loans directly to the consumer through print ads,
direct mail campaigns and other media. Prospective applicants either submit an
application included in the mailing or telephone their information toll free to
a Consumer Finance representative. Once an application is completed, a
preliminary approval may be given within twenty-four hours.
Bulk Purchases. Consumer Finance may, from time to time, purchase portfolios of
home equity loans from other financial institutions which originated the loans
using their own underwriting criteria. Depending upon the size of the portfolio,
Consumer Finance performs a due diligence review on either all the loans in the
portfolio or a statistical sample of loans. Due diligence generally includes
legal and credit file reviews, as well as confirmation of property values.
See "--Sales Financing" for information concerning servicing by Consumer
Finance.
SALES FINANCING
The financing and leasing assets of Sales Financing, which aggregated $1.8
billion at June 30, 1997, represented 9.5% of the Company's total financing and
leasing assets. The managed assets of Sales Financing were $3.3 billion at June
30, 1997, or 15.8% of the total managed assets. The lending activities of Sales
Financing consist primarily of providing nationwide retail financing for the
purchase of new and used recreation vehicles, manufactured housing and
recreational boats. Sales Financing has been a lender to the recreation vehicles
and manufactured housing industries for over 30 years and is a leading lender
for recreation vehicles and recreational boats based on 1996 origination volume.
Sales Financing also provides wholesale
55
<PAGE> 58
manufactured housing and recreational boats inventory financing. Sales Financing
offers (i) fixed-rate, fully amortizing retail sales finance loans and (ii)
short-term, variable-rate inventory finance loans and lines of credit.
The following table sets forth certain information with respect to owned finance
receivables and finance receivables previously securitized and currently managed
by the Company at December 31 of or for each of the years in the five-year
period ended December 31, 1996 and at or for the six months ended June 30, 1997.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
AT OR FOR THE AT OR FOR THE YEARS ENDED DECEMBER 31,
SIX MONTHS ENDED --------------------------------------------------------
JUNE 30, 1997 1996 1995 1994 1993 1992
----------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Dollars in millions
Retail recreation vehicle
Financing and leasing assets $ 704.9 $ 510.1 $ 698.5 $ 898.0 $1,022.4 $ 930.3
Finance receivables previously
securitized and currently
managed by the Company 638.8 746.8 445.7 118.3 -- --
-------- -------- -------- -------- -------- --------
$1,343.7 $1,256.9 $1,144.2 $1.016.3 $1,022.4 $ 930.3
-------- -------- -------- -------- -------- --------
Retail manufactured housing
Financing and leasing assets $ 963.6 $ 790.3 $ 561.5 $ 501.6 $ 396.7 471.8
Finance receivables previously
securitized and currently
managed by the Company 381.0 412.2 470.8 188.4 175.6 43.8
-------- -------- -------- -------- -------- --------
$1,344.6 $1,202.5 $1,032.3 $ 690.0 $ 572.3 $ 515.6
-------- -------- -------- -------- -------- --------
Retail recreational boat
Financing and leasing assets $ 119.7 $ 49.4 $ 156.9 $ 71.6 $ 38.9 $ 9.7
Finance receivables previously
securitized and currently
managed by the Company 426.9 278.4 -- -- -- --
-------- -------- -------- -------- -------- --------
$ 546.6 $ 327.8 $ 156.9 $ 71.6 $ 38.9 $ 9.7
-------- -------- -------- -------- -------- --------
Wholesale inventory financing
Financing and leasing assets $ 59.8(1) -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total financing and
leasing assets 1,848.0 1,349.8 1,416.9 1,471.2 1,458.0 1,411.8
Total finance receivables
previously securitized
and currently managed
by the Company 1,446.7 1,437.4 916.5 306.7 175.6 43.8
-------- -------- -------- -------- -------- --------
Total managed assets $3,294.7 $2,787.2 $2,333.4 $1,777.9 $1,633.6 $1,455.6
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- ------
Percent of owned finance
receivables that were 60+ days
past due(2) 2.52% 2.47% 1.42% 0.64% 1.25% 1.26%
-------- -------- -------- -------- -------- --------
Percent of managed assets that were
60+ days past due(3) 1.86% 1.88% 1.21% 0.69% 1.07% 1.27%
-------- -------- -------- -------- -------- --------
Owned finance receivable net credit
losses as a percent of average
owned finance receivables(2) 1.30%(4) 0.90% 0.58% 0.68% 0.80% 0.91%
-------- -------- -------- -------- -------- --------
Managed asset net credit losses as
a percent of average managed
assets(3) 0.99%(4) 0.78% 0.56% 0.62% 0.77% 0.89%
-------- -------- -------- -------- -------- --------
</TABLE>
- ---------------
(1) The Company began offering this product during January 1997.
(2) Owned finance receivables exclude consumer finance receivables held for
sale.
(3) Managed assets include consumer finance receivables held for sale.
(4) Calculated on an annualized basis.
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Sales Financing has undertaken a number of strategic steps to bolster growth,
increase market share and improve productivity, which have resulted in annual
compound growth of 16.4% in managed assets since 1992. In 1993, Sales Financing
entered the retail recreational boat lending business. The timing of this new
product initiative was predicated largely on an improving recreational boat
market (recovering from the economic downturn of the 1980's and early 1990's),
as well as the withdrawal of several retail recreational boat lenders from the
market. Sales Financing places great emphasis on superior dealer service and, as
a result, has increased its marine dealer base from 125 dealers in 1993 to over
1,800 (or 25% of the marketplace) dealers at June 30, 1997. Additionally in
1995, Sales Financing realigned its sales force across all three product lines
(recreation vehicle, manufactured housing and recreational boat) into a product
management structure. The realignment has resulted in the continued expansion of
the Company's dealer base, improved focus on needs of individual product end
users and ultimately higher retail originations.
During June 1997, the Company entered into an arrangement with Chase pursuant to
which the Company provides servicing for Chase's recreation vehicle and
recreational boat finance receivables portfolio of $1.3 billion. The Company
commenced providing portfolio services under that arrangement during August
1997. The Company also acquired the origination capabilities relating to Chase's
recreation vehicle and recreational boat dealer relationships.
Marketing and Distribution. Sales Financing originates retail sales finance
contracts predominantly through recreation vehicle, manufactured housing and
recreational boat dealer, broker and manufacturer relationships. At June 30,
1997, Sales Financing had over 2,400 dealer and manufacturer relationships.
Sales Financing on occasion purchases recreation vehicle, manufactured housing
and recreational boat loans in "bulk" from other financial institutions.
These origination channels are serviced through seven regional business centers
located strategically throughout the United States. The dealer base is serviced
and marketed with local sales personnel. Sales Financing believes that its
experience in dealer operations and finance, long standing dealer relationships
and product expertise have been instrumental in growing its dealer and broker
base.
Although Sales Financing originates finance receivables through several sources,
delivery can be categorized broadly into retail and wholesale.
Retail. Prior to accepting a retail sales finance application from a dealer,
Sales Financing must review and approve the dealer relationship. This process
includes examination of financial statements, trade references and credit
reports. Sales Financing pays origination fees for certain of its products
offered. These fees, commonly referred to as "dealer participations," are paid
by Sales Financing to the dealer and are accounted for as an adjustment to yield
over the anticipated life of the loan. Once a retail application is underwritten
and approved by a regional business center, the dealer receives the purchase
proceeds as well as any participation due. Certain events, such as early default
or payoff, may result in the dealer forfeiting a portion of a participation.
Wholesale. Working through established manufacturer relationships, Sales
Financing provides financing to manufactured housing and recreational boat
dealers for the purchase of inventory from manufacturers to be sold to the
retail buyer. Notwithstanding Sales Financing's manufacturer relationships, all
dealers participating in the wholesale program must be initially approved and
periodically reviewed by a credit officer, who examines, among other things, the
dealer's financial statements, trade references and credit reports. Once
approved, a dealer accesses credit as each inventory unit is ordered from the
manufacturer. When the manufacturer receives an order, Sales Financing is
contacted for a credit approval. Upon credit approval by Sales Financing, the
manufacturer ships the inventory to the dealer and bills Sales Financing, who
pays the invoice and charges the dealer's account. Dealers are also incentivized
to "roll-over" wholesale financing into a retail contract upon sale of the unit
to the end-user.
Servicing. The ASC centrally services and collects substantially all of the
Company's consumer finance receivables, including home equity loans, recreation
vehicle, manufactured housing, recreational boat and other receivables
(collectively, the "servicing portfolio"). The servicing portfolio includes both
loans originated or purchased by Sales Financing or Consumer Finance, as well as
loans originated or purchased by Sales Financing or Consumer Finance and
subsequently securitized with servicing retained. The servicing portfolio also
includes loans owned by third parties that are serviced by Sales Financing for a
fee on a "contract" basis. At June 30, 1997, the ASC's consumer finance
servicing portfolio aggregated approximately 232,400 loans, representing $5.9
billion, which included $2.2 billion of home equity finance receivables serviced
for Consumer Finance. In addition, during August 1997, the Company commenced
servicing $1.3 billion of recreation vehicle and recreational boat finance
receivables pursuant to its agreement with Chase, which were not included in
ASC's servicing portfolio at June 30, 1997.
Servicing and collections are performed at two locations in Oklahoma City.
Servicing responsibilities of the ASC include collecting principal and interest
payments, taxes and other payments, as applicable, from obligors. For loans
previously owned
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by Sales Financing that have been securitized, as well as loans owned by other
third parties, servicing responsibilities also include remitting principal,
interest and other payments to the holders of the related loans. The ASC has
responsibilities for the repossession and remarketing of collateral on defaulted
loans, and entering into workout arrangements with obligors under certain
defaulted loans. Advanced technology is used to perform many servicing and
collecting tasks. Automated tools engaged in the operation include predictive
autodialers, voice response units and automated payment processing.
Securitization Program
As an additional source of liquidity, in 1992, the Company established a program
to access the public and private asset backed securitization markets. Current
products utilized in the Company's program include consumer loans secured by
manufactured housing, recreation vehicles, recreational boats and residential
real estate.
Under a typical asset backed securitization, Sales Financing or Consumer Finance
sells a "pool" of secured loans to a special purpose entity that, in turn,
issues certificates and/or notes that are collateralized by the loan pool and
that entitle the holders thereof to participate in certain loan pool cash flows.
Sales Financing or Consumer Finance retains the servicing of the securitized
loans for which it is paid a fee, and also participates in certain "residual"
loan pool cash flows (cash flows after payment of principal, interest and losses
to certificate and/or note holders). At the date of a securitization, Sales
Financing or Consumer Finance estimates the "residual" cash flows to be received
over the life of the securitization, records the present value of these cash
flows as an asset (a retained interest in the securitization) and recognizes a
gain.
The following table sets forth each of the Company's asset backed
securitizations since inception of the program:
<TABLE>
<CAPTION>
-------------------------------------------
Dollars in millions PUBLIC/ ORIGINAL POOL BALANCE AT
ASSET TYPE/YEAR SECURITIZED PRIVATE POOL BALANCE JUNE 30, 1997
- ------------------------------------------------------------------- -------- ------------- ----------------
<S> <C> <C> <C>
Manufactured Housing 1992 Private $ 47.7 $ 12.1
Manufactured Housing 1993 Public 155.1 78.8
Manufactured Housing 1994 Private 48.3 23.9
Manufactured Housing 1995-1 Public 124.0 92.1
Manufactured Housing 1995-2 Public 199.2 174.1
Recreation Vehicle 1994 Public 150.5 60.0
Recreation Vehicle 1995-A Public 200.0 100.0
Recreation Vehicle 1995-B Public 200.0 115.2
Recreation Vehicle 1996-A Public 250.0 170.3
Recreation Vehicle 1996-B Public 240.0 193.3
Marine 1996(1) Private 469.7 426.9
-------- --------
Total(2) $2,084.5 $1,446.7
======== ========
</TABLE>
- ---------------
(1) Reflects a conduit program into which newly originated recreational boat
finance receivables are sold.
(2) Does not include $500.0 million of Consumer Finance home equity loans
securitized during July 1997.
Substantially all recreational boat, recreation vehicle and home equity finance
receivables originated in 1997 are classified as held for sale at June 30, 1997.
At June 30, 1997, the remaining balance of retained interests in securitizations
related to the foregoing transactions aggregated $84.6 million. The amortized
cost of these assets approximates their fair value at such date.
EQUITY INVESTMENTS
The CIT Group/Equity Investments and its subsidiary Venture Capital (together
"Equity Investments") participate in merger and acquisition transactions,
purchase private equity and equity-related securities and arrange transaction
financing. Equity Investments also invests in emerging growth opportunities in
selected industries, including the life sciences, information technology,
communications and consumer products industries. Business is developed through
direct solicitation or through referrals from investment banking firms,
financial intermediaries and the Company's other business units. Equity
Investments made its first investment in 1991 and had total investments of $53.1
million at June 30, 1997. The average individual investment size is
approximately $1.9 million at June 30, 1997.
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ADDITIONAL INFORMATION REGARDING THE COMPANY
EMPLOYEES
At June 30, 1997, the Company had approximately 2,925 employees, approximately
1,700 of whom were employed in connection with commercial operations, 765 of
whom were employed in connection with consumer operations and 460 of whom were
employed in corporate functions. The Company is not subject to any collective
bargaining agreements. The Company believes that its employee relations are
good.
PROPERTIES
The operations of the Company 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
Company. The Company utilizes, or plans to utilize in the foreseeable future,
substantially all of its leased office space.
LEGAL PROCEEDINGS
The Company is a defendant in various lawsuits arising in the ordinary course of
its business. The Company aggressively manages its litigation and assesses
appropriate responses to its lawsuits in light of a number of factors, including
potential impact of the actions on the conduct of the Company's operations. In
the opinion of management, none of the pending matters is expected to have a
material adverse effect on the Company's financial condition or results of
operations. However, there can be no assurance that an adverse decision in one
or more of such lawsuits will not have such a material adverse effect.
COMPETITION
The Company's markets are highly competitive and are characterized by
competitive factors that vary based upon product and geographic region. The
Company's competitors include captive and independent finance companies,
commercial banks and thrift institutions, industrial banks, leasing companies,
manufacturers and vendors. Substantial national financial services networks also
have been formed by insurance companies and bank holding companies that compete
with the Company. On a local level, community banks and smaller independent
finance and/or mortgage companies are a competitive force. Some of the Company's
competitors have substantial local market positions. Many of the competitors of
the Company are large companies that have substantial capital, technological and
marketing resources, and some of these competitors are larger than the Company
and may have access to capital at a lower cost than the Company. Also, the
Company's competitors include businesses that are not related to bank holding
companies and, accordingly, may engage in activities, for example aircraft
rental and servicing, currently prohibited to the Company. Competition has been
enhanced in recent years by an improving economy and growing marketplace
liquidity. The markets for most of the Company's products are characterized by a
large number of competitors. However, with respect to certain of the Company's
markets, such as factoring and manufactured housing, competition is more
concentrated.
The Company competes primarily on the basis of pricing, terms and structure,
with other primary competitive factors including industry experience and client
service and relationships. From time to time, competitors of the Company seek to
compete aggressively on the basis of these factors and the Company may lose
market share to the extent it is unwilling to match its competitors' pricing and
terms in order to maintain its interest margins or maintain its credit
discipline. To the extent that the Company matches competitors' pricing or
terms, it may experience lower interest margins and/or increased credit losses.
Other primary competitive factors include industry experience and client service
and relationships. In addition, demand for the Company's products with respect
to certain industries, such as the commercial airline industry, will be affected
by demand for such industry's services and products and by industry regulations.
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. As a
result, the Company 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 has determined to be "so closely related to banking or managing or
controlling banks as to be a proper incident thereto." See "Relationship with
DKB--Regulatory Compliance Agreement." The Company's current principal business
activities constitute permissible activities for a nonbank subsidiary of a bank
holding company.
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The operations of the Company are subject, in certain instances, to supervision
and regulation by state and federal governmental authorities and may be subject
to various laws and judicial and administrative decisions imposing various
requirements and restrictions, which, among other things, (i) regulate credit
granting activities, (ii) establish maximum interest rates, finance charges and
other charges, (iii) regulate customers' insurance coverages, (iv) require
disclosures to customers, (v) govern secured transactions and (vi) set
collection, foreclosure, repossession and claims handling procedures and other
trade practices. See "--Commercial Finance" and "--Consumer Finance" below.
In the judgment of management, existing statutes and regulations have not had a
material adverse effect on the business conducted by the Company. 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,
results of operations or financial condition or prospects of the Company.
Commercial Finance
Although most states do not regulate commercial finance, certain states impose
limitations on interest rates and other charges and on certain collection
practices and creditor remedies and require licensing of lenders and financiers
and adequate disclosure of certain contract terms. The Company is also required
to comply with certain provision of the Equal Credit Opportunity Act ("ECOA")
that are applicable to commercial loans.
Consumer Finance
The Company's consumer finance business is subject to detailed enforcement and
supervision by state authorities under legislation and regulations which
generally require licensing of the lender. Licenses are renewable and may be
subject to suspension or revocation for violations of such laws and regulations.
Applicable state laws generally regulate interest rates and other charges and
require certain disclosures. In addition, most states have other laws, public
policy and general principles of equity relating to the protection of consumers,
unfair and deceptive practices and practices that may apply to the origination,
servicing and collection of consumer finance loans. Depending on the provision
of the applicable law and the specific facts and circumstances involved,
violations of these laws, policies and principles may limit the Company's
ability to collect all or part of the principal of or interest on consumer
finance loans, may entitle the borrower to a refund of amounts previously paid
and, in addition, could subject the Company to damages and administrative
sanctions.
Federal laws preempt state usury ceilings on first mortgage loans and state laws
which restrict various types of alternative dwelling secured receivables, except
in those states which have specifically opted out, in whole or in part, of such
preemption. Loans may also be subject to other federal laws, including: (i) the
Federal Truth-in-Lending Act and Regulation Z promulgated thereunder and the
Real Estate Settlement Procedures Act and Regulation X promulgated thereunder,
which require certain disclosures to borrowers and other parties regarding the
terms of certain of the loans; (ii) ECOA and Regulation B promulgated
thereunder, which prohibit discrimination in the extension of credit and
administration of loans on the basis of age, race, color, sex, religion, marital
status, national original, receipt of public assistance or the exercise of any
right under the Consumer Credit Protection Act; (iii) the Fair Credit Reporting
Act, which regulates the use and reporting of information related to a
borrower's credit experience; and (iv) the Fair Housing Act, which prohibits
discrimination on the basis of, among other things, familial status or handicap.
In certain circumstances, loans may be subject to the Home Ownership and Equity
Protection Act of 1994 (the "Home Ownership Act"), which amended the Federal
Truth-in-Lending Act as it applies to mortgages subject to the Home Ownership
Act. The Home Ownership Act requires certain additional disclosures, specifies
the timing of such disclosures and limits or prohibits the inclusion of certain
provisions in mortgages subject to the Home Ownership Act. The Home Ownership
Act also provides that any purchaser or assignee of a mortgage covered by the
Home Ownership Act is subject to all of the claims and defenses which the
borrower could assert against the original lender. The maximum damages that may
be recovered by a borrower from an assignee in an action under the Home
Ownership Act are the remaining amount of indebtedness plus the total amount
paid by the borrower in connection with the mortgage loan.
Depending on the provisions of the applicable law and the specific facts and
circumstances involved, violations of these laws may limit the ability of the
Company to collect all or part of the principal of or interest on applicable
loans, may entitle the borrower to rescind the loan and any mortgage or to
obtain a refund of amounts previously paid and, in addition, could subject the
Company to damages and administrative sanctions.
In addition, numerous other federal and state statutory provisions, including
the federal bankruptcy laws and state debtor relief laws, may also adversely
affect the Company's ability to collect the principal of or interest on certain
loans.
Federal and state legislation seeking to regulate the maximum interest rate
and/or other charges on consumer finance receivables has been introduced in the
past, and may from time to time be introduced in the future. However, it is not
possible to predict the nature of future legislation with respect to the
foregoing or its impact on the future business, results of operations, financial
condition or prospects of the Company.
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<PAGE> 63
RISK MANAGEMENT
The Company's business activities contain elements of risk. The Company
considers the principal types of risk to be credit risk (including credit,
collateral and equipment risk), asset/liability risk (including interest rate
and liquidity risk), and, to a lesser extent, operational and legal risk.
The Company considers the management of risk essential to conducting its
commercial and consumer businesses and to maintaining profitability.
Accordingly, the Company's risk management systems and procedures are designed
to identify and analyze the Company's risks, to set appropriate policies and
limits and to continually monitor these risks and limits by means of reliable
administrative and information systems and other policies and programs.
CREDIT RISK MANAGEMENT
The Company has developed systems specifically designed to manage credit risk in
its commercial and consumer business segments and at its strategic business
units. Financing and leasing assets are evaluated for credit and collateral risk
both during the credit granting process and periodically after the advancement
of funds.
Credit authority is delegated to each strategic business unit by the Executive
Credit Committee of the Company ("ECC"). The ECC is comprised of members of
senior management, including the Chief Executive Officer, Vice Chairman,
Executive Vice President--Credit Administration, Senior Executive Vice President
and Executive Vice President--Multi-National Marketing Group. Generally, all
non-standard transactions, transactions outside of certain established target
market definitions and transactions outside of certain risk acceptance criteria
must be approved by members of the ECC.
Each of the Company's strategic business units has developed and implemented a
formal credit management process in accordance with formal uniform guidelines
established by the ECC. These ECC guidelines set forth risk acceptance criteria
for: (i) the acceptable maximum credit line; (ii) selected target markets and
products; (iii) the creditworthiness of borrowers, including credit history,
financial condition, adequacy of cash flow and quality of management; and (iv)
the type and value of underlying collateral and guarantees (including recourse
to dealers and manufacturers). The Company also employs a risk adjusted pricing
process where the perceived credit risk is a factor in determining the interest
rate or fees charged for the Company's financing and leasing products. As
economic and market conditions change, credit risk management practices are
reviewed and modified, if necessary, to seek to minimize the risk of credit
loss.
Compliance with established corporate policies and procedures and the credit
management processes at each strategic business unit are reviewed by the credit
audit group of the Company's internal audit department. That group examines
adherence with established credit policies and procedures and tests for
inappropriate credit practices, including whether potential problem accounts are
being detected and reported on a timely basis. The General Auditor, who oversees
the credit audit group, reports to the Chief Executive Officer of the Company
and the Audit Committee.
Commercial
The Company has developed systems specifically designed to effectively manage
credit risk in its commercial operations. The process starts with the initial
evaluation of credit risk and underlying collateral at the time of origination
and continues over the life of the finance receivable or operating lease,
including collecting past due balances and liquidating underlying collateral.
Credit personnel for the applicable strategic business unit review each
potential borrower's financial condition, results of operations, management,
industry, customer base, operations, collateral and other data such as third
party credit reports to perform a thorough evaluation of the customer's
borrowing and repayment ability. Borrowers are graded according to credit
quality based upon the Company's uniform credit grading system, which grades
both the borrower's financial condition and underlying collateral. Credit
facilities are subject to approval within the Company's overall credit approval
and underwriting guidelines and are issued commensurate with the credit
evaluation performed of each borrower.
The Company's ongoing review and monitoring of credit exposures is designed to
identify, as early as possible, those customers that may be experiencing
declining creditworthiness or financial difficulty. Commercial finance
receivables are periodically evaluated based upon credit criteria developed
under the Company's uniform credit grading system. Concentrations are monitored
by borrower, industry, geographic region and equipment type and limits are
changed by management as conditions warrant to seek to minimize the risk of
credit loss.
Periodically, the status of finance receivables greater than $500,000 to
obligors with higher (riskier) credit grades is individually reviewed with the
Asset Quality Review Committee, which is comprised of members of senior
management,
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including the Vice Chairman, the Executive Vice President--Credit Administration
and the Chief Financial Officer, and certain senior executives of the applicable
strategic business unit.
Equipment Financing and Leasing
Equipment Financing and Capital Finance are secured equipment lenders and
equipment lessors. Experienced credit personnel review each potential borrower's
financial condition, results of operations, management, industry, customer base,
operations, collateral and other data, such as Dun and Bradstreet reports, to
perform a thorough evaluation of the customer's borrowing and repayment ability.
Borrowers are graded according to credit quality based upon the Company's
uniform credit grading system, which grades both the borrower's financial
condition and any underlying collateral. Credit facilities are subject to
approval within the Company's overall credit approval and underwriting
guidelines and are issued commensurate with the credit evaluation performed of
each borrower. Monitoring of borrowers and underlying collateral is conducted on
an ongoing basis through reports and regular field audits and evaluation of
collateral. Collateral primarily consists of equipment which is evaluated as to
value, condition, risk of obsolescence and, where applicable, estimated future
residual value. Equipment Financing and Capital Finance use their asset
management and equipment remarketing capabilities and their technical expertise
to manage their equipment collateral positions and their equipment residual
value risk. Although the Company has not realized a deficit from the book value
of its residual values in each of the years 1992 through 1996, because operating
lease equipment value and capital lease residual values are heavily influenced
by estimates, there can be no assurance that such values will be realized by the
Company upon disposition of equipment owned by the Company and returned by
lessees upon termination of their leases. To the extent that the Company fails
to realize its operating lease equipment values and capital lease residual
values, the Company's results of operations and financial condition could be
materially adversely affected. See "Risk Factors -- Leasing Transactions and
Equipment Risk."
Factoring
Commercial Services requires clients to both meet its established credit
criteria and have a customer base that passes an established credit screen. This
dual credit process is required because advances made to a client are to be
repaid by collections from the client's customer base. If the customer is unable
to pay its payables to Commercial Services' client due to financial
difficulties, Commercial Services will nevertheless be responsible for payment
to the extent of its credit guarantee.
The Company's client credit teams and field examiners in the Company's various
regional offices review financial statements, cash flows, projections and
examine collateral. Upon completion, the client credit teams obtain from the
appropriate credit
committee approval of a seasonal financing plan, including advance rates against
eligible receivables. Where required, third party appraisers are utilized. The
approved seasonal plan is monitored closely by the client credit teams as
advances, collateral and accounts receivable are updated on a daily basis.
Customer credit departments located in the Company's various regional offices
analyze the customer's credit worthiness at the onset and throughout the
relationship. Frequent communications exist between the department, the client
and client credit teams regarding the credit quality of the customer base. Close
monitoring occurs through collection experience, financial analysis, frequent
visits and conversations with customers. All clients are generally required to
submit customer orders for approval. The Company has developed proprietary
systems that automatically make certain credit determinations based upon the
Company's stringent credit criteria. The balance of orders are manually reviewed
and dispositioned by an analyst specializing in the customer's industry.
Deterioration in the quality of the customer base leads to a reevaluation of the
client's advance rates.
Commercial Finance
In Commercial Finance, evaluation of each borrower's creditworthiness and
underlying collateral are significant to managing credit risk and controlling
loan charge-offs. The primary focus is on the availability and quality of
collateral underlying approved credit facilities and borrowings. Evaluation of
collateral includes on-site field audits and third party appraisals where
appropriate. Regular monitoring of borrowers and underlying collateral is
important to controlling credit risk and is conducted on an ongoing basis
through reports and regular field audits and evaluation of collateral. Both
Business Credit and Credit Finance have employees experienced in evaluating
accounts receivable, inventories and other collateral and utilize third parties
from time to time in evaluating and/or liquidating certain inventories and other
collateral. The credit underwriting standards of Business Credit and Credit
Finance limit their respective credit exposures to larger borrowings
(concentrations) by limiting the maximum amount each will retain or hold for its
own position. Both Business Credit and Credit Finance syndicate or sell
participation interests in loans over their respective hold limits.
A credit line is arranged with each borrower establishing the maximum amount the
borrower may finance, subject to the amount of underlying eligible collateral
and corresponding advance rates. The excess of approved credit lines outstanding
over
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finance receivables outstanding represents potential additional borrowings or
finance receivables that borrowers may qualify for, subject to the availability
of required collateral and corresponding advance rates. Both Business Credit and
Credit Finance typically advance funds up to 85% of eligible accounts receivable
and up to 60% of eligible inventories.
Consumer
For consumer loans, management has developed and implemented proprietary
automated credit scoring models for each loan type (e.g., recreation vehicles,
manufactured housing, recreational boat and home equity) that include both
customer demographics and credit bureau characteristics. The profiles emphasize,
among other things, occupancy status, length of residence, length of employment,
debt to income ratio (ratio of total installment debt and housing expenses to
gross monthly income), bank account references, credit bureau information and
combined loan to value ratio. The models are used to assess a potential
borrower's credit standing and repayment ability considering the value or
adequacy of property offered as collateral. The Company's credit criteria
include reliance on credit scores, including those based upon both its
proprietary internal credit scoring model and external credit bureau scoring,
combined with judgment. The credit scoring models are reviewed for effectiveness
monthly utilizing statistical tools. Consumer loans are regularly 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. Adjustments to
credit scorecards and lending programs are made when deemed appropriate.
Individual underwriters are assigned credit authority based upon their
experience, performance and understanding of the underwriting policies and
procedures of the Company's consumer operations and a credit approval hierarchy
exists to ensure that all applications are reviewed by an underwriter with the
appropriate level of authority.
Consumer Finance
Consumer Finance's direct originations are underwritten at the NHEC, while
broker and correspondent originations are underwritten at area and regional
offices, respectively. Credit officers evaluate an application and loan package
based upon the internally generated credit score, as well as external credit
bureau scoring (FICO score) and other characteristics of the application. Once
an application is scored and reviewed along with other risk factors, it is
either approved, declined or referred to a credit officer for further
consideration. As part of the approval process, an application is also assigned
a risk rating and applicable loan program code(s) for which the applicant is
eligible.
Collateral values are an important component of Consumer Finance's credit
approval process. Accordingly, third party property appraisals are required for
all applications. Certain third party appraisals are also subject to internal
Consumer Finance review, depending upon origination source and/or the appraised
value of the subject property.
Consumer Finance has instituted an underwriting quality control program ("QCP")
covering all origination channels. The QCP, performed on a sample basis, focuses
on overall underwriting decisions, loan documentation, appraisal
recertifications and employment reverifications.
Sales Financing
Sales Financing's retail sales finance loans are documented on standardized
forms. Typical credit approval protocol includes the submission of a potential
customer's application, manufacturer's invoice (new unit financings) and other
pertinent information to a regional business center credit officer, who then
prepares an analysis of the creditworthiness of the customer and of other
aspects of the transaction. Once an application is scored against targeted
profiles and reviewed for other risk factors, it is either approved, declined or
referred to a credit officer for further consideration. Pricing on an approved
application is also "risk adjusted," as necessary, to reflect the scoring of
that application relative to "buy rates" supplied to dealers or brokers.
Guarantors, endorsers or co-signers are not considered in the determination of
whether or not an application is approved. The credit review and approval
processes of each regional business center are subject to internal reviews and
internal audits.
Loan Loss Reserves and Credit Losses
The Company maintains a consolidated reserve for credit losses on finance
receivables at an amount which it believes is sufficient to provide adequate
protection against potential credit losses in its portfolios. The level of the
consolidated reserve for credit losses is determined principally on the basis
of: (i) current credit quality of the portfolios and trends; (ii) the current
mix of finance receivables; and (iii) historical loss experience. The
consolidated reserve reflects management's judgment of loss potential after
considering factors such as the nature and characteristics of obligors, economic
conditions and trends, charge-off experience, delinquencies and the value of
underlying collateral and guarantees, including recourse to dealers and
manufacturers.
63
<PAGE> 66
Commercial and consumer finance receivables are reviewed to determine the
probability of loss. Charge-offs are taken after considering the above mentioned
factors. 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. Charge-offs from carrying value of commercial finance receivables are
determined on a case-by-case basis. Automatic charge-offs of consumer finance
receivables are recorded to the extent of shortfalls in the value of the
collateral when no contractual payments are received for 120 days, or at 180
days when partial payments have been received.
Although the Company's management considers the consolidated reserve for credit
losses reflected in the Company's consolidated balance sheet as of June 30, 1997
adequate, there can be no assurance that this consolidated reserve will prove to
be adequate over time to cover credit losses in connection with the Company's
portfolio. This reserve may prove to be inadequate due to unanticipated adverse
changes in the economy or discrete events adversely affecting specific customers
or industries or if credit losses occurring as a consequence of the seasoning of
the Company's consumer portfolio exceed those anticipated by the Company. The
Company's results of operations and financial condition could be materially
adversely affected to the extent that the Company's consolidated reserve for
credit losses is insufficient to cover such changes or events. See "Risk
Factors -- Reserve for Credit Losses."
Analysis of Past Due Finance Receivables and Net Credit Losses
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
NET
CREDIT
LOSSES
AS A
PERCENTAGE
BALANCE PAST DUE OF
60 DAYS OR MORE NET AVERAGE
FINANCE ------------------------ CREDIT FINANCE
Dollars in millions RECEIVABLES AMOUNT PERCENT LOSSES RECEIVABLES
----------- ------ ------- ------ ----
<S> <C> <C> <C> <C> <C>
June 30, 1997:
Commercial $13,714.6 $192.6 1.40% $ 38.2 0.57%
Consumer 3,100.1 91.5 2.95 17.3 1.09
--------- ------ ---- ------ ----
$16,814.7 $284.1 1.69% $ 55.5 0.67%
========= ====== ==== ====== ====
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>
64
<PAGE> 67
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, Vice Chairman, Chief Financial Officer and senior
representatives of DKB and Chase. Three members of the Capital Committee are
also members of the Company'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 Company uses off-balance sheet derivatives for hedging purposes only. The
Company does not enter into derivative financial instruments for trading or
speculative purposes. To ensure both appropriate use as a hedge and hedge
accounting treatment, all derivatives entered into are designated, according to
hedge objective, against directly issued commercial paper, a specifically
underwritten debt issue or a specific pool of assets. The Company's primary
hedge objectives include the conversion of variable rate liabilities to fixed
rates, the conversion of fixed rate liabilities to variable rates, the fixing of
spreads on variable-rate liabilities to various market indices and the
elimination of interest rate risk on finance receivables classified as held for
sale prior to securitization.
Derivative positions 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. 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. Credit exposures for each counterparty are measured based upon
market value of the outstanding derivative instruments. Market values are
calculated periodically for each swap contract, summarized by counterparty and
reported to the Capital Committee. For additional information regarding the
Company's derivative portfolio, refer to "Note 7--Derivative Financial
Instruments" in the consolidated financial statements and related notes thereto
set forth herein.
Interest Rate Risk Management
Changes in market interest rates or in the relationships between short-term and
long-term market interest rates or between different interest rate indices
(i.e., basis risk) can affect the interest rates charged on interest-earning
assets differently than the interest rates paid on interest bearing liabilities,
which can result in an increase in interest expense relative to finance income.
See "Risk Factors--Economic Factors--Interest Rate Risk".
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 Company. 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 Company may enter into
a hedge that has an inverse correlation to the interest rate sensitivity
created, whereby the Company 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 Company'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. The
results of this modeling are reviewed monthly by the Capital Committee. The
interest rate sensitivity modeling techniques employed by the Company
essentially include the creation of prospective twelve month "baseline" and
"rate shocked" net interest income simulations. At the date that interest rate
sensitivity is modeled, "baseline" net interest income is derived considering
the current level of interest-sensitive assets and related run-off (including
both contractual repayment and historical prepayment experience), the current
level of interest-sensitive liabilities and related maturities and the current
level of off-balance sheet derivatives. The "baseline" simulation also assumes
that, over the next successive twelve months, market interest rates (as of the
date of simulation) are held constant and that no new loans are extended. Once
the "baseline" net interest income is known, market interest rates, previously
held constant, are raised 100 basis points instantaneously and parallel across
the entire yield curve, and a "rate shocked" simulation is run. Interest rate
sensitivity is then measured as the difference between calculated "baseline" and
"rate shocked" net interest income.
Utilizing the Company'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 June 30, 1997, an immediate hypothetical 100 basis
points parallel
65
<PAGE> 68
rise in the yield curve on July 1, 1997 would reduce net income by an estimated
$0.7 million after-tax over the twelve months ending June 30, 1998. Although
management believes that this measure provides a meaningful estimate of the
Company's interest rate sensitivity, it does not adjust for potential changes in
the credit quality, size and composition of the balance sheet and other business
developments that could affect net income. Accordingly, no assurance can be
given that actual results would not differ materially from the potential outcome
simulated by the Company's computer modeling. Further, it does not necessarily
represent management's current view of future market interest rate movements.
The Company 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 U.S. federal funds rate
can be issued and coupled with an interest rate swap exchanging the U.S. 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 U.S. federal funds
rate-based debt.
Interest rate swaps with notional principal amounts of $4.8 billion at June 30,
1997 and $5.3 billion at December 31, 1996 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 Company's fixed rate
term debt borrowing cost over the life of the swap and reduces the Company's
exposure to rising interest rates but reduces the Company's benefits from lower
interest rates.
Interest rate swaps are further discussed in "Note 7--Derivative Financial
Instruments" in the consolidated financial statements and related notes thereto
set forth herein.
Liquidity Risk
The Company manages liquidity risk by monitoring the relative maturities of
assets and liabilities and by borrowing funds, primarily in the U.S. money and
capital markets. Such cash is used to fund asset growth (including the bulk
purchase of finance 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 funds are commercial paper
borrowings, medium-term notes, other term debt securities and asset-backed
securitizations. At June 30, 1997, commercial paper borrowings were $6.4 billion
and amounts due on term debt within one year were $3.8 billion. If the Company
is unable to access such markets at acceptable terms, it could utilize its bank
credit lines and cash flow from operations and portfolio liquidations to satisfy
its liquidity needs. At June 30, 1997, the Company had committed revolving bank
credit lines totaling $5.0 billion, representing 81% of operating commercial
paper outstanding (commercial paper less interest-bearing deposits). The Company
believes that such credit lines should provide sufficient liquidity to the
Company under foreseeable conditions. See also "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity" for
further information concerning the liquidity of the Company.
OPERATIONAL AND LEGAL RISKS
The Company, like all large financial institutions, is exposed to many types of
operational risks, including the potential for loss caused by a breakdown in
information, communication, transaction processing or by fraud by employees or
outsiders or unauthorized transactions by employees. The Company attempts to
mitigate operational risks, by maintaining a system of internal controls
designed to keep operational risk at appropriate levels in view of its
consolidated financial position, the characteristics of the businesses and
markets in which it operates, competitive circumstances and regulatory
considerations. The potential for material losses from operational risks in the
future cannot be excluded.
Legal risk arises from the uncertainty of enforceability, through legal or
judicial process, of obligations of the Company's customers and counterparties,
and also the possibility that changes in law or regulation could adversely
affect the Company's position. The Company seeks to minimize legal risk through
consultation with internal and external legal counsel.
YEAR 2000 COMPLIANCE
The Company has made and will continue to make certain investments in its
software applications and systems to ensure the Company's systems function
properly to and through the year 2000. The financial impact to the Company of
such investments has not been, and is not anticipated to be, material to its
financial position or results of operations.
66
<PAGE> 69
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The names and ages of all directors and executive officers of the Company 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 discretion of the Board of Directors.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
NAME AGE CURRENT POSITION/OFFICES
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Directors
Hisao Kobayashi 62 Senior Advisor, DKB
Chairman of the Board of Directors of the Company
Albert R. Gamper, Jr. 55 President & Chief Executive Officer of the Company
Yoshiro Aoki 51 Director and General Manager, New York Branch, DKB
Takasuke Kaneko 55 Deputy President, DKB
Joseph A. Pollicino 57 Vice Chairman of the Company
Paul N. Roth 58 Partner, Schulte Roth & Zabel LLP
Peter J. Tobin 53 Chief Financial Officer, The Chase Manhattan Corporation
Tohru Tonoike 47 Senior Executive Vice President of the Company
Keiji Torii 50 General Manager, International Planning and Coordination Division and
International Banking Coordination Division, DKB
Yukiharu Uno 44 Director and Executive Vice President
Executive Officers(1)
Thomas A. Johnson 51 General Auditor
Joseph M. Leone 44 Executive Vice President and Chief Financial Officer
William M. O'Grady 57 Executive Vice President-Administration
Ernest D. Stein 57 Executive Vice President, General Counsel and Secretary
Corinne M. Taylor 36 Senior Vice President and Treasurer
William J. Taylor 45 Senior Vice President and Controller
</TABLE>
- ---------------
(1) Messrs. Gamper, Pollicino, Tonoike and Uno, who are listed above as
Directors, are also Executive Officers of the Company.
HISAO KOBAYASHI has served as a Director of the Company since December 1989 and
as Chairman of the Board of Directors since July 1992. Since May 1995, Mr.
Kobayashi has served as a Senior Advisor of DKB, where he has been an employee
since 1959. Prior to his appointment as a Senior Advisor, Mr. Kobayashi has
served in other executive positions at DKB, including most recently as Senior
Managing Director from May 1993 and Managing Director from June 1991.
ALBERT R. GAMPER, JR. has served as President and Chief Executive Officer since
December 1989 and as a Director since May 1984. From May 1987 to December 1989,
Mr. Gamper served as Chairman and Chief Executive Officer. Prior to such time,
he held a number of executive positions at Manufacturers Hanover Corporation,
where he had been employed since 1962.
YOSHIRO AOKI has served as a Director of the Company since July 1997. Mr. Aoki
has been Director and General Manager of the New York Branch of DKB since June
1997 and General Manager of the New York Branch since May 1997. Prior to such
67
<PAGE> 70
time, Mr. Aoki served as General Manager of the Kabutocho Branch of DKB since
May 1995 and as Assistant General Manager of the Personnel Division of DKB since
February 1991.
TAKASUKE KANEKO has served as a Director of the Company since June 1995. He also
was a Director and Senior Executive Vice President of the Company from December
1989 to May 1993. Mr. Kaneko is Deputy President of DKB, a position he has held
since June 1997. Previously, Mr. Kaneko served as Senior Managing Director from
May 1997 and as Managing Director of DKB since May 1995. Prior to such time, Mr.
Kaneko served in a number of other positions at DKB, including Director and
General Manager of the International Planning and Coordination Division since
August 1994, Director and General Manager of the International Planning Division
since June 1994 and General Manager of the International Finance Division since
May 1993.
JOSEPH A. POLLICINO has served as a Director of the Company since August 1986
and Vice Chairman of its Board of Directors since December 1989. Prior to August
1986, Mr. Pollicino held a number of executive positions at the Company and at
Manufacturers Hanover Corporation, where he had been employed since 1957.
PAUL N. ROTH has served as a Director of the Company since December 1989. Mr.
Roth is a founding partner in the law firm of Schulte Roth & Zabel LLP in New
York, which was founded in 1969.
PETER J. TOBIN has served as a Director of the Company since May 1984. Mr. Tobin
is the Chief Financial Officer of The Chase Manhattan Corporation, a position
that he has held since April 1996. From January 1992 to April 1996, Mr. Tobin
served as Chief Financial Officer of Chemical Bank & Chemical Banking
Corporation, and prior to that he served in a number of executive positions at
Manufacturers Hanover Corporation.
TOHRU TONOIKE has served as Senior Executive Vice President and as a Director of
the Company since April 1997. Prior to April 1997, Mr. Tonoike was employed by
DKB since April 1973, where he served in a number of executive positions
including, most recently, Head of the Americas Office in the International
Planning and Coordination Division since September 1996, Assistant General
Manager of Corporate Finance Division I since September 1993 and Head of the CIT
Office in the Americas Division since October 1992.
KEIJI TORII has served as a Director of the Company from May 1993 to April 1997
and was re-elected as a Director in July 1997. Mr. Torii also served as Senior
Executive Vice President of the Company from April 1996 to April 1997 and as
Executive Vice President of the Company from May 1993 to April 1996. Since July
1997, Mr. Torii has held the position of General Manager of the International
Planning and Coordination Division of DKB and General Manager of its
International Banking Coordination Division. Mr. Torii was Chief Inspector of
the Inspecting Division of DKB from February 1993 to May 1993 and, from June
1990 to February 1993, he was Assistant General Manager of the Securities
Division of DKB.
YUKIHARU UNO has served as Executive Vice President and as a Director of the
Company since April 1996. Previously, Mr. Uno was employed by DKB since April
1976, where he served in a number of executive positions including Manager and
Head of the CIT Office in the Americas Division and Assistant General Manager of
the Americas Group in the International Banking Coordination Division.
THOMAS A. JOHNSON has served as General Auditor of the Company since January
1990. Previously, Mr. Johnson served in various internal audit positions with
Manufacturers Hanover Corporation, including Deputy General Auditor, since
September 1968.
JOSEPH M. LEONE has served as Executive Vice President and Chief Financial
Officer of the Company since July 1995. Previously, Mr. Leone served as
Executive Vice President of Sales Financing from June 1991, and in a number of
other executive positions with the Company and Manufacturers Hanover Corporation
since May 1982.
WILLIAM M. O'GRADY has served as Executive Vice President of Administration of
the Company since January 1986, and previously served in a number of other
executive positions with the Company and RCA Corporation since July 1965.
ERNEST D. STEIN has served as Executive Vice President, General Counsel and
Secretary of the Company since February 1994. Previously, Mr. Stein served as
Senior Vice President and Deputy General Counsel since April 1993, as Senior
Vice President and Assistant General Counsel since March 1992, and in a number
of executive positions with Manufacturers Hanover Corporation, including
Executive Vice President and General Counsel since December 1985.
CORINNE M. TAYLOR has served as Senior Vice President and Treasurer of the
Company since March 1993. Previously, Ms. Taylor served in various executive
positions with the Company, including Vice President-Finance since September
1990.
WILLIAM J. TAYLOR has served as Senior Vice President and Controller of the
Company since March 1993. Previously, Mr. Taylor served in various executive
positions with the Company, including Vice President and Controller since May
1989.
68
<PAGE> 71
Upon consummation of the Offerings, the Company will have a Board of Directors
consisting of the then current members of the Board of Directors and at least
one other person who will not be associated with the Company or DKB.
The Board of Directors is expected to appoint members to a compensation
committee of the Board of Directors (the "Compensation Committee") and an audit
committee of the Board of Directors (the "Audit Committee"). Both such
committees will be comprised solely of independent directors. The Compensation
Committee will establish remuneration levels for certain officers of the Company
and perform such functions as may be delegated to it under certain benefit and
executive compensation programs. The Audit Committee will select and engage the
independent public accountants to audit the Company's annual financial
statements. The Audit Committee will also review and approve the planned scope
of the annual audit.
The Board of Directors may from time to time establish certain other committees
to facilitate the management of the Company. Regular meetings of the Board of
Directors will be held six times a year.
COMPENSATION OF DIRECTORS
It is anticipated that Directors who are not associated with DKB or CIT will be
paid an annual Board membership fee of $30,000, an attendance fee of $1,000 for
each meeting of the Board of Directors, and an annual membership fee of $5,000
for service on any committee of the Board of Directors. In addition, they will
be eligible for stock options and restricted stock grants.
OUTSIDE DIRECTORSHIPS
As indicated in the table, some of the Directors of the Company concurrently
hold positions as directors, officers or employees of DKB or Chase.
Additionally, Mr. Kobayashi is a director of AFLAC, Inc., a life insurance
company, which is not affiliated with the Company 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 Company.
69
<PAGE> 72
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 Company (the "Named Executive Officers") for services rendered in all
capacities to the Company during the fiscal years ended December 31, 1996, 1995
and 1994.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION PAYOUTS
------------------------------------- ------------
OTHER ANNUAL LTIP ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) PAYOUTS(2) COMPENSATION(3)
- ---------------------------- ----- -------- -------- --------------- ------------ ---------------
<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
Joseph M. Leone 1996 $203,231 $170,000 $11,109 $126,444 $17,129
Executive Vice President 1995 189,846 150,000 16,362 126,444 16,594
and Chief Financial Officer 1994 175,692 120,000 7,552 51,768 16,028
William M. O'Grady 1996 $209,769 $150,000 $9,801 $108,350 $17,391
Executive Vice President - 1995 200,923 130,000 12,080 108,350 17,037
Administration 1994 192,885 115,000 8,216 55,450 16,715
Ernest D. Stein 1996 $192,692 $115,000 $6,744 $ 75,845 $16,708
Executive Vice President, 1995 183,077 100,000 8,979 75,845 16,323
General Counsel and 1994 167,307 85,000 2,790 -- 15,692
Secretary
</TABLE>
- ---------------
(1) The payments set forth under "Other Annual Compensation" represent the
dividends paid under The CIT Group Holdings, Inc. Career Incentive Plan (the
"CIT Career Incentive Plan"). For the performance period 1993-1995, Mr. Gamper
was awarded 20,000 phantom shares, Mr. Pollicino was awarded 12,000 phantom
shares, Mr. Leone was awarded 3,500 phantom shares, Mr. O'Grady was awarded
3,000 phantom shares and Mr. Stein was awarded 2,100 phantom shares. The shares
awarded for the performance period 1993-1995 are vested annually 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. Leone was awarded
2,625 phantom shares, Mr. O'Grady was awarded 2,250 phantom shares and Mr. Stein
was awarded 1,500 shares. The Company will terminate the CIT Career Incentive
Plan in conjunction with the consummation of the Offerings. See "-- Long-Term
Incentive Plan."
(2) The payments set forth under LTIP Payouts represent the payout of shares
vested under the CIT Career Incentive Plan. The payout in 1994 was for phantom
shares awarded for the performance period 1990-1992. The payouts in 1995 and
1996 were for shares awarded for the performance period 1993-1995. Dividend
equivalent payments received in respect of such phantom shares are included
under "Other Annual Compensation."
(3) The payments set forth under "All Other Compensation" include 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 include
contributions to each participant's account under the CIT Group Holdings, Inc.
Supplemental Savings Plan (the "CIT Supplemental Savings Plan"), which is an
unfunded non-qualified plan.
70
<PAGE> 73
LONG-TERM INCENTIVE PLAN
Under The CIT Career Incentive Plan in effect prior to the Offerings, awards
were 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 were selected by the Executive Committee from among the
executives of the Company who were in a position to make a substantial
contribution to the long-term financial success of the Company. Grants to
members of the Executive Committee were made by the Board of Directors. The
amount of phantom shares eligible for allocation during a "Performance Period"
(as defined in the CIT Career Incentive Plan) is determined by the Executive
Committee. The Performance Period is at least three consecutive calendar years.
The "Performance Goals" (as defined in the CIT Career Incentive Plan) for each
Performance Period that have been designated by the Executive Committee were
based upon net income growth targets and return on equity performance. The value
of the phantom shares is determined at the end of each Performance Period
relative to such performance targets. Following the end of a Performance Period,
one-third of such phantom shares vest on the first day of the following year and
one-third vest on the first day of each of the next two years. All vested shares
are settled in cash. Cash in an amount equivalent to dividends are paid
quarterly during the Performance Period and the vesting period, based on the
number of phantom shares granted to a participant. The amount of the dividend
equivalent payment is based on the quarterly return on equity of the Company.
All or a part of the value of a vested award could either be paid currently in
cash or deferred in up to five annual installments. Deferred amounts were
credited with interest.
LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
ESTIMATED FUTURE PAYOUTS
UNDER NON-STOCK PRICE-BASED PLANS
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)
- -------------------------------------------------- -------------------- ------------- ------------- ----------------
<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
Joseph M. Leone 2,625 1996-1998 -- $176.52 $355.13
Executive Vice President
and Chief Financial Officer
William M. O'Grady 2,250 1996-1998 -- $176.52 $355.13
Executive Vice President--
Administration
Ernest D. Stein 1,500 1996-1998 -- $176.52 $355.13
Executive Vice President,
General Counsel
and Secretary
</TABLE>
In conjunction with the Offerings, the Company will terminate the CIT Career
Incentive Plan. Payments in respect of the termination will be made in the form
of cash, Restricted Stock (as hereinafter defined) in the form of the shares of
Class A Common Stock and Options to purchase shares of Class A Common Stock. The
shares of Restricted Stock and the options associated with the termination of
the CIT Career Incentive Plan are included in the table "Long-Term Equity
Compensation Plan Awards" under "--Employee Compensation Plans" below.
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 "MHC
Retirement Plan"), the predecessor plan in which the Company's employees
participated. Accumulated years of benefit service under the
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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.
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 0.75% 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 receive a pension
of not less than 2.0% of final average salary for each of the first 20 years of
benefit service as a participant and 1.0% of such salary for each of the next 20
years of benefit service, reduced by 0.4% 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 Company,
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 five 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 Company has the CIT Supplemental Retirement Plan. The CIT Supplemental
Retirement Plan provides retirement benefits on an unfunded basis to
participants who retire from the Company (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>
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(1) At December 31, 1996, Messrs. Gamper, Pollicino, Leone, O'Grady and Stein
had 29, 32, 12, 27 and 3 years of benefit service, respectively.
EXECUTIVE RETIREMENT PLAN
Executive officers of the Company, including the Named Executive Officers, are
participants under the Executive Retirement Plan. The benefit provided is life
insurance equal to approximately three times salary during such participant's
employment,
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with a life annuity option payable monthly by the Company upon retirement. The
participant pays a portion of the annual premium and the Company pays the
balance on behalf of the participant. The Company 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 Company and the
Company anticipates recovering the cost of the life annuity out of the proceeds
of the life insurance policy payable upon the death of the participant.
In addition to the table of pension benefits shown on the preceding page, the
Company is conditionally obligated to make annual payments under the Executive
Retirement Plan in the amounts indicated to the Named Executive Officers at
retirement: Mr. Gamper, $343,130, Mr. Pollicino, $217,642, Mr. Leone, $145,392,
Mr. O'Grady, $103,579 and Mr. Stein, $65,663.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the Offerings, the Executive Committee of the Board of Directors
functioned as the compensation committee and set the compensation for all
executives except Messrs. Gamper, Pollicino, Tonoike and Uno. The members of the
Executive Committee were as follows:
Albert R. Gamper, Jr.
Joseph A. Pollicino
Peter J. Tobin
Tohru Tonoike
Yukiharu Uno
The Board of Directors, except for Messrs. Gamper and Pollicino, who were absent
from any portion of meetings when their compensation was discussed, deliberated
over the compensation of Messrs. Gamper and Pollicino. DKB determines the
compensation for Messrs. Tonoike and Uno. Mr. Tobin is an executive of Chase.
The Executive Committee will be dissolved following the consummation of the
Offerings, although the Board of Directors may determine to reconstitute the
Executive Committee at any time.
EMPLOYMENT AGREEMENTS
Mr. Gamper has an employment agreement with the Company 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 Company. His employment
agreement initially ran for five years from December 29, 1989, and subsequently
was extended until December 31, 1999. The agreement provides for the payment of
an annual base salary of not less than the amount Mr. Gamper received prior to
the date of his last extension on April 1, 1997. Pursuant to his employment
agreement, Mr. Gamper's base salary and performance is reviewed by the Board of
Directors during the term of the agreement pursuant to the Company's normal
practices, subject to increases but not to decreases. Mr. Gamper's employment
agreement provides for participation in all executive bonus and incentive
compensation plans.
Mr. Pollicino has an employment agreement with the Company which provides that
he shall serve as the Vice Chairman and member of the Board of Directors of the
Company. Mr. Pollicino's employment agreement initially ran for five years from
December 29, 1989, and subsequently was extended until December 31, 1999. The
agreement provides for the payment of an annual base salary of not less than the
amount Mr. Pollicino received prior to the date of his last extension on April
1, 1997. Pursuant to his employment agreement, Mr. Pollicino's base salary and
performance is reviewed by the Board of Directors during the term of the
agreement pursuant to the Company's normal practices, subject to increases but
not to decreases. Mr. Pollicino's employment agreement provides for
participation in all executive bonus and incentive compensation plans.
Mr. Leone, Mr. O'Grady and Mr. Stein also have employment agreements with the
Company. Mr. Leone's and Mr. O'Grady's employment agreements initially ran for
three years from December 29, 1989, and subsequently were extended until
December 31, 1998. Mr. Stein entered into an employment agreement on March 17,
1995, which was subsequently extended until December 31, 1998. Mr. Leone's, Mr.
O'Grady's and Mr. Stein's respective agreements provide for the payment of an
annual base salary of not less than the amount received prior to the date of the
last extension on December 6, 1996, to be reviewed by the chief executive
officer or his designee pursuant to the Company's normal practices, subject to
increases but not to decreases. The employment agreements also provide for
participation in all executive bonus and incentive compensation plans.
TERMINATION AND CHANGE-IN-CONTROL ARRANGEMENTS
Mr. Gamper's and Mr. Pollicino's employment agreements with the Company 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
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agreement term, provided that they do not violate the non-competition or
confidentiality provisions of the agreement, in which case the Company would
have no obligation to make any remaining payments. Further, they will be
entitled to receive, among other things, all previously earned and accrued
entitlements and benefits of the Company, full employee welfare benefit
coverage, outplacement services for up to one year, any awards due under the
Company's Long-Term Incentive Plan, and all benefits payable under the Company's
Executive Benefits Program.
Each of the employment agreements of Mr. Leone, Mr. O'Grady and Mr. Stein
provide that if his employment is terminated "without cause" (as defined in the
agreement) or if he resigns for "good reason" (as defined in the agreement), he
will be entitled to receive severance payments equal to his base salary for the
greater of 24 months or the remainder of the agreement term, provided that they
do not violate the non-competition or confidentiality provisions of the
agreement, in which case the Company would have no obligation to make any
remaining payments. Further, upon such termination or resignation, he will be
entitled to all previously earned and accrued entitlements and benefits,
continued participation in employee welfare benefit coverage for 18 months,
outplacement services, any award due under the Company's Long-Term Incentive
Plan and all benefits payable under the Company's Executive Benefits Program.
With respect to Mr. Leone, Mr. O'Grady and Mr. Stein, if they are terminated by
the Company for cause based on non-performance as determined by the current
chief executive officer, they will receive all earned and accrued entitlements
and benefits, participation for 18 months in the Company's welfare benefit plan,
outplacement services and base salary for 12 months. This amount is increased to
base salary for 24 months if the chief executive officer is not the current
chief executive officer of the Company. Termination for cause based on
malfeasance or resignation for any reason other than good reason only provides
for all earned and accrued entitlements.
If the Company terminates Mr. Gamper or Mr. Pollicino for cause or if they
terminate their employment for any reason other than good reason, they will be
entitled to all previously earned and accrued entitlements and benefits of the
Company.
If, during the term of their respective employment agreements, a "Change of
Control" (as defined in the agreement) occurs on or prior to December 31, 1999,
Mr. Gamper and Mr. Pollicino will be entitled to receive a "special payment."
With respect to Mr. Gamper, the amount of such special payment shall equal the
sum of his prior four years annual bonuses, and, with respect to Mr. Pollicino,
the sum of his prior three years annual bonuses. Mr. Gamper and Mr. Pollicino's
special payments are payable over a one-year period as follows: (i) one-half of
the payment shall be paid within 30 days after the date of the Change of
Control; and (ii) one-half shall be paid on or before the first anniversary date
of such Change of Control.
Notwithstanding the foregoing provision, the special payment shall be forfeited
if during the one-year period following the date of a Change of Control: (i)
their employment is involuntarily terminated by the Company for cause; (ii) they
voluntarily terminate employment with the Company for any reason other than good
reason; or (iii) they breach any non-compete or confidentiality covenant
contained in their employment agreements.
In the event of a Change of Control during the term, Mr. Gamper or Mr. Pollicino
may elect, on 90 days notice, to terminate their employment, and have such
termination deemed "Good Reason" (i) upon the first anniversary of the Change of
Control or (ii) at their election, if the first anniversary is prior to December
31, 1998, then on December 31, 1998. In the event the first anniversary of such
a Change of Control occurs after the end of the term, the term shall be extended
to the first anniversary of the Change of Control.
If, during the term of their respective employment agreements, a "Change of
Control" (as defined in the agreement) occurs on or prior to December 31, 1998,
Mr. Leone, Mr. O'Grady and Mr. Stein will be entitled to receive a "special
payment." The amount of such special payment shall equal the sum of their
respective prior two years annual bonuses under The CIT Bonus Plan. The special
payment will be payable over a two year period as follows: (i) one-third of the
payment shall be paid within 30 days after the Change of Control; (ii) one-third
shall be paid on or before the first anniversary date of such Change of Control;
and (iii) one-third shall be paid on or before the second anniversary date of
such Change of Control. Notwithstanding the above, the special payment will be
forfeited (i) to the extent such payment or any part thereof, when aggregated
with any other benefit or compensation payment due to the executive would cause
the executive to be subject to taxation under Section 4999 of the Internal
Revenue Code of 1986 or (ii) if during the two year period commencing on the
date of such Change of Control and ending on the second anniversary of such
date, (a) their employment is involuntarily terminated by the Company for cause,
(b) they voluntarily terminate employment for any reason other than "Good
Reason" as defined in their respective employment agreements or (c) they breach
the non-compete or confidentiality provisions of their agreements.
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EMPLOYEE COMPENSATION PLANS
Corporate Annual Bonus Plan
Under The CIT Group Bonus Plan, which covers the Named Executive Officers and
other employees, cash awards for each calendar year may be paid in amounts
determined by the Executive Committee of the Board of Directors in its
discretion. Following consummation of the Offerings, the annual bonus plan will
be administered by the Compensation Committee.
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 part of a cash award for a particular year may be paid
currently or deferred and paid upon retirement in up to five annual installments
at the option of the participant. All awards are subject to appropriate taxes
and deferred amounts are credited annually with interest.
Long-Term Equity Compensation Plan
Effective upon consummation of the Offerings, the Company will adopt a stock
based incentive plan, the Long-Term Equity Compensation Plan (the "ECP"),
covering the named executive officers and other employees of the Company. The
ECP will be administered by the Compensation Committee (the "Administrator").
Long-term awards granted under this program will be based on shares of Class A
Common Stock.
The ECP provides for the grant of annual incentive awards, incentive and
non-qualified stock options, stock appreciation rights, restricted stock,
performance shares and performance units (individually, an "Award," or
collectively, "Awards"). The terms of the awards will be set forth in award
agreements ("Award Agreements"). Only officers and a limited number of salaried
employees of the Company with potential to contribute to the future success of
the Company or its subsidiaries will be eligible to receive Awards under the
ECP. The Administrator of the ECP will have the discretion to select the
employees to whom Awards will be granted and to determine the type, size and
terms and conditions applicable to each Award, and the authority to interpret,
construe and implement the provisions of the ECP. The Administrator's decisions
will be binding.
It is the Company's intention to award options to purchase shares of
Class A Common Stock to all employees not covered under the ECP upon
consummation of the Offerings.
The total number of shares of Class A Common Stock that may be subject to Awards
under the ECP is % of all outstanding Common Stock as of the tenth business
day following the consummation of the Offerings or approximately
shares, including Awards granted prior to consummation of the Offerings and
subject to adjustment. Class A Common Stock issued under the ECP may be either
authorized but unissued shares (subject to a maximum limit of shares),
treasury shares or any combination thereof. Any shares of Class A Common Stock
in addition to shares to be issued as Awards under the ECP or pursuant to
Awards granted under the ECP will be obtained by the Company either through
forfeitures of shares of Restricted Stock (to the extent that such shares are
made available again for issuance under the ECP) or from treasury shares (to the
extent that the Company is permitted by applicable law to acquire its own
shares).
Awards intended to qualify for the performance-based exception of Section 162(m)
of the Internal Revenue Code shall be subject to an individual maximum. The
maximum aggregate payout with respect to an Annual Incentive Award in any fiscal
year to any one participant is % of the pool for that year. The maximum
aggregate number of shares of Class A Common Stock that may be granted in the
form of stock options, stock appreciation rights, restricted stock, or
performance units/shares in any one fiscal year to any one participant is 100%
of the pool for that year.
Set forth below is a brief description of the Awards that may be granted under
the ECP:
Annual Incentive Awards. An annual incentive award ("Annual Incentive Award")
may be granted under the ECP upon such terms and conditions as may be
established by the Compensation Committee. Annual Incentive Awards for named
executive officers that are intended to qualify for the performance-based
exception of Section 162(m) of the Internal Revenue Code shall be based solely
on the achievement of pre-established performance goals. Annual Incentive Awards
may be granted in lieu of cash awards under The CIT Group Bonus Plan.
Stock Options. Options (each an "Option") to purchase shares of Class A Common
Stock, which may be incentive or non-qualified stock options, may be granted
under the ECP at an exercise price (the "Option Price") determined by the
Administrator of the ECP in its discretion, provided that the Option Price may
be no less than the closing trading price of the Class A Common Stock on the New
York Stock Exchange on the date of grant. Notwithstanding the foregoing, the
initial grants described below will be granted with an exercise price equal to
the initial public offering price set forth on the cover page of this
Prospectus. Each Option represents the right to purchase one share of Class A
Common Stock at the specified Option Price.
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Options will expire no later than ten years after that date on which they were
granted and will become exercisable at such times and in such installments as
determined by the Administrator of the ECP. Payment of the Option Price, except
as set forth below, must be made in full at the time of exercise in cash or by
certified or bank check. As determined by the Administrator of the ECP, payment
in full or in part may also be made by tendering to the Company shares of Class
A Common Stock having a fair market value equal to the Option Price (or such
portion thereof). The Administrator may also allow a cashless exercise of such
options.
Stock Appreciation Rights. An Award of a stock appreciation right ("SAR") may
be granted under the ECP with respect to shares of Class A Common Stock.
Generally, one SAR is granted with respect to one share of Class A Common Stock.
The SAR entitles the participant, upon the exercise of the SAR, to receive an
amount equal to the appreciation in the underlying share of Class A Common
Stock. The appreciation is equal to the difference between (i) the "base value"
of the SAR (which is determined with reference to the closing trading price of
the Class A Common Stock on the New York Stock Exchange on the date the SAR is
granted) and (ii) the closing trading price of the Class A Common Stock on the
New York Stock Exchange on the date the SAR is exercised. Upon the exercise of a
vested SAR, the exercising participant will be entitled to receive the
appreciation in the value of one share of Class A Common Stock as so determined,
payable at the discretion of the participant in cash, shares of Class A Common
Stock, or some combination thereof, subject to availability of shares of Class A
Common Stock to the Company.
SARs will expire no later than ten years after the date on which they are
granted. SARs become exercisable at such times and in such installments as
determined by the Administrator of the ECP.
Tandem Options/SARs. An Option and a SAR may be granted "in tandem" with each
other (a "Tandem Option/SAR"). An Option and a SAR are considered to be in
tandem with each other because the exercise of the Option aspect of the tandem
unit automatically cancels the right to exercise the SAR of the tandem unit, and
vice versa. The Option may be an incentive stock option or non-qualified stock
option, and the Option may be coupled with one SAR, more than one SAR or a
fractional SAR in any proportionate relationship selected by the Administrator.
Descriptions of the terms of the Option and the SAR aspects of a Tandem
Option/SAR are provided above.
Restricted Stock. An Award of restricted stock ("Restricted Stock") is an Award
of Class A Common Stock that is subject to such restrictions as the
Administrator of the ECP deems appropriate, including forfeiture conditions and
restrictions against transfer for a period specified by the Administrator of the
ECP. Restricted Stock Awards may be granted under the ECP for services and/or
payment of cash. Restrictions on Restricted Stock may lapse in installments
based on factors selected by the Administrator of the ECP. Prior to the
expiration of the restricted period, except as and only if provided by the
Administrator of the ECP, a grantee who has received a Restricted Stock Award
generally has the rights of a stockholder of the Company, including the right to
vote and to receive cash dividends on the shares subject to the Award. Stock
dividends issued with respect to a Restricted Stock Award may be treated as
additional shares under such Award with respect to which such dividends are
issued.
Performance Shares and Performance Units. A performance share Award
("Performance Share") and/or a performance unit Award (a "Performance Unit") may
be granted under the ECP. Each Performance Unit will have an initial value that
is established by the Administrator of the ECP at the time of grant. Each
Performance Share will have an initial value equal to the closing trading price
of one share of Class A Common Stock on the New York Stock Exchange on the date
of grant. Such Awards may be earned based upon satisfaction of certain specified
performance criteria, subject to such other terms and conditions as the
Administrator of the ECP deems appropriate. Performance objectives will be
established before, or as soon as practicable after the commencement of the
performance period during which performance will be measured (the "Performance
Period"). Prior to the end of a Performance Period, the Administrator of the
ECP, in its discretion, may adjust the performance objectives to reflect an
event that may materially affect the performance of the Company, including, but
not limited to, market conditions or a significant acquisition or disposition of
assets or other property by the Company. The extent to which a grantee is
entitled to payment in settlement of such an Award at the end of a Performance
Period will be determined by the Administrator of the ECP in its sole
discretion, based on whether the performance criteria have been met and payment
will be made in cash or in shares of Class A Common Stock in accordance with the
terms of the applicable Award Agreements.
Performance Measures. The Compensation Committee may grant Awards under the ECP
to eligible participants subject to the attainment of certain specified
performance measures. The number of performance-based Awards granted under the
ECP in any year is determined by the Compensation Committee in its sole
discretion.
The value of each performance-based Award shall be determined solely upon
achievement of certain pre-established objective performance goals during each
performance period. The duration of a Performance Period is set by the
Compensation
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Committee. A new Performance Period may begin every year, or at more or less
frequent intervals, as determined by the Compensation Committee.
The value of performance-based Awards may be based on absolute measures or on a
comparison of the Company's measures during a Performance Period to the
comparable measures of a group of competitors. Measures selected by the
Compensation Committee shall be one or more of the following: net earnings,
operating earnings or income, net income, absolute and/or relative return on
equity, capital invested or assets, earnings per share, cash flow, profits,
earnings growth, revenue growth, share price, total shareholder return, economic
value added, expense reduction, customer satisfaction, and any combination of
the foregoing measures as the Compensation Committee deems appropriate. To the
extent the performance-based Awards are intended to comply with Section 162(m),
the Compensation Committee's discretion with respect to such Awards shall be
limited as required by Section 162(m).
Change of Control. If a participant's employment with the Company is terminated
by the Company, or a successor to the Company, on or after a Change of Control
and prior to the first anniversary of such Change of Control: (i) all Options,
other than Options granted in consideration of the termination of the CIT Career
Incentive Plan, held by the Participant, if any, shall become immediately
exercisable; (ii) all restrictions and limitations imposed on Restricted Stock,
other than Restricted Stock granted in consideration of the termination of the
CIT Career Incentive Plan, held by the Participant, if any, shall lapse; and
(iii) the target payout opportunities under all outstanding Annual Incentive
Awards, Performance Shares and Performance Units held by the Participant, if
any, will be deemed to have been fully earned for the Performance Period. The
vesting of all Awards denominated in shares of Class A Common Stock will be
accelerated as of the date of termination of the participant's employment with
the Company and there shall be paid out in cash within 30 days of the date of
termination of the participant's termination of employment with the Company, a
pro rata amount based on assumed achievement of all performance goals and upon
the length of time of the performance period elapsed before the Change of
Control as determined by the Administrator. The vesting of all Options and
Restricted Stock granted in consideration of the termination of The CIT Career
Incentive Plan shall be accelerated in the event the participant is terminated
during the vesting period following a Change of Control.
The Company intends to grant Awards to the Named Officers and other selected
participants which will be contingent on the successful completion of the
Offerings (the "Offering Awards"). The Offering Awards, which include restricted
shares and options granted in respect of the termination of The CIT Career
Incentive Plan, are summarized in the following table and are described below.
Long-Term Equity Compensation Plan Awards
<TABLE>
<CAPTION>
----------------------------------------
SHARES OF NON-QUALIFIED
NAME AND POSITION RESTRICTED STOCK(1) STOCK OPTIONS
- ----------------------------------------------------------- ------------------- --------------------
<S> <C> <C>
Albert R. Gamper, Jr.
President and Chief
Executive Officer
Joseph A. Pollicino
Vice Chairman
Joseph M. Leone
Executive Vice President
and Chief Financial Officer
William M. O'Grady
Executive Vice President--
Administration
Ernest D. Stein
Executive Vice President,
General Counsel
and Secretary
All executive officers as a group (a total of 10, including
the Named Executive Officers)
All other employees as a group
</TABLE>
- ---------------
(1) Assumes that the price to the public per share of Class A Common Stock in
the Offerings is $ (the midpoint of the range set forth on the front
cover page of this Prospectus). To the extent that the price varies by $1.00 per
share, the number of shares of Restricted Stock and the number of non-qualified
stock options to be awarded will be adjusted by %.
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Certain Federal Income Tax Consequences of Awards. Certain of the federal
income tax consequences to ECP participants and the Company of Awards granted
under the ECP are generally set forth in the following summary.
An employee to whom an Option which is an incentive stock option ("ISO") that
qualifies under Section 422 of the Internal Revenue Code is granted will not
recognize income at the time of grant or exercise of such Option. No federal
income tax deduction will be allowable to the Company upon the grant or exercise
of such ISO. However, upon the exercise of an ISO, any excess in the fair market
price of the Class A Common Stock over the Option Price constitutes a tax
preference item that may have alternative minimum tax consequences for the
employee. When the employee sells such shares more than one year after the date
of transfer of such shares and more than two years after the date of grant of
such ISO, the employee will normally recognize a capital gain or loss equal to
the difference, if any, between the sale prices of such shares and the aggregate
Option Price and the Company will not be entitled to a federal income tax
deduction with respect to the exercise of the ISO or the sale of such shares. If
the employee does not hold such shares for the required period, when the
employee sells such shares, the employee will recognize ordinary compensation
income and possibly capital gain or loss in such amounts as are prescribed by
the Internal Revenue Code and the regulations thereunder and the Company will
generally be entitled to a federal income tax deduction in the amount of such
ordinary compensation income.
An employee to whom an Option which is a nonqualified stock option ("NSO") is
granted will not recognize income at the time of grant of such Option. When the
employee exercises such NSO, the employee will recognize ordinary compensation
income equal to the difference, if any, between the Option Price paid and the
fair market value, as of the date of Option exercise, of the shares of Class A
Common Stock the employee receives. The tax basis of such shares to such
employee will be equal to the Option Price paid plus the amount includible in
the employee's gross income, and the employee's holding period for such shares
will commence on the date of exercise. Subject to the applicable provisions of
the Internal Revenue Code and regulations thereunder, the Company will generally
be entitled to a federal income tax deduction in respect of an NSO in an amount
equal to the ordinary compensation income recognized by the employee upon the
exercise of the NSO.
Generally, absent an election to be taxed currently under Section 83(b) of the
Internal Revenue Code (a "Section 83(b) Election"), there will be no federal
income tax consequences to either the employee or the Company upon the grant of
Restricted Stock. At the expiration of the restricted period and the
satisfaction of any other restrictions applicable to the Restricted Stock, the
employee will recognize ordinary compensation income and the Company will be
entitled to a corresponding federal income tax deduction (if applicable
withholding requirements are satisfied) equal to the fair market value of the
Class A Common Stock at that time. If a Section 83(b) Election is made within 30
days after the date the Restricted Stock is received by the employee, the
employee will recognize an amount of ordinary compensation income at the time of
the receipt of the Restricted Stock and the Company will be entitled to a
corresponding federal income tax deduction (if applicable withholding
requirements are satisfied) equal to the fair market value (determined without
regard to applicable restrictions) of the shares at such time. If a Section
83(b) Election is made, no additional income will be recognized by the employee
upon the lapse of restrictions on the shares, but, if the shares are
subsequently forfeited, the employee may not deduct the income that was
recognized pursuant to the Section 83(b) Election at the time of the receipt of
the shares.
There will be no federal income tax consequences to either the employee or the
Company upon the grant of a SAR, Performance Share or Performance Unit.
Generally, the employee will recognize ordinary income upon the receipt of
payment pursuant to a SAR, Performance Share or Performance Unit in an amount
equal to the fair market value of the Common Stock and the aggregate amount of
cash received. The Company generally will be entitled to a corresponding tax
deduction equal to the amount includible in the employee's income, but with
respect to a SAR, Performance Share or Performance Unit paid in Common Stock,
the Company must satisfy applicable withholding requirements in order to be
eligible for a corresponding tax deduction.
RELATIONSHIP WITH DKB
Upon consummation of the Offerings, DKB will beneficially own 100% of the
outstanding shares of Class B Common Stock of the Company (which have five votes
per share). Upon consummation of the Offerings, the Common Stock owned by DKB
will represent in the aggregate % of the combined voting power and % of
the combined economic interest of all of the outstanding Common Stock. For as
long as DKB continues to own shares of Common Stock representing more than 50%
of the combined voting power of the Class A Common Stock and Class B Common
Stock, DKB will be able to direct the election of all of the members of the
Company's Board of Directors and exercise a controlling influence over the
business and affairs of the Company, including any determinations with respect
to (i) mergers or other business combinations involving the Company, (ii) the
acquisition or disposition of assets by the Company, (iii) the incurrence of
indebtedness by the Company, (iv) the issuance of any additional Common Stock or
other equity securities and (v) the payment of dividends with respect to the
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Common Stock. Similarly, DKB will have the power (i) to determine matters
submitted to a vote of the Company's stockholders without the consent of the
Company's other stockholders, (ii) to prevent a change in control of the Company
or (iii) to take other actions that might be favorable to DKB. See "Risk
Factors--Control By and Relationship With DKB."
DKB has advised the Company that it currently intends to continue to hold all of
the shares of Class B Common Stock owned by it following the consummation of the
Offerings. However, DKB is not subject to any contractual obligation to retain
its controlling interest, except that DKB has agreed not to sell or otherwise
dispose of any shares of Class B Common Stock for a period of 180 days after the
date of this Prospectus without the prior written consent of J.P. Morgan
Securities Inc. As a result, there can be no assurance that DKB will maintain
its percentage ownership of Common Stock immediately following the Offerings for
any specified period of time. See "Risk Factors--Shares Eligible for Future
Sale" and "Underwriting."
For a description of certain provision of the Company's Restated Certificate of
Incorporation concerning the allocation of business opportunities that may be
suitable for both the Company and DKB, see "Description of Capital
Stock--Certain Certificate of Incorporation and By-Law Provisions--Corporate
Opportunities."
Set forth below are descriptions of certain agreements, relationships and
transactions between the Company and DKB.
REGULATORY COMPLIANCE AGREEMENT
DKB is subject to U.S. and Japanese banking laws, regulations, guidelines and
orders that affect permissible activities of the Company. DKB and the Company
have entered into the Regulatory Compliance Agreement in order to facilitate
DKB's compliance with applicable U.S. and Japanese banking laws, or the
regulations, interpretations, policies, guidelines and court orders of the
applicable regulatory authorities or the staffs thereof (collectively, the
"Banking Laws"). That Agreement prohibits the Company from engaging in new
activity or entering into any transaction (collectively, a "Covered Activity")
for which prior approval, notice or filing is required under Banking Laws
without the required prior approval having been obtained, prior notice having
been given or made by DKB and accepted or such filings having been made. The
Company is also prohibited from engaging in any Covered Activity as would cause
DKB, the Company or any affiliate of DKB or the Company to violate any Banking
Laws. In the event that, at any time, it is determined by DKB that any Covered
Activity then conducted by the Company is prohibited by any Banking Law, the
Company is required to take all reasonable steps to cease such Covered Activity.
Under the terms of the Regulatory Compliance Agreement, DKB is responsible for
making all determinations as to compliance with applicable Banking Laws.
The Regulatory Compliance Agreement expires upon the earlier of the date on
which DKB owns no shares of Common Stock or the determination by counsel that
DKB will not be required to receive prior approval from or give notice to or
make filings with applicable regulatory authorities under the Banking Laws as a
result of the Company or any of its subsidiaries engaging in any Covered
Activity.
REGISTRATION RIGHTS AGREEMENT
The Registration Rights Agreement will provide that, upon the request of DKB,
its subsidiaries or certain transferees of Common Stock from DKB or its
subsidiaries (each, a "Qualified Transferee"), the Company will use its
reasonable best efforts to effect the registration under the applicable federal
and state securities laws of any of the shares of Class A Common Stock (and any
other securities issued in respect of or in exchange for either Class A Common
Stock or Class B Common Stock), including, without limitation, shares of Class A
Common Stock issuable upon conversion of the Class B Common Stock, beneficially
owned by DKB, its subsidiaries or any Qualified Transferee for sale in
accordance with the intended method of disposition of the holder or holders
making such demand for registration, and will take such other actions as may be
necessary to permit the sale thereof in other jurisdictions, subject to certain
specified limitations. DKB, its subsidiaries or any Qualified Transferee will
also have the right which, subject to certain limitations, it may exercise at
any time and from time to time, to include the shares of Class A Common Stock
(and any other securities issued in respect of or in exchange for either)
beneficially owned by it in certain other registrations of common equity
securities of the Company initiated by the Company on its own behalf or on
behalf of its other stockholders. The Company will agree to pay all
out-of-pocket costs and expenses in connection with each such registration which
DKB or any Qualified Transferee initiates or in which any of them participates.
The Registration Rights Agreement will contain indemnification and contribution
provisions: (i) by DKB and its permitted assigns for the benefit of the Company
and related persons; and (ii) by the Company for the benefit of DKB and other
persons entitled to effect registrations of Class A Common Stock (and other
securities) pursuant to its terms and related persons.
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TAX ALLOCATION AGREEMENT
DKB does not include the Company in its consolidated group for federal income
tax purposes. DKB includes the Company in its consolidated group for state
income tax purposes only in the State of California. Pursuant to a Tax
Allocation Agreement, dated as of October 23, 1991 (the "Tax Allocation
Agreement"), the Company and certain other subsidiaries of DKB file a
consolidated unitary California franchise tax return and have elected to file
that return on a "water's edge" basis. Under the Tax Allocation Agreement, the
Company is obligated to pay to DKB the California franchise tax that the Company
would have paid as if it were filing on the same basis it would have filed on
had it not entered into the Tax Allocation Agreement, and its liability cannot
exceed the tax liability it would have incurred had it not entered into the Tax
Allocation Agreement. DKB absorbs any residual cost or benefit of the filing of
a consolidated unitary California franchise tax return.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has in the past and may in the future enter into certain
transactions with affiliates of the Company. Such transactions have been, and it
is anticipated that such transactions will continue to be, entered into at a
fair market value for the transaction. Additional information regarding these
transactions can be found in the Notes to Consolidated Financial Statements,
"Note 20 -- Certain Relationships and Related Transactions."
Schulte Roth & Zabel LLP, of which Paul N. Roth, a director of the Company, is a
partner, provides legal services to the Company. Schulte Roth & Zabel LLP has
been retained in the past and will continue in the future to serve as outside
counsel for DKB.
HISTORY OF OWNERSHIP OF COMMON STOCK
Prior to the consummation of the Offerings, DKB owned 80% of the issued and
outstanding shares of common stock of the Company. DKB purchased a 60% common
stock interest in the Company from Manufacturers Hanover Corporation ("MHC") at
year-end 1989 and acquired an additional twenty percent (20%) common stock
interest in the Company on December 15, 1995 from CBC Holding. DKB held an
option, expiring December 15, 2000, to purchase the remaining twenty percent
(20%) common stock interest from CBC Holding and its parent.
CBC Holding became a direct, wholly-owned subsidiary of Chemical Banking
Corporation ("CBC") after the merger between MHC and CBC on December 31, 1991.
On March 31, 1996, CBC was merged into Chase and Chase became the sole
stockholder of CBC Holding.
The principal executive offices of DKB are located at 1-5, Uchisaiwaicho
1-chome, Chiyoda-ku, Tokyo 100, Japan.
SHARES AVAILABLE FOR FUTURE SALE
Upon consummation of the Offerings, the Company will have shares of
Class A Common Stock and shares of Class B Common Stock issued and
outstanding. All of the shares of Class A Common Stock to be sold in the
Offerings will be freely tradeable without restrictions or further registration
under the Securities Act, except for any share purchased by an "affiliate" of
the Company (as that term is defined in Rule 144 adopted under the Securities
Act ("Rule 144")), which will be subject to the resale limitations of Rule 144.
Immediately following the consummation of the Offerings, all of the outstanding
shares of Class B Common Stock will be beneficially owned by DKB and will not
have been registered under the Securities Act. Therefore, such shares owned by
DKB may be sold only pursuant to an effective registration statement under the
Securities Act or in accordance with Rule 144 or another exemption from
registration. DKB has certain rights to require the Company to effect
registration of shares of Common Stock owned by DKB, which rights may be
assigned. See "Relationship with DKB--Registration Rights Agreement."
In general, under Rule 144 as currently in effect, a person (or persons whose
shares are required to be aggregated) who has beneficially owned shares of
Common Stock for at least one year, including a person who may be deemed an
"affiliate," is entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of (i) one percent (1%) of the total
number of outstanding shares of the class of stock being sold or (ii) the
average weekly reported trading volume of the class of stock being sold during
the four calendar weeks preceding such sale. A person who is not deemed an
"affiliate" of the Company at any time during the three months preceding a sale
and who has beneficially owned shares for at least two years is entitled to sell
such shares under Rule 144 without regard to the volume limitations described
above. As defined in Rule 144, an "affiliate" of an issuer is a person that
directly or indirectly through the use of one or more intermediaries controls,
is
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controlled by, or is under common control with, such issuer. Rule 144A under the
Securities Act ("Rule 144A") provides a non-exclusive safe harbor exemption from
the registration requirements of the Securities Act for specified resales of
restricted securities to certain institutional investors. In general, Rule 144A
allows unregistered resales of restricted securities to a "qualified
institutional buyer," which generally includes an entity, acting for its own
account or for the account of other qualified institutional buyers, that in the
aggregate owns or invests at least $100 million in securities of unaffiliated
issuers. Rule 144A does not extend an exemption to the offer or sale of
securities that, when issued, were of the same class as securities listed on a
national securities exchange or quoted on an automated quotation system. The
shares of Class B Common Stock outstanding as of the date of this Prospectus
would be eligible for resale under Rule 144A because such shares, when issued,
were not of the same class as any listed or quoted securities. The foregoing
summary of Rule 144 and Rule 144A is not intended to be a complete description
thereof.
Prior to the Offerings, there has been no market for the Class A Common Stock,
and no prediction can be made as to the effect, if any, that market sales of
outstanding shares of Common Stock by DKB, or the availability of such shares
for sale, will have on the market price of the Class A Common Stock prevailing
from time to time. Nevertheless, sales by DKB of substantial amounts of Common
Stock in the public market, or the perception that such sales could occur, could
adversely affect prevailing market prices for the Class A Common Stock offered
in the Offerings. See "Risk Factors--Shares Eligible for Future Sale."
Although DKB in the future may effect or direct sales or other dispositions of
Class B Common Stock that would reduce its beneficial ownership interest in the
Company, DKB has advised the Company that it currently intends to continue to
hold all of the Class B Common Stock beneficially owned by it following the
Offerings. However, DKB is not subject to any contractual obligation to retain
its controlling interest, except that DKB has agreed not to sell or otherwise
dispose of any shares of Class B Common Stock for a period of 180 days after the
date of this Prospectus without the prior written consent of J.P. Morgan
Securities Inc. As a result, there can be no assurance concerning the period of
time during which DKB will maintain its ownership of Class B Common Stock owned
by it immediately following the consummation of the Offerings. See "Risk
Factors--Shares Eligible for Future Sale" and "Underwriting." Beneficial
ownership of at least 50% of the issued and outstanding Common Stock of the
Company is required in order for DKB to continue to include the Company in its
consolidated group for state income tax purposes in the State of California. See
"Relationship with DKB."
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company will consist of (i) shares
of Class A Common Stock, par value $.01 per share, and shares of Class
B Common Stock, par value $.01 per share, and (ii) shares of Preferred
Stock (the "Preferred Stock"), par value $.01 per share. Of the shares
of Class A Common Stock, shares are being offered in the Offerings and
shares will be reserved for issuance upon conversion of shares of
Class B Common Stock into shares of Class A Common Stock. There will be
shares of Class B Common Stock outstanding on the closing date of the
Offerings, all of which will be beneficially owned by DKB. In addition,
shares of restricted Class A Common Stock and options to purchase
shares of Class A Common Stock will be granted upon consummation of
the Offerings and shares of Class A Common Stock will be reserved for
future issuance under employee benefit plans. Upon consummation of the
Offerings, there will be no Preferred Stock outstanding. A description of the
material terms and provisions which will be set forth in the Company's Amended
and Restated Certificate of Incorporation, as amended immediately prior to the
closing of the Offerings, affecting the relative rights of the Class A Common
Stock, the Class B Common Stock and the Preferred Stock is set forth below. The
following description of the capital stock of the Company is intended as a
summary only and is qualified in its entirety by reference to the Company's
Amended and Restated Certificate of Incorporation which will be filed with the
Registration Statement of which this Prospectus forms a part and to Delaware
corporate law.
COMMON STOCK
Voting Rights
The holders of Class A Common Stock and Class B Common Stock generally have
identical rights except that holders of Class A Common Stock are entitled to one
vote per share and holders of Class B Common Stock are entitled to five votes
per share on all matters to be voted on by stockholders, subject to the right of
DKB or the Class B Transferee (as defined below), as the case may be, to reduce
from time to time the number of votes per share of Class B Common Stock by
written notice to the Company specifying the reduced number of votes per share.
Holders of shares of Class A Common Stock and Class B
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Common Stock are not entitled to cumulate their votes for the election of
directors. Generally, all matters to be voted on by stockholders must be
approved by a majority (or, in the case of the election of directors, by a
plurality) of the votes entitled to be cast by all holders of shares of Class A
Common Stock and Class B Common Stock present in person or represented by proxy,
voting together as a single class, subject to any voting rights granted to
holders of any Preferred Stock. Except as otherwise provided by law or the
Company's Amended and Restated Certificate of Incorporation, and subject to any
voting rights granted to holders of any outstanding Preferred Stock, amendments
to the Company's Amended and Restated Certificate of Incorporation must be
approved by the vote of the holders of Common Stock having a combined voting
power of a majority of all shares of Class A Common Stock and Class B Common
Stock, voting together as a single class. Amendments to the Company's Amended
and Restated Certificate of Incorporation that would alter or change the powers,
preferences or special rights of the Class A Common Stock or the Class B Common
Stock so as to affect them adversely also must be approved by a majority of the
votes entitled to be cast by the holders of the shares affected by the
amendment, voting as a separate class. Notwithstanding the foregoing, any
amendment to the Company's Amended and Restated Certificate of Incorporation to
increase or decrease the authorized shares of either class must be approved by
the affirmative vote of the holders of Common Stock having a combined voting
power of a majority of the shares of Class A Common Stock and Class B Common
Stock, voting together as a single class.
Dividends
Holders of Class A Common Stock and Class B Common Stock will share ratably on a
per share basis in any dividends declared by the Board of Directors, subject to
any preferential rights of any outstanding Preferred Stock. In the case of
dividends or other distributions payable in Common Stock, including
distributions pursuant to stock splits or divisions of Common Stock, only shares
of Class A Common Stock shall be paid or distributed to holders of shares of
Class A Common Stock, and only shares of Class B Common Stock shall be paid or
distributed to holders of Class B Common Stock.
The Company may not subdivide or combine shares of one class of Common Stock
without at the same time proportionally subdividing or combining shares of the
other class of Common Stock.
Conversion
Each share of Class B Common Stock will be convertible at any time while held by
DKB and/or any of its subsidiaries or the Class B Transferee (as defined below)
and/or any of its subsidiaries at the option of the holder thereof into one
share of Class A Common Stock.
Except as provided below, any shares of Class B Common Stock transferred to a
person other than DKB or any of its subsidiaries or the Class B Transferee or
any of its subsidiaries shall automatically convert into shares of Class A
Common Stock upon such disposition. Shares of Class B Common Stock representing
more than a 50% economic interest in the Company transferred by DKB and/or any
of its subsidiaries in a single transaction or series of related transactions to
one unrelated person (the "Class B Transferee") and/or any of its subsidiaries
shall not automatically convert into shares of Class A Common Stock upon such
disposition. Any shares of Class B Common Stock retained by DKB or any of its
subsidiaries following any such disposition of more than a 50% economic interest
in the Company to the Class B Transferee and/or any of its subsidiaries shall
automatically convert into shares of Class A Common Stock upon such disposition.
All shares of Class B Common Stock shall automatically convert into Class A
Common Stock if the number of outstanding shares of Class B Common Stock
beneficially owned by DKB and its subsidiaries or the Class B Transferee and its
subsidiaries, as the case may be, falls below 25% of the aggregate number of
outstanding shares of Common Stock. This will prevent DKB and its subsidiaries
or the Class B Transferee and its subsidiaries, as the case may be, from
decreasing their economic interest in the Company to less than 25% while still
retaining control of a majority of the Company's voting power. The foregoing
automatic conversion is intended to ensure that DKB and/or its subsidiaries or
the Class B Transferee and/or its subsidiaries, as the case may be, retain
voting control by virtue of their ownership of Class B Common Stock only if they
continue to have a significant economic interest in the Company. All conversions
will be effected on a share-for-share basis.
Other Rights
In the event of any merger or consolidation of the Company with or into another
company in connection with which shares of Common Stock are converted into or
exchangeable for shares of stock, other securities or property (including cash),
all holders of Common Stock, regardless of class, will be entitled to receive
the same kind and amount of shares of stock and other securities and property
(including cash).
On liquidation, dissolution or winding up of the Company, after payment in full
of the amounts required to be paid to holders of Preferred Stock, if any, all
holders of Common Stock, regardless of class, are entitled to share ratably in
any assets available for distribution to holders of shares of Common Stock.
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No shares of either class of Common Stock are subject to redemption. Shares of
Class A Common Stock do not have preemptive rights to purchase additional
shares. Holders of shares of Class B Common Stock have preemptive rights to
subscribe for and receive additional securities of the Company upon all
additional issuances of stock by the Company (other than in connection with
certain issuances pursuant to employee stock plans) of any or all classes or
series thereof, or securities of the Company convertible into such stock, such
that such holder of Class B Common Stock may, by purchasing such additional
securities, maintain the percentage interest it had immediately prior to such
issuance of the votes of the capital stock of the Company voting together as a
single class and/or its economic interest in the Company.
Upon consummation of the Offerings, all the outstanding shares of Class A Common
Stock and Class B Common Stock will be legally issued, fully paid and
nonassessable.
PREFERRED STOCK
The Preferred Stock will be issuable from time to time in one or more series,
with such designations and preferences for each series as shall be stated in the
resolutions providing for the designation and issue of each such series adopted
by the Board of Directors of the Company. The Board of Directors is authorized
by the Company's Amended and Restated Certificate of Incorporation to determine,
among other things, the rights and preferences and the limitations thereon
pertaining to each such series. The Board of Directors, without stockholder
approval, may issue Preferred Stock with voting and other rights that could
adversely affect the voting power and other rights of the holders of the Common
Stock and could have certain anti-takeover effects. Upon consummation of the
Offerings, the Company will have no Preferred Stock outstanding and it has no
current plans to issue any shares of Preferred Stock. The ability of the Board
of Directors to issue Preferred Stock in the future without stockholder approval
could have the effect of delaying, deferring or preventing a change in control
of the Company or the removal of existing management.
CERTAIN CERTIFICATE OF INCORPORATION AND BY-LAW PROVISIONS
Corporate Opportunities
The Company's Amended and Restated Certificate of Incorporation will provide
that DKB shall have no duty to refrain from engaging in the same or similar
activities or lines of business as the Company, and neither DKB nor any
director, officer or other employee thereof (except as provided below) will be
liable to the Company or its stockholders for breach of any fiduciary duty by
reason of any such activities of DKB. In the event that DKB acquires knowledge
of a potential transaction or matter which may be a corporate opportunity for
both DKB and the Company, DKB shall have no duty to communicate or offer such
corporate opportunity to the Company and shall not be liable to the Company or
its stockholders for breach of any fiduciary duty as a stockholder of the
Company by reason of the fact that DKB pursues or acquires such corporate
opportunity for itself, directs such corporate opportunity to another person or
does not communicate information regarding such corporate opportunity to the
Company.
In the event that a director, officer or other employee of the Company who is
also a director or officer or other employee of DKB acquires knowledge of a
potential transaction or matter which may be a corporate opportunity for both
the Company and DKB, such director, officer or other employee of the Company
shall have fully satisfied and fulfilled the fiduciary duty of such director,
officer or other employee of the Company and its stockholders with respect to
such corporate opportunity if such director, officer or other employee acts in a
manner consistent with the following policy:
(i) a corporate opportunity offered to any person who is an officer or
other employee of the Company, and who is also a director but not an
officer or other employee of DKB, shall belong to the Company;
(ii) a corporate opportunity offered to any person who is a director but
not an officer or other employee of the Company, and who is also a director
or officer or other employee of DKB, shall belong to the Company if such
opportunity is expressly offered to such person in writing solely in his or
her capacity as a director of the Company, and otherwise shall belong to
DKB; and
(iii) a corporate opportunity offered to any person who is an officer or
other employee of both the Company and DKB shall belong to the Company if
such opportunity is expressly offered to such person in writing solely in
his or her capacity as an officer of the Company, and otherwise shall
belong to DKB.
For purposes of the foregoing:
(i) A director of the Company who is Chairman of the Board of Directors of
the Company or of a committee thereof shall not be deemed to be an officer
of the Company by reason of holding such position (without regard to
whether such
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position is deemed an officer of the Company under the By-Laws of the Company),
unless such person is a full-time employee of the Company; and
(ii) (A) The term "Company" shall mean the Company and all corporations,
partnerships, joint ventures, associations and other entities controlled
directly or indirectly by the Company through the ownership of voting
securities or otherwise in and (B) the term "DKB" shall mean DKB and all
corporations, partnerships, joint ventures, associations and other entities
(other than the Company, defined in accordance with clause (A) of this
section (ii)) controlled (directly or indirectly) by DKB through the
ownership of voting securities or otherwise.
The foregoing provisions of the Company's Amended and Restated Certificate of
Incorporation will expire on the date that DKB ceases to own beneficially Common
Stock representing at least a majority of the total voting power of all classes
of outstanding Common Stock and no person who is a director, officer or employee
of the Company is also a director, officer or employee of DKB or any of its
subsidiaries (other than the Company).
In addition to any vote of the stockholders required by the Company's Amended
and Restated Certificate of Incorporation, until such time as DKB ceases to own
beneficially Common Stock representing at least a majority of the total voting
power of all classes of outstanding Common Stock, the affirmative vote of the
holders of at least 80% of the total voting power of all classes of outstanding
Common Stock shall be required to alter, amend or repeal in a manner adverse to
the interests of DKB and its subsidiaries (other than the Company), or adopt any
provision adverse to the interests of DKB and its subsidiaries (other than the
Company), or inconsistent with, the corporate opportunity provisions described
above. Accordingly, so long as DKB beneficially owns Common Stock representing
more than 20% of the total voting power of all classes of outstanding Common
Stock, it can prevent any such alteration, amendment, repeal or adoption.
Any person purchasing or otherwise acquiring Common Stock will be deemed to have
notice of, and to have consented to, the foregoing provisions of the Company's
Amended and Restated Certificate of Incorporation.
Provisions That May Have an Anti-Takeover Effect
Certain provisions to be contained in the Company's Amended and Restated
Certificate of Incorporation and By-Laws summarized below may be deemed to have
an anti-takeover effect and may delay, deter or prevent a tender offer or
takeover attempt that a stockholder might consider to be in its best interest,
including attempts that might result in a premium being paid over the market
price for the shares held by stockholders.
The Company's Amended and Restated Certificate of Incorporation will provide
that, subject to any rights of holders of Preferred Stock to elect additional
directors under specified circumstances, the number of directors of the Company
will be fixed as specified in the By-Laws. The By-Laws will provide that,
subject to any rights of holders of Preferred Stock to elect additional
directors under specified circumstances, the number of directors will be fixed
at ten (10) unless the Board of Directors, by vote of a majority of the
directors, votes that such number shall be increased or decreased. In addition,
the Amended and Restated Certificate of Incorporation and By-Laws will provide
that, subject to any rights of holders of Preferred Stock, and unless the
Company's Board of Directors otherwise determines, any vacancies may be filled
by the affirmative vote of a majority of the remaining members of the Board,
though less than a quorum, or by a sole remaining director, and except as
otherwise provided by law, any such vacancy may not be filled by the
stockholders.
The Company's By-Laws will provide for an advance notice procedure for the
nomination, other than by or at the direction of the Board of Directors, of
candidates for election as directors as well as for other stockholder proposals
to be considered at annual meetings of stockholders. In general, notice of
intent to nominate a director or raise matters at such meetings will have to be
received in writing by the Company at its principal executive offices not less
than 60 nor more than 90 days prior to the first anniversary of the previous
year's annual meeting of stockholders, and must contain certain information
concerning the person to be nominated or the matters to be brought before the
meeting and concerning the stockholder submitting the proposal. The Company's
Amended and Restated Certificate of Incorporation and By-Laws will also provide
that special meetings of stockholders may be called only by certain specified
officers of the Company or by any such officer at the request in writing of the
Board of Directors; special meetings of stockholders cannot be called by
stockholders. In addition, the Company's Amended and Restated Certificate of
Incorporation will provide that any action required or permitted to be taken by
stockholders may be effected by written consent provided, however, that on and
after the date on which neither DKB nor the Class B Transferee continues to
beneficially own more than 50% of the total voting power of the outstanding
Common Stock, any action required or permitted to be taken by stockholders may
be effected only at a duly called annual or special meeting of stockholders and
may not be effected by a written consent by stockholders in lieu of such a
meeting.
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TRANSACTIONS WITH INTERESTED STOCKHOLDERS
The Company has elected not to be governed by Section 203 of the Delaware
General Corporation Law which requires the vote of at least 66 2/3% of the
outstanding voting stock not owned by an interested stockholder with respect to
certain business combinations. As a result, any such business combination will
only require the vote of a majority of stockholders. So long as DKB controls a
majority of the voting power of the Company, it will be able to approve or
disapprove of any such action without the vote of any other stockholder.
LIMITATIONS ON DIRECTORS' LIABILITY
The Company's Amended and Restated Certificate of Incorporation provides that no
director of the Company shall be liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) in respect of
certain unlawful dividend payments or stock redemptions or repurchases or (iv)
for any transaction from which the director derived an improper personal
benefit. The effect of these provisions will be to eliminate the rights of the
Company and its stockholders (through stockholders' derivative suits on behalf
of the Company) to recover monetary damages against a director for breach of
fiduciary duty as a director (including breaches resulting from grossly
negligent behavior), except in the situations described above.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Class A Common Stock will be
.
85
<PAGE> 88
CERTAIN UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS
The following is a general discussion of certain U.S. federal income and estate
tax consequences of the ownership and disposition of Class A Common Stock by a
Non-U.S. Holder. For this purpose, a "Non-U.S. Holder" is any person who is, for
U.S. federal income tax purposes, a foreign corporation, a non-resident alien
individual, a foreign partnership or a foreign estate or trust. This discussion
does not address all aspects of U.S. federal income and estate taxes and does
not deal with foreign, state and local consequences that may be relevant to such
Non-U.S. Holders in light of their personal circumstances (such as certain tax
consequences applicable to pass-through entities). Furthermore, this discussion
is based on provisions of the Internal Revenue Code of 1986, as amended,
existing and proposed regulations promulgated thereunder and administrative and
judicial interpretations thereof, as of the date hereof, all of which are
subject to change (possibly with retroactive effect). EACH PROSPECTIVE PURCHASER
OF CLASS A COMMON STOCK IS ADVISED TO CONSULT A TAX ADVISOR WITH RESPECT TO
CURRENT AND POSSIBLE FUTURE TAX CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING
OF CLASS A COMMON STOCK AS WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE UNDER THE
LAWS OF ANY U.S. STATE, MUNICIPALITY OR OTHER TAXING JURISDICTION.
DIVIDENDS
Dividends paid to a Non-U.S. Holder of Class A Common Stock generally will be
subject to withholding of U.S. federal income tax either at a rate of 30% of the
gross amount of the dividends or at such lower rate as may be specified by an
applicable income tax treaty. However, dividends that are effectively connected
with the conduct of a trade or business by the Non-U.S. Holder within the United
States and, where a tax treaty applies, are attributable to a U.S. permanent
establishment of the Non-U.S. Holder, are not subject to the withholding tax,
but instead are subject to U.S. federal income tax on a net income basis at
applicable graduated individual or corporate rates. Any such effectively
connected dividends received by a foreign corporation may, under certain
circumstances, be subject to an additional "branch profits tax" at a 30% rate or
such lower rate as may be specified by an applicable income tax treaty.
Under current law, dividends paid to an address outside the United States are
presumed to be paid to a resident of such country (unless the payer has
knowledge to the contrary) for purposes of the withholding discussed above and,
under the current interpretation of United States Treasury regulations, for
purposes of determining the applicability of a tax treaty rate. Under proposed
United States Treasury regulations not currently in effect, however, a Non-U.S.
Holder of Class A Common Stock who wishes to claim the benefit of an applicable
treaty rate (and avoid backup withholding, as discussed below) would be required
to satisfy applicable certification and other requirements. Currently, certain
certification and disclosure requirements must be complied with in order to be
exempt from withholding under the effectively connected income exemption
discussed above.
A Non-U.S. Holder of Class A Common Stock eligible for a reduced rate of U.S.
withholding tax pursuant to an income tax treaty may obtain a refund of any
excess amounts withheld by filing an appropriate claim for refund with the
Internal Revenue Service (the "IRS").
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to U.S. federal income tax with
respect to gain recognized on a sale or other disposition of Class A Common
Stock unless (i) the gain is effectively connected with a trade or business of
the Non-U.S. Holder in the United States, and, where a tax treaty applies, is
attributable to a U.S. permanent establishment of the Non-U.S. Holder, (ii) in
the case of a Non-U.S. Holder who is an individual and holds the Class A Common
Stock as a capital asset, such holder is present in the United States for 183 or
more days in the taxable year of the sale or other disposition and certain other
conditions are met, (iii) the Non-U.S. Holder is subject to tax pursuant to
certain provisions of the Code applicable to U.S. expatriates or (iv) the
Company is or has been a "U.S. real property holding corporation" for U.S.
federal income tax purposes and, in the event that the Class A Common Stock is
considered "regularly traded," the Non-U.S. Holder held directly or indirectly
at any time during the five-year period ending on the date of disposition more
than five percent of the Class A Common Stock. The Company believes it is not
and does not anticipate becoming a "U.S. real property holding corporation" for
U.S. federal income tax purposes.
An individual Non-U.S. Holder described in clause (i) above, will, unless an
applicable treaty provides otherwise, be taxed on the net gain derived from the
sale under regular graduated U.S. federal income tax rates. An individual
Non-U.S. Holder described in clause (ii) above, will be subject to a flat 30%
tax on the gain derived from the sale, which may be offset by certain U.S.
source capital losses.
86
<PAGE> 89
If a Non-U.S. Holder that is a foreign corporation falls under clause (i) above,
it will be taxed on its gain under regular graduated U.S. federal income tax
rates and may be subject to an additional branch profits tax at a 30% rate,
unless it qualifies for a lower rate under an applicable income tax treaty.
FEDERAL ESTATE TAX
Class A Common Stock owned or treated as owned by an individual Non-U.S. Holder
at the time of death will be included in such holder's gross estate for U.S.
federal estate tax purposes, unless an applicable estate tax treaty provides
otherwise, and therefore may be subject to U.S. federal estate tax.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
The Company must report annually to the IRS and to each Non-U.S. Holder the
amount of dividends paid to such holder and the tax withheld with respect to
such dividends, regardless of whether withholding was required. Copies of the
information returns reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the Non-U.S. Holder
resides under the provisions of an applicable income tax treaty.
Under current law, backup withholding at the rate of 31% generally will not
apply to dividends paid to a Non-U.S. Holder at an address outside the United
States (unless the payer has knowledge that the payee is a U.S. person). Under
proposed United States Treasury regulations not currently in effect, however, a
Non-U.S. Holder will be subject to backup withholding unless applicable
certification requirements are met.
Payment of the proceeds of a sale of Class A Common Stock by or through a U.S.
office of a broker is subject to both backup withholding and information
reporting unless the beneficial owner provides the payer with its name and
address and certifies under penalties of perjury that it is a Non-U.S. Holder,
or otherwise establishes an exemption. In general, backup withholding and
information reporting will not apply to a payment of the proceeds of a sale of
Class A Common Stock by or through a foreign office of a foreign broker. If,
however, such broker is, for U.S. federal income tax purposes a U.S. person, a
controlled foreign corporation, or a foreign person that derives 50% or more of
its gross income for a certain period from the conduct of a trade or business in
the United States, such payments will be subject to information reporting, but
not backup withholding, unless (1) such broker has documentary evidence in its
records that the beneficial owner is a Non-U.S. Holder and certain other
conditions are met, or (2) the beneficial owner otherwise establishes an
exemption.
Any amounts withheld under the backup withholding rules generally will be
allowed as a refund or a credit against such holder's U.S. federal income tax
liability provided the required information is furnished in a timely manner to
the IRS.
The backup withholding and information reporting rules are under review by the
Treasury Department and their application to the Class A Common Stock could be
changed by future regulations. Non-U.S. Holders should consult their tax
advisors regarding the application of these rules to their particular
situations, the availability of an exemption therefrom, the procedure for
obtaining such an exemption, if available, and the possible application of the
proposed United States Treasury regulations addressing the withholding and the
information reporting rules.
87
<PAGE> 90
UNDERWRITING
J.P. Morgan & Co. is acting as bookrunning lead manager for the Offerings. J.P.
Morgan & Co. and Goldman, Sachs & Co. are acting as joint lead managers.
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date of this Prospectus (the "U.S. Underwriting Agreement"),
the U.S. Underwriters named below, for whom J.P. Morgan Securities Inc.,
Goldman, Sachs & Co., Morgan Stanley & Co., Incorporated, Credit Suisse First
Boston Corporation, Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Salomon Brothers Inc and UBS Securities LLC are acting as
representatives (the "U.S. Representatives"), have severally agreed to purchase,
and the Company has agreed to sell to them, the respective number of shares of
Class A Common Stock set forth opposite their names below. Under the terms and
subject to the conditions contained in an Underwriting Agreement dated the date
of this Prospectus (the "International Underwriting Agreement" and, together
with the U.S. Underwriting Agreement, the "Underwriting Agreements"), the
International Managers named below, for whom J.P. Morgan Securities Ltd.,
Goldman Sachs International, Morgan Stanley & Co. International Limited, Credit
Suisse First Boston (Europe) Limited, Lehman Brothers International (Europe),
Merrill Lynch International, Salomon Brothers International Limited and UBS
Limited are acting as representatives (the "International Representatives"),
have severally agreed to purchase, and the Company has agreed to sell to them,
the respective number of shares of Class A Common Stock set forth opposite their
names below. The closing of the offering made hereby is a condition to the
closing of the International Offering, and vice versa. Under the terms and
conditions of the Underwriting Agreements, the Underwriters are obligated to
take and pay for all such shares of Class A Common Stock, if any are taken.
Under certain circumstances, the commitments of nondefaulting Underwriters may
be increased as set forth in the Underwriting Agreements.
<TABLE>
<CAPTION>
----------------
U.S. UNDERWRITERS NUMBER OF SHARES
----------------
<S> <C>
J.P. Morgan Securities Inc. .............................................................
Goldman, Sachs & Co. ....................................................................
Morgan Stanley & Co., Incorporated.......................................................
Credit Suisse First Boston Corporation...................................................
Lehman Brothers Inc. ....................................................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......................................
Salomon Brothers Inc.....................................................................
UBS Securities LLC.......................................................................
Subtotal............................................................................
----------------
</TABLE>
88
<PAGE> 91
<TABLE>
<CAPTION>
----------------
INTERNATIONAL MANAGERS NUMBER OF SHARES
----------------
<S> <C>
J.P. Morgan Securities Ltd. .............................................................
Goldman Sachs International..............................................................
Morgan Stanley & Co. International Limited...............................................
Credit Suisse First Boston (Europe) Limited..............................................
Lehman Brothers International (Europe) ..................................................
Merrill Lynch International..............................................................
Salomon Brothers International Limited...................................................
UBS Limited..............................................................................
----------------
Subtotal............................................................................
----------------
Total...............................................................................
=============
</TABLE>
The U.S. Underwriters and the International Managers have entered into an
Agreement Between Syndicates (the "Agreement Between Syndicates") which provides
for the coordination of their activities. Pursuant to the Agreement Between
Syndicates, sales may be made between the U.S. Underwriters and the
International Managers of such number of shares as they may mutually agree. The
price of any shares so sold shall be the offering price, less such amount as may
be mutually agreed upon by the U.S. Representatives and the International
Representatives, but not exceeding the selling concession to dealers applicable
to such shares. To the extent there are sales between the U.S. Underwriters and
the International Managers pursuant to the Agreement Between Syndicates, the
number of shares initially available for sale by the U.S. Underwriters or by the
International Managers may be more or less than the amount appearing on the
cover page of this Prospectus with respect to the Offerings. Neither the U.S.
Underwriters nor the International Managers are obligated to purchase from the
other any unsold shares.
Pursuant to the Agreement Between Syndicates, each U.S. Underwriter has
represented and agreed that (i) it is not purchasing any Class A Common Stock
for the account of anyone other than a United States or Canadian Person and (ii)
it has not offered or sold, and will not offer or sell, directly or indirectly,
any Class A Common Stock or distribute any prospectus relating to the Offerings
outside the United States or Canada or to anyone other than a United States or
Canadian Person. Pursuant to the Agreement Between Syndicates, each
International Manager has represented and agreed that (i) it is not purchasing
Class A Common Stock for the account of any United States or Canadian Person and
(ii) it has not offered or sold, and will not offer or sell, directly or
indirectly, any Class A Common Stock or distribute any prospectus relating the
Offerings within the United States or Canada or to any United States or Canadian
Person. The foregoing limitations do not apply to certain transactions specified
in the Agreement Between Syndicates, including stabilization transactions and
transactions between the U.S. Underwriters and the International Managers
pursuant to the Agreement Between Syndicates. As used herein, "United States or
Canadian Person" means any individual who is a national or a resident of the
United States or Canada or any corporation, pension, profit-sharing or other
trust or other entity organized under the laws of the United States or Canada or
any political
89
<PAGE> 92
subdivision thereof (other than a branch located outside the United States or
Canada), and includes any United States or Canadian branch of a person who is
otherwise not a United States or Canadian Person.
Pursuant to the Agreement Between Syndicates, each U.S. Underwriter has
represented that it has not offered or sold, and agreed not to offer or sell,
any Class A Common Stock, directly or indirectly, in Canada in contravention of
the securities laws of Canada or any province or territory thereof and has
represented that any offer of Class A Common Stock in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which such offer is made. Each U.S.
Underwriter has further agreed to send to any dealer who purchased from it any
of the Class A Common Stock a notice stating in substance that it has not
offered or sold, and will not offer or sell, directly or indirectly, any Class A
Common Stock in Canada or to, or for the benefit of, any resident of Canada in
contravention of the securities laws of Canada or any province or territory
thereof and that any offer of Class A Common Stock in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which such offer is made, and that such
dealer will deliver to any other dealer to whom it sells any of such Class A
Common Stock a notice containing substantially the same statement as is
contained in this sentence.
Pursuant to the Agreement Between Syndicates, each International Manager has
also represented and agreed that (i) it has not offered or sold and prior to the
expiration of the period six months from the closing date for the issuance of
the Class A Common Stock, will not offer or sell any Class A Common Stock to
persons in the United Kingdom, except to those persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for purpose of their businesses or otherwise in
circumstances that have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995, (ii) it has complied and will comply with all
applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the Class A Common Stock in, from or
otherwise involving the United Kingdom and (iii) it has only issued and passed
on and will only issue and pass on in the United Kingdom any document received
by it in connection with the issue of the Class A Common Stock to a person who
is of a kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1996 or is a person to whom the
document may otherwise lawfully be issued or passed on.
The Underwriters propose initially to offer the Class A Common Stock directly to
the public at the price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $ per share to certain other dealers. After the
initial public offering of the Class A Common Stock, the public offering price
and such concession may be changed.
Pursuant to the Underwriting Agreements, the Company has granted the
Underwriters options, exercisable for 30 days from the date of this Prospectus,
to purchase up to an additional shares of Class A Common Stock on the
same terms and conditions as set forth on the cover page hereof. The
Underwriters may exercise such options to purchase solely for the purpose of
covering over-allotments, if any, made in connection with the sale of the Class
A Common Stock offered hereby. To the extent such options are exercised, such
Underwriter will have a commitment, subject to certain conditions, to purchase
approximately the same percentage of such additional Class A Common Stock as the
number set forth next to each Underwriter's name in the preceding tables bears
to the total number of shares of Class A Common Stock offered hereby.
In connection with the Offerings, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Class A Common
Stock. Specifically, the Underwriters may over-allot in connection with the
Offerings, creating a syndicate short position. In addition, the Underwriters
may bid for, and purchase, shares of Class A Common Stock in the open market to
cover syndicate short positions or to stabilize the price of the Class A Common
Stock. Finally, the underwriting syndicate may reclaim selling concessions
allowed for distributing the Class A Common Stock in the Offerings if the
syndicate repurchases previously distributed Class A Common Stock in syndicate
covering transactions, in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the Class A Common
Stock above independent market levels. The Underwriters are not required to
engage in these activities, and may end any of these activities at any time.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Company and DKB have agreed that during the period beginning from the date
of this Prospectus and continuing to and including the date 180 days after the
date of this Prospectus they will (i) not offer, sell, contract to sell or
otherwise dispose of any securities of the Company which are substantially
similar to the Class A Common Shares, including but not limited to any
securities that are convertible into or exchangeable for, or that represent the
right to receive, Class A Common Stock or any such substantially similar
securities or (ii) enter into any swap, option, future, forward or other
agreement that transfers, in whole or in part, the economic consequence of
ownership of Class A Common Stock or any securities substantially similar to
90
<PAGE> 93
the Class A Common Stock (other than (i) pursuant to employee stock option plans
existing on, or upon the conversion or exchange of convertible or exchangeable
securities outstanding as of, the date of this Prospectus and (ii) the issuance
of Common Stock in connection with the transactions described in this
Prospectus), without the prior written consent of J.P. Morgan Securities Inc.
The Underwriters have reserved for sale, at the initial public offering price,
shares of the Class A Common Stock for certain directors, officers, employees,
business associates and related persons of the Company in the United States and,
subject to local laws, internationally, who have expressed an interest in
purchasing such shares of Class A Common Stock in the Offerings. Such persons
are expected to purchase, in the aggregate, not more than % of the Class A
Common Stock offered in the Offerings. The number of shares available for sale
to the general public in the Offerings will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares not so purchased will
be offered to the general public on the same basis as other shares offered
hereby.
Application will be made to list the Class A Common Stock on the New York Stock
Exchange, under the trading symbol "CIT."
Prior to the Offerings, there has been no public market for the Class A Common
Stock. The initial public offering price for the shares of Class A Common Stock
offered hereby has been determined by agreement among the Company and the
Underwriters. Among the factors considered in making such determination were the
history of and the prospects for the industry in which the Company competes, an
assessment of the Company's management, the present operations of the Company,
the historical results of operations of the Company and the trend of its
revenues and earnings, the prospects for future earnings of the Company, the
general condition of the securities markets at the time of the Offerings and the
prices of similar securities of generally comparable companies. There can be no
assurance that an active trading market will develop for the Class A Common
Stock or that the Class A Common Stock will trade in the public market at or
above the initial public offering price.
The Underwriters have advised the Company that they do not expect that sales to
accounts over which they exercise discretionary authority will exceed 5% of the
shares offered hereby.
From time to time in the ordinary course of their respective businesses, certain
of the Underwriters and their affiliates have engaged in and may in the future
engage in commercial and/or investment banking transactions with the Company and
its affiliates.
LEGAL MATTERS
The validity of the Class A Common Stock offered hereby will be passed upon for
the Company by Schulte Roth & Zabel LLP, New York, New York. Certain legal
matters in connection with the Offerings will be passed upon for the
Underwriters by Davis Polk & Wardwell, New York, New York. Schulte Roth & Zabel
LLP has in the past provided, and may continue to provide, legal services to DKB
and its affiliates. Paul N. Roth, a director of the Company, is a partner of
Schulte Roth & Zabel LLP.
EXPERTS
The consolidated balance sheets of the Company 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 included in this Prospectus, have been included herein in
reliance upon the report of KPMG Peat Marwick LLP, independent accountants,
included in this Prospectus, and upon the authority of said firm as experts in
accounting and auditing.
91
<PAGE> 94
GLOSSARY
ASA Average serviced assets -- reflecting AEA plus the
average of consumer finance receivables previously
securitized and currently managed by the Company and
consumer finance receivables serviced for third
parties.
AEA Average earning assets -- reflecting the average of
finance receivables, operating lease equipment,
consumer finance receivables held for sale and certain
investments, less credit balances of factoring
clients.
charge-off A loan which is deemed uncollectible, in whole or in
part, and is charged against the reserve for credit
losses. Generally, finance receivables are charged-off
after considering such factors as the customer's
financial condition and the value of underlying
collateral and guarantees (including recourse to
dealers and manufacturers).
Class A Common Stock Class A Common Stock, par value $0.01 per share, of
the Company.
Class B Common Stock Class B Common Stock, par value $0.01 per share, of
the Company.
Common Stock Class A Common Stock and Class B Common Stock.
contractual delinquency Failure to pay when due any amount as called for by
the terms of the contract.
debt to common equity ratio
The ratio of interest bearing debt to total common
stockholders' equity.
Duff & Phelps Duff & Phelps Credit Rating Company.
earning assets The sum of finance receivables, operating lease
equipment, consumer finance receivables held for sale
and certain investments, less credit balances of
factoring clients.
efficiency ratio The ratio of salaries and general operating expenses
to the sum of operating revenue less depreciation of
operating lease equipment and minority interest in
subsidiary trust holding solely debentures of the
Company.
FICO scores Borrower ratings determined under the Fair Isaac
Company consumer loan credit scoring system.
finance receivables Consists of loans and leases (except operating leases)
extended to customers, net of any unearned income or
other adjustments.
financing and leasing assets
The sum of finance receivables, operating lease
equipment, consumer finance receivables held for sale
and certain investments.
HLT Highly Leveraged Transaction. See page 33 for the
criteria used to determine whether a transaction is an
HLT.
home equity Fixed- and adjustable-rate loans secured by mortgages
on residential real estate.
LIBOR London Interbank Offered Rate.
loans See "finance receivables."
managed assets The sum of financing and leasing assets and
off-balance sheet consumer finance receivables
previously securitized and currently managed by the
Company.
Moody's Moody's Investor Services, Inc.
net credit losses The losses from accounts charged-off, net of
recoveries on loans previously charged-off.
net finance income Finance income less interest expense.
portfolio seasoning The maturing of a loan portfolio beyond an early stage
when past due and net credit loss experience increases
to normalized levels.
serviced assets The sum of previously owned and securitized consumer
finance receivables currently managed by the Company
and other consumer finance receivables serviced for
third parties.
Standard & Poor's Standard & Poor's Ratings Group.
92
<PAGE> 95
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Auditors F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-3
Consolidated Statements of Income for the Years Ended December 31, 1996, 1995, and 1994 F-4
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1996,
1995 and 1994 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 F-6
Notes to Consolidated Financial Statements F-7
Consolidated Balance Sheets as of June 30, 1997 (Unaudited) and December 31, 1996 F-27
Unaudited Consolidated Statements of Income for the Three and Six Months Ended June 30, 1997 and
1996 F-28
Unaudited Consolidated Statements of Changes in Stockholders' Equity for the Six Months Ended
June 30, 1997 and 1996 F-29
Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1997 and 1996 F-30
Notes to Unaudited Consolidated Financial Statements F-31
</TABLE>
F-1
<PAGE> 96
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The CIT Group, Inc.:
We have audited the accompanying consolidated balance sheets of The CIT Group,
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 Company'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, 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 and
Note 22 which is as of
September 26, 1997
F-2
<PAGE> 97
THE CIT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
-----------------------
AT DECEMBER 31,
1996 1995
--------- ---------
<S> <C> <C>
Dollars in millions
ASSETS
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
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 98
THE CIT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
--------------------------------------
YEARS ENDED DECEMBER 31,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Dollars in millions
Finance income $1,646.2 $1,529.2 $1,263.8
Interest expense 848.3 831.5 614.0
-------- -------- --------
Net finance income 797.9 697.7 649.8
Fees and other income (Note 9) 244.1 184.7 174.4
-------- -------- --------
Operating revenue 1,042.0 882.4 824.2
-------- -------- --------
Salaries and general operating expenses (Note 10) 393.1 345.7 337.9
Provision for credit losses (Note 4) 111.4 91.9 96.9
Depreciation on operating lease equipment (Note 5) 121.7 79.7 64.4
-------- -------- --------
Operating expenses 626.2 517.3 499.2
-------- -------- --------
Income before provision for income taxes 415.8 365.1 325.0
Provision for income taxes (Note 11) 155.7 139.8 123.9
-------- -------- --------
Net income $ 260.1 $ 225.3 $ 201.1
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 99
THE CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
--------------------------------------
YEARS ENDED DECEMBER 31,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Dollars in millions
COMMON STOCK
Balance, beginning and end of period $ 250.0 $ 250.0 $ 250.0
-------- -------- --------
PAID-IN CAPITAL
Balance, beginning of period $ 408.3 $ 408.3 $ 408.3
Capital contribution from stockholders (Note 1) 165.0 -- --
-------- -------- --------
Balance, end of period $ 573.3 $ 408.3 $ 408.3
-------- -------- --------
RETAINED EARNINGS
Balance, beginning of period $1,255.9 $1,134.7 $1,033.9
Net income 260.1 225.3 201.1
Dividends paid--regular (98.9) (104.1) (100.3)
--special (Note 1) (165.0) -- --
-------- -------- --------
Balance, end of period $1,252.1 $1,255.9 $1,134.7
-------- -------- --------
Total stockholders' equity (Note 8) $2,075.4 $1,914.2 $1,793.0
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 100
THE CIT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
-----------------------------------------
YEARS ENDED DECEMBER 31,
1996 1995 1994
---------- ---------- -----------
<S> <C> <C> <C>
Dollars in millions
CASH FLOWS FROM OPERATIONS
Net income $ 260.1 $ 225.3 $ 201.1
Adjustments to reconcile net income to net cash flows from
operations:
Provision for credit losses 111.4 91.9 96.9
Depreciation and amortization 140.3 88.7 75.4
Provision for deferred Federal income taxes 54.1 42.5 27.7
Gains on sales of equipment, other investments, 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 receivable 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 transfer 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.
F-6
<PAGE> 101
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY
The CIT Group, Inc. (the "Company") formerly known as The CIT Group Holdings,
Inc. 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 Company, 60% of which it purchased from Manufacturers Hanover
Corporation ("MHC") in 1989. DKB acquired an additional 20% of the Company from
Chemical Banking Corporation ("CBC") in December 1995. The remaining 20% of the
Company'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 Company 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 Company'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 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 Company 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 Company 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 Company 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.
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
F-7
<PAGE> 102
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. Chargeoffs 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 chargeoffs 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 chargeoffs, automatic chargeoffs 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 Company 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 exected 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 Company'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. Certain consumer loans are
originated and sold to trusts which, in turn, issue asset-backed securities to
investors. The Company 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 Company
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 Company 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
F-8
<PAGE> 103
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 Company'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 Company 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 Company 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 Company 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.
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.
F-9
<PAGE> 104
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
Company.
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>
---------------------------------------------
AT DECEMBER 31,
1996 1995
-------------------- --------------------
Dollars in millions AMOUNT PERCENT AMOUNT PERCENT
--------- ------ --------- ------
<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>
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.
<TABLE>
<CAPTION>
-----------------
AT DECEMBER 31,
1996 1995
------ ------
<S> <C> <C>
Dollars in millions
Nonaccrual finance receivables $119.6 $139.5
Assets received in satisfaction of loans 47.9 42.0
------ ------
Total nonperorming assets $167.5 $181.5
====== ======
Percent to finance receivables 0.99% 1.15%
</TABLE>
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
F-10
<PAGE> 105
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
after being classified as impaired loans. The adoption of SFAS 114 on January 1,
1995 had no material effect on the Company's 1995 financial condition, results
of operation or liquidity.
At December 31, 1996, and 1995, the Company 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.
NOTE 4--RESERVE FOR CREDIT LOSSES
The following table presents changes in the reserve for credit losses.
<TABLE>
<CAPTION>
----------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Dollars in millions
Balance, January 1 $206.0 $192.4 $169.4
------ ------ ------
Finance receivables charged-off (122.2) (96.9) (95.4)
Recoveries on finance receivables previously charged-off 20.7 19.7 11.2
------ ------ ------
Net credit losses (101.5) (77.2) (84.2)
------ ------ ------
Provision for credit losses 111.4 91.9 96.9
Portfolio acquisitions (dispositions), net 4.9 (1.1) 10.3
------ ------ ------
Net addition to the reserve for credit losses 116.3 90.8 107.2
------ ------ ------
Balance, December 31 $220.8 $206.0 $192.4
====== ====== ======
Reserve for credit losses as a percentage of finance
receivables 1.30% 1.30% 1.30%
</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.
<TABLE>
<CAPTION>
---------------------
AT DECEMBER 31,
Dollars in millions 1996 1995
-------- --------
<S> <C> <C>
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
========= =========
</TABLE>
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 Company 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
F-11
<PAGE> 106
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
adoption of SFAS 121 did not have a significant impact on the Company's
consolidated financial position, results of operations or liquidity.
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.
<TABLE>
<CAPTION>
----------
AMOUNTS
IN MILLIONS
-----------
<S> <C>
Years Ended December 31,
1997 $ 193.7
1998 162.7
1999 126.3
2000 91.9
2001 70.1
Thereafter 89.8
------
Total $ 734.5
======
</TABLE>
NOTE 6--DEBT
The following table presents data on commercial paper borrowings.
<TABLE>
<CAPTION>
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Dollars in millions
At December 31,
Borrowings outstanding $5,827.0 $6,105.6 $5,660.2
Weighted average interest rate 5.45% 5.75% 5.65%
Weighted average maturity 32 days 45 days 22 days
For the year ended December 31,
Daily average borrowings $5,817.7 $5,800.1 $6,532.5
Maximum amount outstanding $6,591.3 $6,672.1 $7,207.3
Weighted average interest rate (excluding amounts related to interest
bearing deposits) 5.44% 5.95% 4.31%
</TABLE>
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
---------- ------------- -------- --------
<S> <C> <C> <C> <C>
Dollars in millions
Due in 1996 (rates ranging from 5.55% to 5.95%) $ -- $ -- $ -- $8,505.6
Due in 1997 (rates ranging from 5.04% to 6.14%) 5,827.0 2,856.0 8,683.0 806.0
Due in 1998 (rates ranging from 5.47% to 6.03%)(1) -- 461.5 461.5 241.5
Due in 1999 (rates ranging from 5.04% to 6.06%) -- 380.0 380.0 380.0
Due after 2001 (rate of 5.85%) -- 20.0 20.0 --
-------- -------- -------- --------
Total $5,827.0 $ 3,717.5 $9,544.5 $9,933.1
======== ======== ======== ========
</TABLE>
F-12
<PAGE> 107
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
---------------------------------------------------
FIXED RATE NOTES 1996 1995
SENIOR SUBORDINATED TOTAL TOTAL
-------- ------------ -------- --------
<S> <C> <C> <C> <C>
Dollars in millions
Due in 1996 (rates ranging from 4.75% to 8.88%) $ -- $ -- $ -- $1,030.0
Due in 1997 (rates ranging from 5.50% to 8.75%) 700.2 -- 700.2 702.0
Due in 1998 (rates ranging from 5.63% to 8.75%) 1,550.0 -- 1,550.0 800.0
Due in 1999 (rates ranging from 5.38% to 6.63%) 1,070.0 -- 1,070.0 20.0
Due in 2000 (rate of 6.15%) 20.0 -- 20.0 20.0
Due in 2001 (rates ranging from 5.63% to 9.25%) 500.0 200.0 700.0 200.0
Due after 2001 (rates ranging from 5.37% to 7.13%)(2) 928.6 100.0 1,028.6 870.2
-------- ------ -------- --------
Face amount of maturities 4,768.8 300.0 5,068.8 3,642.2
Issue discount (7.6) -- (7.6) (5.2)
-------- ------ -------- --------
Total $4,761.2 $300.0 $5,061.2 $3,637.0
======== ====== ======== ========
</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.
<TABLE>
<CAPTION>
Dollars in millions --------
MATURITY AMOUNT
-------------------------------------------------------------- --------
<S> <C> <C>
May 1997 $1,212.0
September 1997 81.0
May 2001 3,638.0
September 2001 244.0
Total $5,175.0
</TABLE>
The credit line agreements contain clauses which allow the Company 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.
NOTE 7--DERIVATIVE FINANCIAL INSTRUMENTS
As part of managing the exposure to changes in market interest rates, the
Company, 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 Company uses off-balance sheet derivatives
for hedging purposes only. The Company does not enter into derivative financial
instruments for trading or speculative purposes. To ensure both appropriate use
as a hedge and hedge accounting treatment, all derivatives entered into are
designated, according to hedge objective, against directly issued commercial
paper, a specifically underwritten debt issue or a specific pool of assets. The
Company's primary hedge objectives include the conversion of variable rate
liabilities to fixed rates, the conversion of fixed rate liabilities to variable
rates, the fixing of spreads on variable rate liabilities to various market
indices and the elimination of interest rate risk on finance receivables
classified as held for sale prior to securitization. The notional amounts,
rates, indices and maturities of the Company's off-balance sheet derivatives are
required to closely match the related terms of the Company's hedged assets and
liabilities.
F-13
<PAGE> 108
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
Notional Amounts in Millions
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
FLOATING TO FIXED RATE FIXED TO FLOATING RATE FLOATING TO FLOATING RATE
----------------------------- ----------------------------- -----------------------------
YEARS ENDING NOTIONAL RECEIVE PAY NOTIONAL RECEIVE PAY NOTIONAL RECEIVE PAY
DECEMBER 31 AMOUNT RATE RATE AMOUNT RATE RATE AMOUNT RATE RATE
-------- ------- ---- -------- ------- ---- -------- ------- ----
<S> <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 in Millions
<TABLE>
<CAPTION>
NOTIONAL
INTEREST RATE SWAPS AMOUNTS COMMENTS
- ------------------------------------------ ---------------- --------------------------------------------
<S> <C> <C>
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
========
</TABLE>
The Company'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 Company's hedging activity. However, this calculation of
interest expense does not take into account any actions the Company 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.
F-14
<PAGE> 109
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 Company 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 Company 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 Company'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 Company 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,
Dollars in millions 1996 1995 1994
------ ------ ------
<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.
<TABLE>
<CAPTION>
----------------------------
YEARS ENDED DECEMBER 31,
Dollars in millions 1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
NOTE 11--INCOME TAXES
The effective tax rate of the Company varied from the statutory Federal
corporate income tax rate as follows:
<TABLE>
<CAPTION>
------------------------
YEARS ENDED DECEMBER 31,
Percentage of Pretax Income 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
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%
====== ====== ======
</TABLE>
F-15
<PAGE> 110
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
----------------------------
YEARS ENDED DECEMBER 31,
Dollars in millions 1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred Federal income tax assets and liabilities are presented below.
<TABLE>
<CAPTION>
-------------------
YEARS ENDED
DECEMBER 31,
1996 1995
------- -------
<S> <C> <C>
Dollars 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
====== ======
</TABLE>
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.
NOTE 12--POSTRETIREMENT AND OTHER BENEFIT PLANS
Retirement Plan
Substantially all employees of the Company 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 Company funds the plan to the extent the funding qualifies for
an income tax deduction. Such funding is charged to salaries and employee
benefits expense.
F-16
<PAGE> 111
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The accompanying table sets forth the funded status of the Plan and the amounts
recognized in the Consolidated Balance Sheets.
<TABLE>
<CAPTION>
------------------------------
AT OR FOR THE YEARS ENDED
DECEMBER 31,
Dollars in millions 1996 1995 1994
------ ------ ------
<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.
<TABLE>
<CAPTION>
--------------------------
1996 1995 1994
----- ----- ------
<S> <C> <C> <C>
Discount rate 7.50% 7.25% 8.75%
Rate of increase in competition 4.50% 4.50% 5.00%
Expected long-term rate of return on plan assets 10.00% 10.00% 9.00%
</TABLE>
Postretirement Medical and Life Insurance Benefits
The Company 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.
F-17
<PAGE> 112
THE CIT GROUP, 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.
<TABLE>
<CAPTION>
---------------
AT DECEMBER 31,
1996 1995
----- -----
<S> <C> <C>
Dollars in millions
Accumulated post retirement 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
===== =====
</TABLE>
The components of net periodic postretirement benefit cost were as follows.
<TABLE>
<CAPTION>
------------------------
YEARS ENDED DECEMBER 31,
1996 1995 1994
----- ----- ----
<S> <C> <C> <C>
Dollars in millions
Service cost, benefits earned during the period $ 1.1 $ 1.1 $1.2
Interest cost on accumulated postretirement benefit obligation 2.4 3.2 2.8
Amortization of unrecognized transition obligation 1.7 1.7 1.7
Amortization of gain (0.6) -- --
Amortization of unrecognized prior service cost -- (0.1) --
----- ----- ----
Net periodic postretirement benefit cost $ 4.6 $ 5.9 $5.7
===== ===== ====
</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 Company participate in The CIT Group Holdings, Inc.
Savings Incentive Plan. This plan qualifies under section 401(k) of the Internal
Revenue Code. The Company'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.
F-18
<PAGE> 113
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13--LEASE COMMITMENTS
The Company 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.
<TABLE>
<CAPTION>
DOLLARS
AT DECEMBER 31, IN MILLIONS
-------------------------------------------------------------- ------------
<S> <C>
1997 $ 23.8
1998 22.3
1999 18.9
2000 15.6
2001 14.5
Thereafter 60.5
------
Total $155.6
======
</TABLE>
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.
<TABLE>
<CAPTION>
-------------------------
YEARS ENDED DECEMBER 31,
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Dollars 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
===== ===== =====
</TABLE>
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 Company. 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
Company.
NOTE 15--CREDIT-RELATED COMMITMENTS
In the normal course of meeting the financing needs of its customers, the
Company 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 Company 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 Company represents the
contractual amount outstanding less the value of all underlying collateral and
guarantees.
F-19
<PAGE> 114
THE CIT GROUP, 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 OUTSTANDING
WITHIN AFTER -------------------------
ONE YEAR ONE YEAR 1996 1995
-------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Dollars in millions
AT DECEMBER 31,
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 Company'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 Company'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 Company'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.
Estimated fair values, recorded carrying values and various assumptions used in
valuing the Company's financial instruments at December 31, 1996 and 1995 are
set forth below.
F-20
<PAGE> 115
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
-------------------------------------------------------
AT DECEMBER 31,
1996 1995
-------------------------- --------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
----------- ---------- ----------- ----------
ASSET ASSET ASSET ASSET
(LIABILITY) (LIABILITY) (LIABILITY) (LIABILITY)
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Dollars in millions
Finance Receivables--Loans(a) $ 13,275.2 $ 13,480.1 $ 12,563.4 $ 12,844.1
Other Assets(b) 389.7 424.4 305.5 333.2
Commercial Paper(c) (5,827.0) (5,827.0) (6,105.6) (6,105.6)
Fixed rate senior notes and subordinated fixed rate
notes(d) (5,061.2) (5,091.6) (3,637.0) (3,762.2)
Variable rate notes(d) (3,717.5) (3,714.3) (3,827.5) (3,827.5)
Credit balances of factoring clients and accrued
liabilities and payables(e) (1,578.9) (1,578.9) (1,344.8) (1,344.8)
Derivative Financial Instruments(f)
Interest Rate Swaps
Off-balance sheet assets -- 6.3 -- 2.8
Off-balance sheet liabilities -- (64.6) -- (107.8)
Cross currency interest rate swaps -- 14.1 -- 36.8
Forward interest rate agreement -- -- -- (0.5)
</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 Company 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 Company'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
F-21
<PAGE> 116
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
NOTE 17--INVESTMENTS IN DEBT AND EQUITY SECURITIES
At December 31, 1996 and 1995, the book value of the Company'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 Company'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 Company. 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
Company 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
Company 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 Company.
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 Company 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 Company has in the past and may in the future enter into certain
transactions with affiliates of the Company. It is anticipated that such
transactions will be entered into at a fair market value for the transaction.
The Company's interest-bearing deposits generally represent overnight money
market investments of excess cash that are maintained for liquidity purposes. At
December 31, 1995, the Company had $135.0 million of interest-bearing deposits
with DKB. At December 31, 1996, the Company had no such deposits. From time to
time, the Company may maintain such deposits with DKB or Chase.
At December 31, 1996, the Company'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 Company'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
commitments of $55.0 million, $80.0 million and $105.0
F-22
<PAGE> 117
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 Company 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 Company 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 Company 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 Company 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 Company 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 Company 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 Company purchased finance receivables totaling $33.4 million from Chase
during 1996.
The Company 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
Company 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 Company, 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
Company, having identical rates and payment dates. The Debentures of the Company
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 Company
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 Company to the
extent that the Trust has funds available for distribution.
For financial reporting purposes, the Capital Securities will be presented in
the consolidated balance sheet of the Company 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 Company will record distributions payable on
the Capital Securities as an expense in the consolidated statements of income.
NOTE 22--SUBSEQUENT EVENT--INITIAL PUBLIC OFFERING
On September 26, 1997, the Company filed a Registration Statement in connection
with the proposed initial public offering of the Company's common stock.
F-23
<PAGE> 118
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 23--BUSINESS SEGMENT INFORMATION
The Company's primary business activities are comprised of commercial and
consumer operations. The Company's diversified commercial segment is engaged in
equipment financing and leasing, factoring and commercial finance. The Company's
consumer segment offers home equity lending, secured retail sales financing of
manufactured housing, recreation vehicles and recreational boats, as well as
consumer loan servicing.
Segment total revenue is defined as finance income plus fees and other income.
Segment operating income (loss) is defined as total revenue less direct segment
interest and operating expenses. Other includes general corporate expenses, and
revenues and expenses related to other operations of the Company. The following
table sets forth information on the Company's commercial and consumer business
segments (in millions).
<TABLE>
<CAPTION>
-------------------------------------
AT DECEMBER 31,
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Dollars in millions
TOTAL ASSETS
Commercial $15,143.2 $14,590.5 $13,670.7
Consumer 3,563.4 2,587.7 2,122.2
Other 225.9 242.1 166.8
--------- --------- ---------
Total $18,932.5 $17,420.3 $15,959.7
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
----------------------------------
YEARS ENDED DECEMBER 31,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Dollars in millions
TOTAL REVENUES
Commercial $1,542.6 $1,443.0 $1,242.7
Consumer 325.6 264.4 177.2
Other 22.1 6.5 18.3
-------- -------- --------
Total $1,890.3 $1,713.9 $1,438.2
======= ======= =======
OPERATING INCOME (LOSS)
Commercial $ 390.2 $ 341.5 $ 336.9
Consumer 67.4 63.9 24.3
Other (41.8) (40.3) (36.2)
-------- -------- --------
Total $ 415.8 $ 365.1 $ 325.0
======= ======= =======
</TABLE>
NOTE 24--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
----------------------------------------------------
1996
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Dollars in millions
Net finance income $195.4 $197.3 $201.4 $203.8 $797.9
Fees and other income 52.7 73.2 50.9 67.3 244.1
Salaries and general operating expenses 95.9 97.6 97.9 101.7 393.1
Provision for credit losses 27.8 26.6 24.2 32.8 111.4
Depreciation on operating lease equipment 27.5 28.8 28.0 37.4 121.7
Provision for income taxes 37.1 45.1 37.1 36.4 155.7
Net income $ 59.8 $ 72.4 $ 65.1 $ 62.8 $260.1
</TABLE>
F-24
<PAGE> 119
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
----------------------------------------------------
1995
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Dollars 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>
F-25
<PAGE> 120
THE CIT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
-----------------------------
AT JUNE
30, AT DECEMBER 31,
1997 1996
--------- ---------------
(UNAUDITED)
<S> <C> <C>
Dollars in millions
ASSETS
Financing and leasing assets
Loans
Commercial $ 9,776.3 $10,195.6
Consumer 3,100.1 3,239.0
Lease receivables 3,938.3 3,562.0
--------- ---------
Finance receivables 16,814.7 16,996.6
Reserve for credit losses (221.9) (220.8)
--------- ---------
Net finance receivables 16,592.8 16,775.8
Operating lease equipment, net 1,573.0 1,402.1
Consumer finance receivables held for sale 950.1 116.3
Cash and cash equivalents 252.0 103.1
Other assets 585.7 535.2
--------- ---------
Total assets $19,953.6 $18,932.5
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt
Commercial paper $ 6,377.8 $ 5,827.0
Variable rate senior notes 3,261.5 3,717.5
Fixed rate senior notes 5,360.5 4,761.2
Subordinated fixed rate notes 300.0 300.0
--------- ---------
Total debt 15,299.8 14,605.7
Credit balances of factoring clients 1,089.1 1,134.1
Accrued liabilities and payables 603.3 594.0
Deferred Federal income taxes 520.8 523.3
--------- ---------
Total liabilities 17,513.0 16,857.1
Company-obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely debentures of the company 250.0 --
STOCKHOLDERS' EQUITY
Common stock--authorized, issued and outstanding--1,000 shares 250.0 250.0
Paid-in capital 573.3 573.3
Retained earnings 1,367.3 1,252.1
--------- ---------
Total stockholders' equity 2,190.6 2,075.4
--------- ---------
Total liabilities and stockholders' equity $19,953.6 $18,932.5
========= =========
</TABLE>
See accompanying notes to financial statements. It is suggested these condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes included herein as of December 31, 1996 and 1995
and for the each of the years in the three-year period ended December 31, 1996.
F-26
<PAGE> 121
THE CIT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
---------------------------------------
THREE MONTHS
ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Dollars in millions
Finance income $451.9 $403.9 $889.0 $806.5
Interest expense 233.6 206.6 456.7 413.8
------ ------ ------ ------
Net finance income 218.3 197.3 432.3 392.7
Fees and other income 49.4 73.2 107.1 125.9
Gain on sale of equity interest acquired in loan workout 58.0 -- 58.0 --
------ ------ ------ ------
Operating revenue 325.7 270.5 597.4 518.6
------ ------ ------ ------
Salaries and general operating expenses 110.6 97.6 210.5 193.5
Provision for credit losses 29.0 26.6 56.0 54.4
Depreciation on operating lease equipment 33.9 28.8 66.0 56.3
Minority interest in subsidiary trust holding solely debentures
of the company 4.8 -- 6.7 --
------ ------ ------ ------
Operating expenses 178.3 153.0 339.2 304.2
------ ------ ------ ------
Income before provision for income taxes 147.4 117.5 258.2 214.4
Provision for income taxes 53.7 45.1 94.4 82.2
------ ------ ------ ------
Net income $ 93.7 $ 72.4 $163.8 $132.2
====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements. It is suggested these condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes included herein as of December 31, 1996 and 1995
and for the each of the years in the three-year period ended December 31, 1995.
F-27
<PAGE> 122
THE CIT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
-----------------------
SIX MONTHS ENDED
JUNE 30,
1997 1996
-------- --------
<S> <C> <C>
Dollars in millions
Balance, January 1 $2,075.4 $1,914.2
Net income 163.8 132.2
Dividends paid(1) (48.6) (60.4)
-------- --------
Balance, June 30 $2,190.6 $1,986.0
======== ========
</TABLE>
- ---------------
(1) Commencing with the 1996 second quarter dividend, the dividend policy of the
Company was changed to require the payment of dividends by the Company of 30% of
net operating earnings on a quarterly basis. Previously, the Company's dividend
policy required the payment of dividends by the Company of 50% of net operating
earnings on a quarterly basis.
See accompanying notes to financial statements. It is suggested these condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes included herein as of December 31, 1996 and 1995
and for the each of the years in the three-year period ended December 31, 1995.
F-28
<PAGE> 123
THE CIT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
-------------------------
SIX MONTHS ENDED
JUNE 30,
1997 1996
---------- ----------
<S> <C> <C>
Dollars in millions
CASH FLOWS FROM OPERATIONS
Net income $ 163.8 $ 132.2
Adjustments to reconcile net income to net cash flows from operations
Provision for credit losses 56.0 54.4
Depreciation and amortization 76.8 64.9
(Benefit) provision for deferred Federal income taxes (2.5) 10.3
Gains on asset and receivable sales (86.5) (43.2)
Increase in accrued liabilities and payables 9.3 1.6
Increase in other assets (50.5) (17.1)
Other 4.7 (19.2)
---------- ----------
Net cash flows provided by operations 171.1 183.9
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans extended (15,919.0) (14,936.5)
Collections on loans 15,165.4 14,512.4
Purchases of assets to be leased (275.6) (194.4)
Net increase in short-term factoring receivables (137.8) (60.7)
Proceeds from asset and receivable sales 377.5 371.0
Proceeds from sales of assets received in satisfaction of loans 13.6 17.5
Purchases of finance receivables portfolios (58.6) (81.9)
Purchases of investment securities (11.6) (14.2)
Other (11.7) (16.3)
---------- ----------
Net cash flows used for investing activities (857.8) (403.1)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of variable and fixed rate notes 1,949.3 1,977.1
Repayments of variable and fixed rate notes (1,806.0) (1,146.0)
Proceeds from the issuance of company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely debentures of the company 250.0 --
Net increase (decrease) in commercial paper 550.8 (532.3)
Proceeds from nonrecourse leveraged lease debt 33.0 9.2
Repayments of nonrecourse leveraged lease debt (92.9) (79.8)
Cash dividends paid (48.6) (60.4)
---------- ----------
Net cash flows provided by financing activities 835.6 167.8
---------- ----------
Net increase (decrease) in cash and cash equivalents 148.9 (51.4)
Cash and cash equivalents, beginning of period 103.1 161.5
---------- ----------
Cash and cash equivalents, end of period $ 252.0 $ 110.1
========== ==========
SUPPLEMENTAL DISCLOSURES
Interest paid $ 458.3 $ 432.2
Federal and State and local taxes paid 60.3 59.5
Noncash transfer of finance receivables to finance receivables held for sale 972.9 318.3
Noncash transfers of finance receivables to assets received in satisfaction of
loans 12.5 70.9
Noncash transfers of assets received in satisfaction of loans to finance
receivables 4.6 --
</TABLE>
See accompanying notes to financial statements. It is suggested these condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes included herein as of December 31, 1996 and 1995
and for the each of the years in the three-year period ended December 31, 1995.
F-29
<PAGE> 124
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
The Company considers that all adjustments (all of which are normal recurring
accruals) necessary for a fair statement of financial position and results of
operations for these periods have been made; however, results for such interim
periods are subject to year-end audit adjustments. Results for such interim
periods are not necessarily indicative of results for a full year.
NOTE 2--RECENT ACCOUNTING PRONOUNCEMENTS
The Company 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 that proper accounting for financial asset transfers and addresses
the accounting for servicing rights on financial assets in addition to mortgage
loans. 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.
In accordance with the transition rules set forth in SFAS 125, the Company, on
January 1, 1997, reclassified the portion of previously recognized excess
servicing assets that did not exceed contractually specified servicing fees to
servicing assets which are included in other assets in the Consolidated Balance
Sheets. The remaining balances of previously recognized excess servicing assets
are included in other asset in the Consolidated Balance Sheets and are
classified as available-for-sale investment securities subject to the provisions
of Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The amortized cost approximates the
current fair market value of such assets.
The adoption of SFAS 125 did not have a significant impact on the Company's
financial position or results of operations.
Additionally, in February of 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard No. 128 "Earnings Per Share"
("SFAS 128"). SFAS 128 establishes standards for the presentation and disclosure
for earnings per share (EPS). It also simplifies the standards for computing
EPS, and makes them comparable to international EPS standards. SFAS 128 replaces
the presentation of primary and fully diluted EPS with basic and diluted EPS,
respectively, and requires the reconciliation of the numerator and denominator
of basic EPS with that of diluted EPS. SFAS 128 is effective for financial
statements for both interim and annual periods ending after December 15, 1997.
Earlier application is not permitted. After adoption, all prior period EPS is
required to be restated to conform with SFAS 128.
F-30
<PAGE> 125
Subject to Completion
Dated September 26, 1997
PROSPECTUS Alternate Page
Shares
THE CIT GROUP, INC.
Class A Common Stock
(par value $0.01 per share)
All of the shares of Class A Common Stock offered hereby are being offered by
The CIT Group, Inc. (the "Company"), which is an 80% owned subsidiary of The
Dai-Ichi Kangyo Bank, Limited ("DKB"). Upon completion of the Offerings, DKB
will own 100% of the outstanding shares of Class B Common Stock of the Company
(which has five votes per share), a class of common stock separate from the
Class A Common Stock (which has one vote per share). Following the Offerings,
the shares offered hereby will represent % of the combined voting
power of all classes of voting stock and % of the economic interest (or rights
of holders of common equity to participate in distributions in respect of the
common equity) in the Company. The remainder of the voting power and economic
interest in the Company will be beneficially held by DKB. See "Risk
Factors--Control By and Relationship with DKB," "Relationship with DKB" and
"Description of Capital Stock."
Of the shares of Class A Common Stock offered hereby, shares are being
offered initially outside the United States and Canada by the International
Managers (the "International Managers") and shares are being offered
initially in the United States and Canada in a concurrent offering by the U.S.
Underwriters (the "U.S. Underwriters" and, together with the International
Managers, the "Underwriters"). See "Underwriting."
Prior to the Offerings, there has been no public market for the Class A Common
Stock. It is currently anticipated that the initial public offering price will
be between $ and $ per share. See "Underwriting" for information
relating to the factors considered in determining the initial public offering
price of the Class A Common Stock. Application will be made to list the Class A
Common Stock on The New York Stock Exchange, Inc. (the "New York Stock
Exchange") under the symbol "CIT."
Shares of Class A Common Stock are being reserved for sale to certain directors,
officers and employees of the Company and certain related persons at the initial
public offering price. See "Underwriting." All such persons are expected to
purchase, in the aggregate, not more than % of the Class A Common Stock
offered in the Offerings.
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR CERTAIN INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
THIS INTERNATIONAL PROSPECTUS IS INTENDED FOR USE ONLY IN CONNECTION WITH OFFERS
AND SALES OF THE CLASS A COMMON STOCK OUTSIDE THE UNITED STATES OR CANADA AND IS
NOT TO BE SENT OR GIVEN TO ANY PERSON WITHIN THE UNITED STATES OR CANADA. THE
CLASS A COMMON STOCK OFFERED HEREBY IS NOT BEING REGISTERED UNDER THE U.S.
SECURITIES ACT OF 1933 FOR THE PURPOSE OF SALES OUTSIDE THE UNITED STATES.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
PRICE TO PROCEEDS TO
PUBLIC UNDERWRITING COMPANY(2)
DISCOUNT(1)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- -----------------------------------------------------------------------------------------------------------
Total(3) $ $ $
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
See "Underwriting."
(2) Before deducting expenses of the Offerings payable by the Company estimated
at .
(3) The Company has granted the Underwriters options, exercisable within 30 days
after the date of this Prospectus, to purchase up to an additional shares
of Class A Common Stock on the same terms and conditions as set forth above,
solely to cover over-allotments, if any. If such over-allotment options are
exercised in full, the total Price to Public, Underwriting Discount and Proceeds
to Company will be $ , $ and $ , respectively.
<PAGE> 126
The shares of Class A Common Stock are being offered by the International
Managers, subject to prior sale, when, as and if delivered to and accepted by
the International Managers, and subject to approval of certain legal matters by
Davis Polk & Wardwell, counsel for the Underwriters. It is expected that
delivery of the shares of Class A Common Stock will be made against payment
therefor on or about , 1997, at the offices of J.P. Morgan
Securities Inc., 60 Wall Street, New York, New York.
J.P. MORGAN SECURITIES LTD. GOLDMAN SACHS INTERNATIONAL
Joint Lead Managers
MORGAN STANLEY DEAN WITTER
CREDIT SUISSE FIRST BOSTON
LEHMAN BROTHERS
MERRILL LYNCH INTERNATIONAL
SALOMON BROTHERS INTERNATIONAL LIMITED
UBS
LIMITED
, 1997
INFORMATION CONTAINED
HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT.
<PAGE> 127
Alternate Page
UNDERWRITING
J.P. Morgan & Co. is acting as bookrunning lead manager for the Offerings. J.P.
Morgan Securities Ltd. and Goldman Sachs International, are acting as joint lead
managers.
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date of this Prospectus (the "International Underwriting
Agreement"), the International Managers named below, for whom J.P. Morgan
Securities Ltd., Goldman Sachs International, Morgan Stanley & Co. International
Limited, Credit Suisse First Boston (Europe) Limited, Lehman Brothers
International (Europe), Merrill Lynch International, Salomon Brothers
International Limited and UBS Limited are acting as representatives (the
"International Representatives"), have severally agreed to purchase, and the
Company has agreed to sell to them, the respective number of shares of Class A
Common Stock set forth opposite their names below. Under the terms and subject
to the conditions contained in an Underwriting Agreement dated the date of this
Prospectus (the "U.S. Underwriting Agreement" and, together with the
International Underwriting Agreement, the "Underwriting Agreements"), the U.S.
Underwriters named below, for whom J.P. Morgan Securities Inc., Goldman, Sachs &
Co., Morgan Stanley & Co., Incorporated, Credit Suisse First Boston Corporation,
Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Salomon Brothers Inc and UBS Securities LLC are acting as representatives (the
"U.S. Representatives"), have severally agreed to purchase, and the Company has
agreed to sell to them, the respective number of shares of Class A Common Stock
set forth opposite their names below. The closing of the offering made hereby is
a condition to the closing of the U.S. Offering, and vice versa. Under the terms
and conditions of the Underwriting Agreements, the Underwriters are obligated to
take and pay for all such shares of Class A Common Stock, if any are taken.
Under certain circumstances, the commitments of nondefaulting Underwriters may
be increased as set forth in the Underwriting Agreements.
<TABLE>
<CAPTION>
----------------
NUMBER OF SHARES
----------------
<S> <C>
INTERNATIONAL MANAGERS
J.P. Morgan Securities Ltd. .............................................................
Goldman Sachs International..............................................................
Morgan Stanley & Co. International Limited...............................................
Credit Suisse First Boston (Europe) Limited..............................................
Lehman Brothers International (Europe) ..................................................
Merrill Lynch International..............................................................
Salomon Brothers International Limited...................................................
UBS Limited..............................................................................
Subtotal............................................................................
----------------
</TABLE>
<PAGE> 128
Alternate Page
<TABLE>
<CAPTION>
----------------
NUMBER OF SHARES
----------------
<S> <C>
U.S. UNDERWRITERS
J.P. Morgan Securities Inc. .............................................................
Goldman, Sachs & Co. ....................................................................
Morgan Stanley & Co. Incorporated........................................................
Credit Suisse First Boston Corporation...................................................
Lehman Brothers Inc. ....................................................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......................................
Salomon Brothers Inc.....................................................................
UBS Securities LLC.......................................................................
Subtotal............................................................................
----------------
Total...............................................................................
=============
</TABLE>
The Class A Common Stock offered hereby is not being registered under the
Securities Act for the purpose of sales outside the United States. This
Prospectus is intended for use only in connection with offers and sales of the
Class A Common Stock outside the United States and Canada and is not to be sent
or given to any person within the United States or Canada. The Prospectus
relating to the U.S. Offering must be used by underwriters and dealers in
connection with sales of Class A Common Stock to persons located in the United
States and Canada.
The U.S. Underwriters and the International Managers have entered into an
Agreement Between Syndicates (the "Agreement Between Syndicates") which provides
for the coordination of their activities. Pursuant to the Agreement Between
Syndicates, sales may be made between the U.S. Underwriters and the
International Managers of such number of shares as they may mutually agree. The
price of any shares so sold shall be the offering price, less such amount as may
be mutually agreed upon by the U.S. Representatives and the International
Representatives, but not exceeding the selling concession to dealers applicable
to such shares. To the extent there are sales between the U.S. Underwriters and
the International Managers pursuant to the Agreement Between Syndicates, the
number of shares initially available for sale by the U.S. Underwriters or by the
International Managers may be more or less than the amount appearing on the
cover page of this Prospectus with respect to the Offerings. Neither the U.S.
Underwriters nor the International Managers are obligated to purchase from the
other any unsold shares.
<PAGE> 129
Alternate Page
Pursuant to the Agreement Between Syndicates, each U.S. Underwriter has
represented and agreed that (i) it is not purchasing any Class A Common Stock
for the account of anyone other than a United States or Canadian Person and (ii)
it has not offered or sold, and will not offer or sell, directly or indirectly,
any Class A Common Stock or distribute any prospectus relating to the Offerings
outside the United States or Canada or to anyone other than a United States or
Canadian Person. Pursuant to the Agreement Between Syndicates, each
International Manager has represented and agreed that (i) it is not purchasing
Class A Common Stock for the account of any United States or Canadian Person and
(ii) it has not offered or sold, and will not offer or sell, directly or
indirectly, any Class A Common Stock or distribute any prospectus relating the
Offerings within the United States or Canada or to any United States or Canadian
Person. The foregoing limitations do not apply to certain transactions specified
in the Agreement Between Syndicates, including stabilization transactions and
transactions between the U.S. Underwriters and the International Managers
pursuant to the Agreement Between Syndicates. As used herein, "United States or
Canadian Person" means any individual who is a national or a resident of the
United States or Canada or any corporation, pension, profit-sharing or other
trust or other entity organized under the laws of the United States or Canada or
any political subdivision thereof (other than a branch located outside the
United States or Canada), and includes any United States or Canadian branch of a
person who is otherwise not a United States or Canadian Person.
Pursuant to the Agreement Between Syndicates, each International Manager has
represented that it has not offered or sold, and agreed not to offer or sell,
any Class A Common Stock, directly or indirectly, in Canada in contravention of
the securities laws of Canada or any province or territory thereof and has
represented that any offer of Class A Common Stock in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which such offer is made. Each International
Manager has further agreed to send to any dealer who purchased from it any of
the Class A Common Stock a notice stating in substance that it has not offered
or sold, and will not offer or sell, directly or indirectly, any Class A Common
Stock in Canada or to, or for the benefit of, any resident of Canada in
contravention of the securities laws of Canada or any province or territory
thereof and that any offer of Class A Common Stock in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which such offer is made, and that such
dealer will deliver to any other dealer to whom it sells any of such Class A
Common Stock a notice containing substantially the same statement as is
contained in this sentence.
Pursuant to the Agreement Between Syndicates, each International Manager has
also represented and agreed that (i) it has not offered or sold and prior to the
expiration of the period six months from the closing date for the issuance of
the Class A Common Stock, will not offer or sell any Class A Common Stock to
persons in the United Kingdom, except to those persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for purpose of their businesses or otherwise in
circumstances that have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995, (ii) it has complied and will comply with all
applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the Class A Common Stock in, from or
otherwise involving the United Kingdom and (iii) it has only issued and passed
on and will only issue and pass on in the United Kingdom any document received
by it in connection with the issue of the Class A Common Stock to a person who
is of a kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1996 or is a person to whom the
document may otherwise lawfully be issued or passed on.
The Underwriters propose initially to offer the Class A Common Stock directly to
the public at the price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $ per share to certain other dealers. After the
initial public offering of the Class A Common Stock , the public offering price
and such concession may be changed.
Pursuant to the Underwriting Agreements, the Company has granted the
Underwriters options, exercisable for 30 days from the date of this Prospectus,
to purchase up to an additional shares of Class A Common Stock on the
same terms and conditions as set forth on the cover page hereof. The
Underwriters may exercise such options to purchase solely for the purpose of
covering over-allotments, if any, made in connection with the sale of the Class
A Common Stock offered hereby. To the extent such options are exercised, such
Underwriter will have a commitment, subject to certain conditions, to purchase
approximately the same percentage of such additional Class A Common Stock as the
number set forth next to each Underwriter's name in the preceding tables bears
to the total number of shares of Class A Common Stock offered hereby.
In connection with the Offerings, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Class A Common
Stock. Specifically, the Underwriters may over-allot in connection with the
Offerings, creating a syndicate short position. In addition, the Underwriters
may bid for, and purchase, shares of Class A Common Stock in the open market to
cover syndicate short positions or to stabilize the price of the Class A Common
Stock. Finally, the underwriting syndicate may reclaim selling concessions
allowed for distributing the Class A Common Stock in the Offerings if the
syndicate repurchases previously distributed Class A Common Stock in syndicate
covering transactions, in stabilization transactions or
<PAGE> 130
Alternate Page
otherwise. Any of these activities may stabilize or maintain the market price of
the Class A Common Stock above independent market levels. The Underwriters are
not required to engage in these activities, and may end any of these activities
at any time.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Company and DKB have agreed that during the period beginning from the date
of this Prospectus and continuing to and including the date 180 days after the
date of this Prospectus they will (i) not offer, sell, contract to sell or
otherwise dispose of any securities of the Company which are substantially
similar to the Class A Common Shares, including but not limited to any
securities that are convertible into or exchangeable for, or that represent the
right to receive, Class A Common Stock or any such substantially similar
securities or (ii) enter into any swap, option, future, forward or other
agreement that transfers, in whole or in part, the economic consequence of
ownership of Class A Common Stock or any securities substantially similar to the
Class A Common Stock (other than (i) pursuant to employee stock option plans
existing on, or upon the conversion or exchange of convertible or exchangeable
securities outstanding as of, the date of this Prospectus and (ii) the issuance
of Common Stock in connection with the transactions described in this
Prospectus), without the prior written consent of J.P. Morgan Securities Inc.
Buyer of shares of Class A Common Stock offered hereby may be required to pay
stamp taxes and other charges in accordance with the laws and practice of the
country of purchase in addition to the initial public offering price.
The Underwriters have reserved for sale, at the initial public offering price,
shares of the Class A Common Stock for certain directors, officers, employees,
business associates and related persons of the Company and its affiliates in the
United States and, subject to local laws, internationally, who have expressed an
interest in purchasing such shares of Class A Common Stock in the Offerings.
Such persons are expected to purchase, in the aggregate, not more than % of
the Class A Common Stock offered in the Offerings. The number of shares
available for sale to the general public in the Offerings will be reduced to the
extent such persons purchase such reserved shares. Any reserved shares not so
purchased will be offered to the general public on the same basis as other
shares offered hereby.
Application will be made to list the Class A Common Stock on the New York Stock
Exchange under the trading symbol "CIT."
Prior to the Offerings, there has been no public market for the Class A Common
Stock. The initial public offering price for the shares of Class A Common Stock
offered hereby has been determined by agreement among the Company and the
Underwriters. Among the factors considered in making such determination were the
history of and the prospects for the industry in which the Company competes, an
assessment of the Company's management, the present operations of the Company,
the historical results of operations of the Company and the trend of its
revenues and earnings, the prospects for future earnings of the Company, the
general condition of the securities markets at the time of the Offerings and the
prices of similar securities of generally comparable companies. There can be no
assurance that an active trading market will develop for the Class A Common
Stock or that the Class A Common Stock will trade in the public market at or
above the initial public offering price.
The Underwriters have advised the Company that they do not expect that sales to
accounts over which they exercise discretionary authority will exceed 5% of the
shares offered hereby.
From time to time in the ordinary course of their respective businesses, certain
of the Underwriters and their affiliates have engaged in and may in the future
engage in commercial and/or investment banking transactions with the Company and
its affiliates.
<PAGE> 131
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
SEC Registration Fee $30,304.00
NASD Filing Fee 10,000.00
NYSE Application Fee
Transfer Agent Fees and Expenses
Legal Fees and Expenses
Accounting Fees and Expenses
Printing Expenses
Miscellaneous Expenses
----------
Total Fees and Expenses $
==========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Subsection (a) of Section 145 of the General Corporation Law of Delaware
empowers a corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation), by reason of the
fact that he is or was a director, officer, employee or agent of the corporation
or is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that such person acted in any of the
capacities set forth above against expenses (including attorneys' fees) actually
and reasonably incurred by him in connection with the defense or settlement of
such action or suit if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation,
except that no indemnification may be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine that despite the
adjudication of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
the court shall deem proper.
Section 145 further provides that: (i) to the extent a director, officer,
employee or agent of a corporation has been successful in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) or in the
defense of any claim, issue or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith; and (ii) indemnification provided for by Section 145 shall
not be deemed exclusive of any other rights to which the indemnified party may
be entitled. In addition, Section 145 empowers the corporation to purchase and
maintain insurance on behalf of any person acting in any capacities set forth in
the second preceding paragraph against any liability asserted against him or
incurred by him in any such capacity or arising out of his status as such
whether or not the corporation would have the power to indemnify him against
such liabilities under Section 145.
Giving effect to the consummation of the offerings, Article X of the By-Laws of
the Registrant provides, in effect, that, in addition to any rights afforded to
an officer, director of employee of the Registrant by contract or operation of
law, the Registrant may indemnify any person who is or was a director, officer,
employee, or agent of the Registrant, or of any other corporation which he
served at the requested of the Registrant, against any and all liability and
reasonable expense incurred by him in connection with or resulting from any
claim, action, suit, or proceeding (whether brought by or in the right of the
Registrant or such other corporation or otherwise), civil or criminal, in which
he may have become involved, as a party or otherwise, by reason of his being or
having been such director, officer, employee, or agent of the Registrant or such
other corporation, whether or not he continues to be such at the time such
liability or expense is incurred, provided that such person acted in good faith
and in what he reasonably believed to be the best interests of the Registrant or
such other corporation, and, in connection with any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
II-1
<PAGE> 132
In addition, the Registrant maintains directors' and officers' reimbursement and
liability insurance pursuant to standard form policies with aggregate limits of
$90,000,000. The risks covered by such policies do not exclude liabilities under
the Securities Act.
ITEM 16. EXHIBITS
The following exhibits either are filed herewith or will be filed by amendment,
as indicated below:
<TABLE>
<S> <C> <C>
1.1* -- Form of Underwriting Agreement.
3.1* -- Restated Certificate of Incorporation of The CIT Group, Inc., amended as of ,
1997.
3.2* -- Bylaws of The CIT Group, Inc., amended as of , 1997.
4.1* -- Proposed form of certificate of Class A Common Stock
5* -- Opinion of Schulte Roth & Zabel LLP in respect of the legality of the Class A Common Stock
registered hereunder.
8* -- Opinion of Schulte Roth & Zabel LLP in respect of tax matters (included in Exhibit 5).
10.1 -- Stockholders Agreement (incorporated by reference to Exhibit 10(a) to Form 10-K filed by the
Company for the year ended December 31, 1989).
10.2 -- 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).
10.3 -- Registration Rights Agreement, dated December 15, 1995 (incorporated by reference to Exhibit
10(b) to Form 8-K dated December 15, 1995).
10.4* -- Regulatory Compliance Agreement, dated , 1997.
10.5* -- Registration Rights Agreement, dated , 1997.
10.6* -- California Tax Sharing Agreement, dated October 23, 1991.
10.7* -- Employment Agreement of Albert R. Gamper, Jr., dated April, 1997, comparable to the agreement
for Joseph A. Pollicino.
10.8* -- Employment Agreement of Joseph M. Leone dated December 6, 1996, comparable to the agreements
for William M. O'Grady and Ernest D. Stein.
10.9 -- The CIT Group Bonus Plan (incorporated by reference to Exhibit 10(d) to Form 10-K filed by the
Company for the year ended December 31, 1992).
10.10 -- The CIT Group Holdings, Inc. Career Incentive Plan (incorporated by reference to Exhibit 10(e)
to Form 10-K filed by the Company for the year ended December 31, 1992).
10.11 -- The CIT Group Holdings, Inc. Supplemental Savings Plan (incorporated by reference to Exhibit
10(f) to Form 10-K filed by the Company for the year ended December 31, 1992).
10.12 -- The CIT Group Holdings, Inc. Supplemental Retirement Plan (incorporated by reference to
Exhibit 10(g) to Form 10-K filed by the Company for the year ended December 31, 1992).
23.1 -- Consent of KPMG Peat Marwick LLP.
23.2* -- Consent of Schulte Roth & Zabel LLP (included in Exhibit 5).
24 -- Power of Attorney
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) For the purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of the
registrant pursuant to the provisions described under Item 15 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim of indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer, or controlling person of the Registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling preceding, submit to a court of
appropriate jurisdiction the question whether such indemnification by its
is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
II-2
<PAGE> 133
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Livingston, State of New Jersey, on the 26th day of
September, 1997.
THE CIT GROUP, INC.
By: /s/ ERNEST D. STEIN
---------------------------------------
Ernest D. Stein
Executive Vice President,
General Counsel and Secretary
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE AND TITLE DATE
- ---------------------------------------------------- ----------------------------------------------------
<S> <C>
/s/ ALBERT R. GAMPER, JR. September 26, 1997
- ----------------------------------------------------
Albert R. Gamper, Jr.
President, Chief Executive Officer and Director
(principal executive officer)
/s/ JOSEPH M. LEONE September 26, 1997
- ----------------------------------------------------
Joseph M. Leone
Executive Vice President and Chief Financial Officer
(principal financial and accounting officer)
*
- ----------------------------------------------------
Takasuke Kaneko
Director
*
- ----------------------------------------------------
Hisao Kobayashi
Director
*
- ----------------------------------------------------
Yoshiro Aoki
Director
*
- ----------------------------------------------------
Joseph A. Pollicino
Director
*
- ----------------------------------------------------
Paul N. Roth
Director
*
- ----------------------------------------------------
Peter J. Tobin
Director
*
- ----------------------------------------------------
Tohru Tonoike
Director
*
- ----------------------------------------------------
Keiji Torii
Director
*
- ----------------------------------------------------
Yukiharu Uno
Director
*By: /s/ ERNEST D. STEIN September 26, 1997
- ----------------------------------------------------
Ernest D. Stein, attorney-in-fact
</TABLE>
Original powers of attorney authorizing Albert R. Gamper, Jr., Ernest D. Stein,
and Joseph M. Leone and each of them to sign this Registration Statement and
amendments hereto on behalf of the directors and officers of the Registrant
indicated above are held by the Registrant and available for examination
pursuant to Rule 302(b) of Regulation S-T.
II-3
<PAGE> 134
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
------- --------------------------------------------------------------------------------- ------------
<S> <C> <C> <C>
1.1* -- Form of Underwriting Agreement.
3.1* -- Restated Certificate of Incorporation of The CIT Group, Inc., amended as of
, 1997.
3.2* -- Bylaws of The CIT Group, Inc., amended as of , 1997.
4.1* -- Proposed form of certificate of Class A Common Stock
5* -- Opinion of Schulte Roth & Zabel LLP in respect of the legality of the Class A
Common Stock registered hereunder.
8* -- Opinion of Schulte Roth & Zabel LLP in respect of tax matters (included in
Exhibit 5).
10.1 -- Stockholders Agreement (incorporated by reference to Exhibit 10(a) to Form 10-K
filed by the Company for the year ended December 31, 1989).
10.2 -- 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).
10.3 -- Registration Rights Agreement, dated December 15, 1995 (incorporated by reference
to Exhibit 10(b) to Form 8-K dated December 15, 1995).
10.4* -- Regulatory Compliance Agreement, dated , 1997.
10.5* -- Registration Rights Agreement, dated , 1997.
10.6* -- California Tax Sharing Agreement, dated October 23, 1991.
10.7* -- Employment Agreement of Albert R. Gamper, Jr., dated April, 1997, comparable to
the agreement for Joseph A. Pollicino.
10.8* -- Employment Agreement of Joseph M. Leone dated December 6, 1996, comparable to the
agreements for William M. O'Grady and Ernest D. Stein.
10.9 -- The CIT Group Bonus Plan (incorporated by reference to Exhibit 10(d) to Form 10-K
filed by the Company for the year ended December 31, 1992).
10.10 -- The CIT Group Holdings, Inc. Career Incentive Plan (incorporated by reference to
Exhibit 10(e) to Form 10-K filed by the Company for the year ended December 31,
1992).
10.11 -- The CIT Group Holdings, Inc. Supplemental Savings Plan (incorporated by reference
to Exhibit 10(f) to Form 10-K filed by the Company for the year ended December
31, 1992).
10.12 -- The CIT Group Holdings, Inc. Supplemental Retirement Plan (incorporated by
reference to Exhibit 10(g) to Form 10-K filed by the Company for the year ended
December 31, 1992).
23.1 -- Consent of KPMG Peat Marwick LLP.
23.2* -- Consent of Schulte Roth & Zabel LLP (included in Exhibit 5).
24 -- Power of Attorney
</TABLE>
- ---------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 23.1
Independent Auditors' Consent
The Board of Directors
The CIT Group, Inc.:
We consent to the use of our report dated January 17, 1997, except as to note 21
which is as of February 21, 1997 and note 22 which is as of September 26, 1997,
relating to the consolidated balance sheets of The CIT Group, 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, incorporated by
reference and included in this Registration Statement on Form S-2 of The CIT
Group, Inc., which report appears in the Registration Statement and in the
December 31, 1996 Annual Report on Form 10-K of The CIT Group Holdings, Inc.,
incorporated by reference in the Registration Statement and to the reference to
our firm under the heading "Experts" in the Registration Statement.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Short Hills, New Jersey
September 26, 1997
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each undersigned director of THE
CIT GROUP HOLDINGS, INC., a Delaware corporation, which intends to file with
the Securities and Exchange Commission, Washington, D.C., under the provisions
of the Securities Act of 1933, as amended, a Registration Statement on Form
S-2 for the registration of shares of Class A Common Stock, hereby constitutes
and appoints ALBERT R. GAMPER, JR., ERNEST D. STEIN and JOSEPH M. LEONE his
true and lawful attorneys-in-fact and agents, and each of them with full power
to act without the others, for him and in his name, place and stead, in any and
all capacities, to sign such Registration Statement and any and all amendments
thereto (including post-effective amendments), and to file such Registration
Statement and each such amendment, with all exhibits thereto, and any and all
other documents in connection therewith, with the Securities and Exchange
Commission, and hereby grants unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform any and all other acts and
things requisite and necessary or advisable in connection with such Registration
Statement, and confirms all that said attorneys-in-fact and agents, or any of
them, may lawfully do or cause to be done by virtue hereby.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the
25th day of September, 1997.
/s/ Takasuke Kaneko
-----------------------------
Takasuke Kaneko
/s/ Hisao Kobayashi
-----------------------------
Hisao Kobayashi
/s/ Kenji Nakamura
-----------------------------
Kenji Nakamura
/s/ Joseph A. Pollicino
-----------------------------
Joseph A. Pollicino
/s/ Paul N. Roth
-----------------------------
Paul N. Roth
/s/ Peter J. Tobin
-----------------------------
Peter J. Tobin
/s/ Tohru Tonoike
-----------------------------
Tohru Tonoike
/s/ Yasuo Tsunemi
-----------------------------
Yasuo Tsunemi
/s/ Yukiharu Uno
-----------------------------
Yukiharu Uno
