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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
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Form 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition period from to
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Commission file number 1-1861
The CIT Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-2994534
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1211 Avenue of the Americas, New York, New York 10036
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 536-1950
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
Class A Common Stock, par value $0.01 per share ...... New York Stock Exchange
8 3/4% Notes Due April 15, 1998 ...................... New York Stock Exchange
5 7/8% Notes Due October 15, 2008 .................... New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the most recent New York Stock Exchange Composite
Transaction closing price of the Class A Common Stock ($33.00 per share), which
occurred on February 27, 1998, was $1,070,617,185. For purposes of this
computation, all officers, directors, and 5% beneficial owners of the registrant
are deemed to be affiliates. Such determination should not be deemed an
admission that such officers, directors, and beneficial owners are, in fact,
affiliates of the registrant. At February 27, 1998, 37,173,527 shares of the
Company's Class A Common Stock, par value $0.01 per share, were outstanding and
126,000,000 shares of the Company's Class B Common Stock, par value $0.01 per
share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE*
Document Where Incorporated
-------- ----------\--------
Proxy Statement for 1998 Part III (Items 10, 11, 12 and 13)
Annual Meeting of Stockholders
- --------------
* As stated under various Items of this Report, only certain specified portions
of such document are incorporated by reference herein.
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<PAGE>
TABLE OF CONTENTS
Form 10-K
Item No. Name of Item Page
-------- ------------ ----
Part I
Item 1. Business ....................................................... 1
Overview .................................................. 1
Industry Concentration .................................... 8
Competition ............................................... 8
Regulation ................................................ 9
Item 2. Properties ..................................................... 10
Item 3. Legal Proceedings .............................................. 10
Item 4. Submission of Matters to a Vote of Security Holders ............ 10
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters .......................................... 11
Item 6. Selected Financial Data ........................................ 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .......................... 15
Item 8. Financial Statements and Supplementary Data .................... 34
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .......................... 60
Part III
Item 10. Directors and Executive Officers of the Registrant ............. 61
Item 11. Executive Compensation ......................................... 61
Item 12. Security Ownership of Certain Beneficial Owners and Management . 61
Item 13. Certain Relationships and Related Transactions ................. 61
Part IV
Item 14. Exhibits, Financial Statement Schedule and Reports
on Form 8-K .................................................. 62
<PAGE>
PART I
Item 1. Business
OVERVIEW
The CIT Group, Inc., formerly The CIT Group Holdings, Inc. (the "Company"),
a Delaware corporation, is a leading diversified finance organization with over
$22 billion of managed assets at December 31, 1997. The Company offers 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" businesses that focus on specific industries, asset
types and markets, which are balanced by client, industry and geographic
diversification. The Company has its principal executive offices at 1211 Avenue
of the Americas, New York, New York 10036 and its telephone number is (212)
536-1390.
The Company operates through two business segments: (i) commercial, which
is comprised of Equipment Financing (equipment financing and leasing), Capital
Finance (commercial aircraft and rail equipment 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 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.
In November 1997, the Company issued 36,225,000 shares of Class A common
stock in an initial public offering (the "Offering"). Prior to November 1997,
The Dai-Ichi Kangyo Bank, Limited ("DKB") owned 80% of the issued and
outstanding stock of the Company. The remaining 20% of the Company's issued and
outstanding stock was owned by The Chase Manhattan Corporation ("Chase"),
through a wholly-owned subsidiary. DKB had an option expiring December 15, 2000
to purchase the remaining 20% common stock interest from Chase. In November
1997, the Company purchased DKB's option at its fair market value, exercised the
option to purchase the stock held by Chase and recapitalized the Company by
converting the previous common stock to 157,500,000 shares of Class B common
stock. Twenty percent of the Class B common stock shares (which has five votes
per share) were converted to Class A common stock shares (which has one vote per
share) and, in addition to an underwriter's overallotment option, were issued in
the Offering. The issuance of Class A common stock pursuant to the underwriter's
overallotment resulted in an increase to the Company's stockholders' equity of
$117.7 million. At December 31, 1997, DKB owns 100% of the outstanding shares of
Class B common stock of the Company, 77.2% of the economic interest in the
Company, and 94.4% of the combined voting power of all classes of voting stock
of the Company.
The business segments within which the Company operates are described in
greater detail below.
Commercial
The Company's commercial operations are diverse and provide a wide range of
financing and leasing products to small, midsize and larger companies across a
wide variety of industries, including aerospace, retailing, construction, rail,
machine tool, 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.
1
<PAGE>
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, 1997.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Dollars in millions
<S> <C> <C> <C> <C> <C>
Equipment Financing and Leasing .... $11,709.7 $11,321.6 $10,591.6 $ 9,631.1 $ 9,027.4
Factoring .......................... 2,113.1 1,804.7 1,743.3 1,896.2 981.9
Commercial Finance ................. 2,137.7 2,033.4 2,229.7 2,161.7 1,927.8
--------- --------- --------- --------- ---------
$15,960.5 $15,159.7 $14,564.6 $13,689.0 $11,937.1
========= ========= ========= ========= =========
</TABLE>
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 jointly structure transactions and 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.
Equipment Financing and Leasing
The Company's Equipment Financing and Leasing operations had total
financing and leasing assets of $11.7 billion at December 31, 1997, representing
58.7% 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,
dealers/distributors, intermediaries and direct calling primarily with the
construction, transportation and machine tool 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.
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 profitability. For the period 1993 through
1997, Equipment Financing and Capital Finance have realized in excess of 100% of
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, 1997.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Dollars in millions
<S> <C> <C> <C> <C> <C>
Finance receivables - loans ........... $ 5,671.7 $ 6,357.5 $ 6,383.4 $5,852.6 $5,607.3
Finance receivables - leases .......... 4,132.4 3,562.0 3,095.2 2,910.6 2,668.2
Operating lease equipment, net ........ 1,905.6 1,402.1 1,113.0 867.9 751.9
--------- --------- --------- -------- --------
Total financing and leasing assets $11,709.7 $11,321.6 $10,591.6 $9,631.1 $9,027.4
========= ========= ========= ======== ========
</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
2
<PAGE>
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 commercial aircraft and railcars.
Equipment Financing
Equipment Financing is the largest of the Company's strategic business
units with total financing and leasing assets of $8.0 billion at December 31,
1997, representing 40.2% of the Company's total financing and leasing assets.
Equipment Financing offers secured equipment financing and leasing products,
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 is a leading nationwide asset-based equipment lender.
At December 31, 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, followed by
construction and printing. The Equipment Financing portfolio at December 31,
1997 included many different types of equipment, including construction,
transportation, and manufacturing equipment and business aircraft.
Equipment Financing originates its products through direct calling on
customers and through its relationships with manufacturers, dealers/distributors
and intermediaries that have leading 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.
The following table sets forth certain information concerning the financing
and leasing assets of Equipment Financing at December 31 of each of the years in
the five-year period ended December 31, 1997.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Dollars in millions
<S> <C> <C> <C> <C> <C>
Finance receivables - loans ............. $4,622.8 $3,859.0 $3,657.0 $3,081.7 $2,690.0
Finance receivables - leases ............ 2,780.6 1,757.8 1,272.9 1,188.0 1,191.0
Operating lease equipment, net .......... 623.8 426.6 363.0 219.2 186.2
-------- -------- -------- -------- --------
Total financing and leasing assets .. $8,027.2 $6,043.4 $5,292.9 $4,488.9 $4,067.2
======== ======== ======== ======== ========
</TABLE>
Capital Finance
Capital Finance had financing and leasing assets of $3.7 billion at
December 31, 1997, which represented 18.5% 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.
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 has developed strong
relationships with most major airlines and all major aircraft and aircraft
engine manufacturers, which provide 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 and currently maintains relationships with several leading railcar
manufacturers in the United States. 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 includes primarily 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.
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.
3
<PAGE>
The following table sets forth certain information concerning the financing
and leasing assets of Capital Finance at December 31 of each of the years in the
five-year period ended December 31, 1997.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Dollars in millions
<S> <C> <C> <C> <C> <C>
Finance receivables - loans $1,048.9 $2,498.5 $2,726.4 $2,770.9 $2,917.3
Finance receivables - leases 1,351.8 1,804.2 1,822.3 1,722.6 1,477.2
Operating lease equipment, net 1,281.8 975.5 750.0 648.7 565.7
-------- -------- -------- -------- --------
Total financing and leasing assets $3,682.5 $5,278.2 $5,298.7 $5,142.2 $4,960.2
======== ======== ======== ======== ========
</TABLE>
Factoring
The CIT Group/Commercial Services ("Commercial Services") factoring
operation had total financing and leasing assets of $2.1 billion at December 31,
1997, which represented 10.6% 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 provides financing to its clients through the purchase
of accounts receivables 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 a percentage of the factored sales volume. When
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
receivable (as defined for that transaction), charging interest on such advances
(in addition to any factoring fees) and satisfying such advances from
receivables collections.
Clients use Commercial Services' products and services 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.
Commercial Services generates business regionally from a variety of
sources, including direct calling and referrals from existing clients and other
referral sources.
The following table sets forth certain information concerning the financing
and leasing assets of Commercial Services at December 31 of each of the years in
the five-year period ended December 31, 1997.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Dollars in millions
<S> <C> <C> <C> <C> <C>
Total financing and leasing assets ..... $2,113.1 $1,804.7 $1,743.3 $1,896.2 $981.9
</TABLE>
Commercial Finance
At December 31, 1997, the financing and leasing assets of Commercial
Finance totaled $2.1 billion, representing 10.7% 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 (ii) The CIT Group/Credit Finance
("Credit Finance"), which provides secured financing primarily to smaller-sized
to middle-market borrowers.
4
<PAGE>
The following table sets forth certain information concerning the financing
and leasing assets of Commercial Finance at December 31 of each of the years in
the five-year period ended December 31, 1997.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Dollars in millions
<S> <C> <C> <C> <C> <C>
Business Credit ........................ $1,247.9 $1,235.6 $1,471.0 $1,442.1 $1,282.1
Credit Finance ......................... 889.8 797.8 758.7 719.6 645.7
-------- -------- -------- -------- --------
Total financing and leasing assets .... $2,137.7 $2,033.4 $2,229.7 $2,161.7 $1,927.8
======== ======== ======== ======== ========
</TABLE>
In October 1997, $95.0 million of small ticket commercial finance
receivables were transferred from Business Credit to Credit Finance.
Business Credit
Financing and leasing assets of Business Credit totaled $1.2 billion at
December 31, 1997 and represented 6.3% 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.
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.
Business is originated through direct calling efforts and intermediary and
referral sources. 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.
Credit Finance
Financing and leasing assets of Credit Finance totaled $889.8 million at
December 31, 1997 and represented 4.5% 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 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 receivable, 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.
Business is originated through the sales and regional offices and is also
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.
Consumer
At December 31, 1997, the Company's consumer segment financing and leasing
assets totaled $3.9 billion, representing 19.7% of the Company's total financing
and leasing assets. The consumer segments' managed assets were $6.3 billion at
December 31, 1997, representing 28.3% of total managed assets.
The Company's consumer business is focused primarily on home equity lending
and on 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
5
<PAGE>
consumer 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.
The following table sets forth certain information regarding the Company's
consumer business segment at December 31 for each of the years in the five-year
period ended December 31, 1997.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Dollars in millions
<S> <C> <C> <C> <C> <C>
Consumer Finance
Financing and leasing assets ........ $1,992.3 $2,005.5 $1,039.0 $ 570.8 $ 131.3
Finance receivables previously
securitized and currently
managed by the Company ......... 453.8 -- -- -- --
-------- -------- -------- -------- --------
Managed assets ............. $2,446.1 $2,005.5 $1,039.0 $ 570.8 $ 131.3
======== ======== ======== ======== ========
Sales Financing
Financing and leasing assets ........ $1,940.7 $1,349.8 $1,416.9 $1,471.2 $1,458.0
Finance receivables previously
securitized and currently
managed by the Company ......... 1,931.8 1,437.4 916.5 306.7 175.6
-------- -------- -------- -------- --------
Managed assets ............. $3,872.5 $2,787.2 $2,333.4 $1,777.9 $1,633.6
======== ======== ======== ======== ========
Total financing and leasing assets ..... $3,933.0 $3,355.3 $2,455.9 $2,042.0 $1,589.3
Consumer finance receivables
previously securitized and
currently managed by the
Company ............................. 2,385.6 1,437.4 916.5 306.7 175.6
------- ------- ------- ------- -------
Total managed assets ................... 6,318.6 4,792.7 3,372.4 2,348.7 1,764.9
-------- -------- -------- -------- --------
Consumer finance receivables
serviced for third parties .......... 1,451.6 549.2 338.2 191.5 240.5
-------- -------- -------- -------- --------
Total serviced assets .................. $7,770.2 $5,341.9 $3,710.6 $2,540.2 $2,005.4
======== ======== ======== ======== ========
</TABLE>
Consumer Finance
Financing and leasing assets of Consumer Finance, which aggregated $2.0
billion at December 31, 1997, represented 10.0% of the Company's total financing
and leasing assets. The managed assets of Consumer Finance were $2.4 billion at
December 31, 1997, or 10.9% of total managed 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. Consumer Finance originates loans through brokers and correspondents as
well as on a direct marketing basis.
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 automation, Consumer Finance provides
rapid turnaround time from application to loan funding, a characteristic
considered to be critical by its broker and correspondent relationships.
6
<PAGE>
Sales Financing
The financing and leasing assets of Sales Financing, which aggregated $1.9
billion at December 31, 1997, represented 9.7% of the Company's total financing
and leasing assets. The managed assets of Sales Financing were $3.9 billion at
December 31, 1997, or 17.3% of 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. During 1997, Sales Financing began providing wholesale
manufactured housing and recreational boat inventory financing directly to
dealers. Sales Financing originates loans predominantly through recreation
vehicle, manufactured housing and recreational boat dealer, manufacturer and
broker relationships.
The following table sets forth certain information with respect to the
managed assets of Sales Financing at December 31 for each of the years in the
five-year period ended December 31, 1997.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Dollars in millions
<S> <C> <C> <C> <C> <C>
Retail recreation vehicle
finance receivables ................. $1,596.5 $1,256.9 $1,144.2 $1,016.3 $1,022.4
-------- -------- -------- -------- --------
Retail manufactured
housing finance receivables ......... $1,471.9 $1,202.5 $1,032.3 $ 690.0 $ 572.3
-------- -------- -------- -------- --------
Retail recreational
boat finance receivables ............ $ 682.5 $ 327.8 $ 156.9 $ 71.6 $ 38.9
-------- -------- -------- -------- --------
Wholesale inventory
financing finance receivables ....... $ 121.6 $ -- $ -- $ -- $ --
-------- -------- -------- -------- --------
Total managed assets ................... $3,872.5 $2,787.2 $2,333.4 $1,777.9 $1,633.6
======== ======== ======== ======== ========
</TABLE>
Servicing
The ASC centrally services and collects substantially all of the Company's
consumer finance receivables including loans originated or purchased by Sales
Financing or Consumer Finance, as well as loans originated or purchased 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 December 31, 1997, the consumer finance servicing
portfolio aggregated approximately 282,000 loans, including $1.5 billion of
finance receivables serviced for third parties.
Securitization Program
The Company funds most of its assets on balance sheet using its access to
the commercial paper, medium-term note and capital markets. In an effort to
broaden its funding sources and to provide an additional source of liquidity,
the Company, in 1992, established a program to opportunistically access the
public and private asset backed securitization markets. Current products
utilized in the Company's program include consumer loans secured by recreation
vehicles, recreational boats and residential real estate. The Company has sold
$3.3 billion of finance receivables since the inception of the Company's asset
backed securitization program and the remaining pool balance at December 31,
1997 was $2.4 billion or 10.7% of the Company's total managed assets.
Under a typical asset backed securitization, the Company 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. The Company
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 and interest to certificate and/or note holders and after
losses). At the date of securitization, the Company estimates the "residual"
cash flows to be received over the life of the securitization, records the
present value of these cash flows as an interest-only receivable, or I/O (a
retained interest in the securitization), and recognizes a gain. The I/O is then
amortized over the estimated life of the related loan pool.
7
<PAGE>
The Company, in its estimation of residual cash flows and related I/Os,
inherently employs a variety of financial assumptions, including loan pool
credit losses, prepayment speeds and discount rates. These assumptions are
empirically supported by both the Company's historical experience and
anticipated trends relative to the particular products securitized. Subsequent
to the recognition of I/Os, the Company regularly reviews such assets for
valuation impairment. These reviews are performed on a disaggregated basis. Fair
values of I/Os are calculated utilizing current and anticipated credit losses,
prepayment speeds and discount rates and are then compared to the Company's
carrying values. Carrying value of the Company's I/Os at December 31, 1997 was
$155.5 million and approximated fair value.
Equity Investments
The CIT Group/Equity Investments and its subsidiary The CIT Group/Venture
Capital (together "Equity Investments") originate and 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. Equity
Investments made its first investment in 1991 and had total investments of $65.8
million at December 31, 1997.
INDUSTRY CONCENTRATION
See the "Industry Composition" and "Commercial Airline Industry" sections
of "Financing and Leasing Assets Composition" in Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations.
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. 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, short-term equipment
rental and servicing, which currently are 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.
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 and/or
credit standards.
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.
8
<PAGE>
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
and is subject to examination by the Federal Reserve. 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." The Company's current principal business
activities constitute permissible activities for a nonbank subsidiary of a bank
holding company.
In addition to being subject to the Act, DKB is subject to Japanese banking
laws, regulations, guidelines and orders that affect permissible activities of
the Company. DKB and the Company have entered into an agreement in order to
facilitate DKB's compliance with applicable U.S. and Japanese banking laws, or
the regulations, interpretations, policies, guidelines, requests, directives and
orders of the applicable regulatory authorities or the staffs thereof or a court
(collectively, the "Banking Laws"). That agreement prohibits the Company from
engaging in any new activity or entering into any transaction 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 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 activity then conducted by the
Company is prohibited by any Banking Law, the Company is required to take all
reasonable steps to cease such activity. Under the terms of that agreement, DKB
is responsible for making all determinations as to compliance with applicable
Banking Laws.
Two of the subsidiaries of the Company are investment companies organized
under Article XII of the New York Banking Law and, as a result, the activities
of these subsidiaries are restricted by state banking laws and these
subsidiaries are subject to examination by state banking examiners. Also, any
person or entity seeking to purchase "control" of the Company would be required
to apply for and obtain the prior approval of the Superintendent of Banks of the
State of New York. "Control" is presumed to exist if a person or entity would,
directly or indirectly, own, control or hold (with power to vote) 10% or more of
the voting stock of the Company.
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.
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
policies 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,
which require certain disclosures to borrowers and other parties regarding loan
terms; (ii) the Real Estate Settlement Procedures Act and
9
<PAGE>
Regulation X promulgated thereunder, which require certain disclosures to
borrowers and other parties regarding certain loan terms and regulates certain
practices with respect to such loans; (iii) the Equal Credit Opportunity Act 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 origin, receipt of public
assistance or the exercise of any right under the Consumer Credit Protection
Act; (iv) the Fair Credit Reporting Act, which regulates the use and reporting
of information related to a borrower's credit experience; and (v) the Fair
Housing Act, which prohibits discrimination on the basis of, among other things,
familial status or handicap.
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.
The above federal and state regulation and supervision 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 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. 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 businesses or to acquire assets outside of
the normal course of business.
Item 2. 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.
Item 3. 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 a material adverse
effect.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
10
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Class A common stock of the Company was priced at $27.00 per share and
was listed on the New York Stock Exchange on November 13, 1997. The high and low
sales prices for the Class A common stock for the fourth quarter of 1997 were
$32 13/16 and $29 1/8, respectively. The Class B common stock of the Company is
entirely owned by DKB and is not publicly traded.
Commencing with the 1996 second quarter and ceasing prior to the Offering,
the Company operated under a policy requiring the payment of dividends by the
Company equal to and not exceeding 30% of net operating earnings on a quarterly
basis. Previously, the Company's dividend policy required payment of dividends
of 50% of net operating earnings on a quarterly basis. Such dividends were paid
to DKB and Chase based upon their respective stock ownership in the Company. In
connection with the Offering, the Company terminated its dividend policy in
favor of a new policy beginning with the payment of a dividend for the first
quarter of 1998. It is expected that the dividend in respect of the quarter
ending March 31, 1998, which is the first dividend following the consummation of
the Offering, will be $0.10 per share (a rate of $0.40 annually) for both Class
A common stock and Class B common stock. The declaration and payment of
dividends by the Company are subject to the discretion of the Board of
Directors. By agreement with DKB and Chase, the final cash dividend under the
Company's terminated dividend policy was paid to DKB and Chase for the fourth
quarter of 1997 (based upon net operating earnings through October 31, 1997)
prior to the consummation of the Offering.
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. Each stockholder immediately contributed an aggregate amount equal
to the special dividend to the Company as additional paid-in capital.
Below are the dividends paid during the past two years:
Dividends Paid 1997 1996
-------------- ---- ----
Dollars in millions
Regular Dividends
First Quarter ............................ $ 21.0 $ 37.9
Second Quarter ........................... 27.6 22.5
Third Quarter ............................ 23.2 19.7
Fourth Quarter ........................... 7.5 18.8
----- ------
Sub-total ............................ 79.3 98.9
Special Dividend ............................ -- 165.0
------ ------
Total ................................ $ 79.3 $263.9
====== ======
As of February 27, 1998, stockholders of record of the Company included 76
holders of Class A common stock, representing approximately 11,500 beneficial
holders, and one holder of Class B common stock.
11
<PAGE>
Item 6. Selected Financial Data
The following table sets forth selected consolidated financial information
regarding the Company's results of operations and balance sheet. This data
presented below should be read in conjunction with Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Item 8. Financial Statements and Supplementary Data.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Dollars in millions, except per share data
<S> <C> <C> <C> <C> <C>
Results of Operations
Net finance income ...................... $887.5 $797.9 $697.7 $649.8 $603.9
Total operating revenue (1) ............. 1,193.3 1,042.0 882.4 824.2 737.7
Salaries and general operating
expenses ............................. 428.4 393.1 345.7 337.9 282.2
Provision for credit losses ............. 113.7 111.4 91.9 96.9 104.9
Net income .............................. 310.1 260.1 225.3 201.1 182.3
Net income per diluted share ............ 1.95 1.64 1.43 1.28 1.16
<CAPTION>
At December 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Dollars in millions
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Finance receivables:
Commercial .............................. $14,054.9 $13,757.6 $13,451.5 $12,821.2 $11,185.2
Consumer ................................ 3,664.8 3,239.0 2,344.0 1,973.2 1,438.9
--------- --------- --------- --------- ---------
Total finance receivables ............... $17,719.7 $16,996.6 $15,795.5 $14,794.4 $12,624.1
Reserve for credit losses ............... 235.6 220.8 206.0 192.4 169.4
Operating lease equipment, net .......... 1,905.6 1,402.1 1,113.0 867.9 751.9
Consumer finance receivables
held for sale ........................ 268.2 116.3 112.0 68.7 150.4
Total assets ............................ 20,464.1 18,932.5 17,420.3 15,959.7 13,725.0
Commercial paper ........................ 5,559.6 5,827.0 6,105.6 5,660.2 6,516.1
Variable rate senior notes .............. 2,861.5 3,717.5 3,827.5 3,812.5 1,686.5
Fixed rate senior notes ................. 6,593.8 4,761.2 3,337.0 2,619.4 2,389.0
Subordinated fixed-rate notes ........... 300.0 300.0 300.0 300.0 200.0
Company-obligated mandatorily
redeemable preferred securities of
subsidiary trust holding solely
debentures of the Company ............ 250.0 -- -- -- --
Stockholders' equity .................... 2,432.9 2,075.4 1,914.2 1,793.0 1,692.2
<CAPTION>
At or for the Years Ended December 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Selected Data and Ratios
Profitability
Net interest margin as a
percentage of average
earning assets ("AEA") (2) ........... 4.87% 4.82% 4.54% 4.77% 4.93%
Return on average stockholders'
equity ............................... 14.0% 13.0% 12.1% 11.5% 11.0%
Return on AEA (2) ....................... 1.70% 1.57% 1.46% 1.48% 1.49%
Ratio of earnings to fixed charges ...... 1.51x 1.49x 1.44x 1.52x 1.60x
Salaries and general operating
expenses as a percentage of
average managed assets
("AMA") (3) .......................... 2.16% 2.22% 2.16% 2.44% 2.28%
Efficiency ratio (4) 41.6% 42.7% 43.1% 44.5% 40.4%
Dividend payout ratio (5) ............... 26% 38% 46% 50% 50%
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
At or for the Years Ended December 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Credit Quality
60+ days contractual delinquency
(as a percentage of finance
receivables)
Consumer - managed (as a
percentage of managed finance
receivables) (6) ............... 2.92% 1.97% 1.34% 0.57% 0.99%
Consumer - owned .................. 3.48% 2.24% 1.50% 0.51% 1.13%
Commercial - owned ................ 1.20% 1.60% 1.70% 1.30% 1.79%
Total - owned .................. 1.67% 1.72% 1.67% 1.20% 1.71%
Net credit losses (as a percentage
of average finance receivables)
Consumer - managed (as a
percentage of average managed
finance receivables) ........... 0.91% 0.70% 0.45% 0.54% 0.75%
Consumer - owned .................. 1.09% 0.75% 0.44% 0.55% 0.77%
Commercial - owned ................ 0.47% 0.59% 0.51% 0.62% 0.77%
Total - owned .................. 0.59% 0.62% 0.50% 0.61% 0.77%
Total nonperforming assets (as a
percentage of finance
receivables) (7)
Consumer - owned .................. 2.78% 1.64% 1.02% 0.46% 0.95%
Commercial - owned ................ 0.75% 1.17% 1.33% 1.50% 1.99%
Total - owned .................. 1.17% 1.26% 1.28% 1.36% 1.87%
Reserve for credit losses as a
percentage of finance
receivables .......................... 1.33% 1.30% 1.30% 1.30% 1.34%
Ratio of reserve for credit losses
to current period net credit losses .. 2.33x 2.18x 2.67x 2.29x 1.79x
Leverage
Total debt to stockholders' equity and
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust
holding solely debentures of the Company 5.71x 7.04x 7.09x 6.91x 6.38x
Total debt to stockholders'
equity (8) ........................... 6.40x 7.04x 7.09x 6.91x 6.38x
Other
Total managed assets (in millions) (9) .. $22,344.9 $20,005.4 $17,978.6 $16,072.1 $13,723.6
Employees ............................... 3,025 2,950 2,750 2,700 2,400
</TABLE>
- ---------------
(1) Includes a gain of $58.0 million recorded in 1997 on the sale of an equity
interest acquired in connection with a loan workout.
(2) "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.
(3) "AMA" reflects average earning assets plus the average of consumer finance
receivables previously securitized and currently managed by the Company.
(4) Efficiency ratio reflects 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.
(5) 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. In 1996, the Company changed its dividend policy to
require the payment of dividends equal to and not exceeding 30% of operating
earnings.
(6) Managed finance receivables include owned finance receivables, consumer
finance receivables held for sale and the remaining balance of consumer
finance receivables previously securitized and currrently managed by the
Company.
13
<PAGE>
(7) Owned nonperforming assets reflect finance receivables on nonaccrual status
and assets received in satisfaction of loans.
(8) 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.
(9) "Managed assets" include (i) financing and leasing assets and (ii)
off-balance sheet consumer finance receivables previously securitized and
currently managed by the Company.
14
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
1997 vs. 1996
Overview
For the year ended December 31, 1997, net income totaled $310.1 million,
up 19.2% from the $260.1 million for 1996, representing the tenth consecutive
increase in annual earnings and the seventh consecutive year of record earnings
for the Company. Return on equity for 1997 rose to 14.0% from 13.0% in 1996. The
1997 results reflect stronger revenues from a higher level of financing and
leasing assets and a $58.0 million pretax gain on the sale of an equity interest
acquired in a loan workout. These increased revenues were partially offset by
higher operating expenses principally due to a $10.0 million pretax charge that
related to the termination of a long-term incentive plan in connection with the
Company's initial public offering (the "Offering"), higher performance based
incentive accruals, and a provision for vacant leased space.
Managed assets totaled $22.3 billion, an increase of 11.7% over $20.0
billion in 1996. Financing and leasing assets totaled a record $20.0 billion, an
increase of 7.5% over 1996. The increase is the result of growth in the
operating lease portfolio and factoring receivables as well as strong new
business originations in the consumer businesses, offset by certain liquidating
portfolios and high levels of paydowns. During 1997, the Company securitized
$1.4 billion of recreation vehicle, home equity and recreational boat finance
receivables, compared with securitizations of recreation vehicle and
recreational boat finance receivables of $774.9 million in 1996.
Net Finance Income
A comparison of the components of 1997 and 1996 net finance income is set
forth below.
<TABLE>
<CAPTION>
Years Ended December 31, Increase
---------------------------- ----------------------
1997 1996 Amount Percent
---------- ---------- --------- -------
Dollars in Millions
<S> <C> <C> <C> <C>
Finance income ....................... $1,824.7 $1,646.2 $178.5 10.8%
Interest expense ..................... 937.2 848.3 88.9 10.5
--------- --------- -------- ----
Net finance income ................... $887.5 $797.9 $89.6 11.2%
========= ========= ======== ====
AEA .................................. $18,224.5 $16,543.1 $1,681.4 10.2%
Net finance income as a % of AEA ..... 4.87% 4.82%
</TABLE>
Net finance income increased $89.6 million or 11.2% in 1997, primarily as
a result of growth in the Company's earning assets.
Finance income totaled $1,824.7 million in 1997, up $178.5 million or
10.8% over 1996. As a percentage of AEA (excluding interest income relating to
short-term interest-bearing deposits), finance income was 9.92% in 1997 and
9.90% in 1996. Despite continued competitive pressure on yields, commercial
segment finance income, as a percentage of commercial AEA, was 10.02% and 9.93%
for 1997 and 1996, respectively. Consumer segment finance income as a percentage
of consumer AEA was 9.57% for 1997, compared with 9.85% for 1996. The decline in
the consumer segment yield 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 $937.2 million in 1997, up $88.9 million or 10.5%
over 1996. As a percentage of AEA, 1997 interest expense decreased to 5.05% from
5.08% in 1996, excluding dividends related to the Company's preferred capital
securities.
15
<PAGE>
The Company seeks to mitigate interest rate risk by matching the repricing
characteristics of its assets with its liabilities. This strategy is, in part,
accomplished through the use of interest rate swaps. A comparative analysis of
the weighted average principal outstanding and interest rates paid on the
Company's debt before and after the effect of interest rate swaps is shown in
the following table.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------------------
1997 1996
----------------------------------------- -----------------------------------------
Before Swaps After Swaps Before Swaps After Swaps
-------------------- ------------------- -------------------- --------------------
Dollars in Millions
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial paper and
variable rate senior
notes .................... $ 9,574.2 5.61% $ 6,443.2 5.54% $ 9,952.2 5.48% $ 6,774.3 5.42%
Fixed rate senior and
subordinated notes ....... 5,497.6 6.52% 8,628.6 6.52% 3,917.0 6.83% 7,094.9 6.68%
--------- --------- --------- ---------
Composite ................. $15,071.8 5.94% $15,071.8 6.10% $13,869.2 5.86% $13,869.2 6.06%
========= ========= ========= =========
</TABLE>
The Company's interest rate swaps principally convert floating rate debt
to fixed rate debt. 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. See-"Asset/Liability Management" for further
discussion.
Fees and Other Income
Fees and other income improved $3.7 million to $247.8 million during 1997,
primarily due to higher factoring commissions and gains from higher levels of
securitization activity offset by a lower level of gains on leasing equipment
sales.
The following table sets forth the components of fees and other income.
Years Ended
December 31,
---------------------------
1997 1996
--------- ---------
Dollars in Millions
Factoring commissions ....................... $ 95.2 $ 91.0
Fees and other .............................. 72.9 74.2
Gains on sales of leasing equipment and
other investments(1) ..................... 46.9 54.6
Gans on securitizations and sales of
finance receivables ....................... 32.8 24.3
------ ------
$247.8 $244.1
====== ======
- -----------
(1) Includes $12.9 million and $15.2 million from the sale of venture capital
investments in 1997 and 1996, respectively.
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 telecommunications company, which was sold in the second quarter of 1997
for a pretax gain to the Company of $58.0 million.
Salaries and General Operating Expenses
Salaries and general operating expenses increased $35.3 million or 9.0% to
$428.4 million in 1997 from $393.1 million in 1996. Salaries and employee
benefits rose $30.5 million (13.7%) while general operating expenses rose $4.8
million (2.8%). Personnel increased to 3,025 at December 31, 1997 from 2,950 at
December 31, 1996.
16
<PAGE>
The increase in expenses from 1996 to 1997 is primarily the result of a
$10.0 million pretax charge relating to the termination of a long-term incentive
plan ("LTIP") in connection with the Offering, higher performance based
incentive accruals and a provision for vacant leased space. Subsequent to
termination, the LTIP was replaced with a stock-based compensation plan.
Management monitors productivity via the analysis of efficiency ratios and
the ratio of salaries and general operating expenses to AMA. AMA is comprised of
average earning assets plus the average of consumer finance receivables
previously securitized and currently managed by the Company. The improvement in
the ratios in the following table reflects continuing productivity initiatives.
Years Ended
December 31,
----------------------
1997 1996
--------- ---------
Efficiency ratio ................................. 41.6% 42.7%
Salaries and general operating expenses
as a percentage of AMA ......................... 2.16% 2.22%
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 major capital
expenditures, such as purchases of computer equipment, including
post-implementation evaluation.
Provision and Reserve for Credit Losses/Credit Quality
The provision for credit losses for 1997 was $113.7 million compared to
$111.4 million for 1996. Comparative net credit loss experience is provided in
the following table.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------
1997 1996
------------------------------- -----------------------------
Total Commercial Consumer Total Commercial Consumer
----- ---------- -------- ----- ---------- --------
Dollars in Millions
<S> <C> <C> <C> <C> <C> <C>
Net credit losses .................... $101.0 $65.5 $35.5 $101.5 $80.4 $21.1
Net credit losses as a percentage
of average finance receivables,
excluding consumer finance
receivables held for sale ........... 0.59% 0.47% 1.09% 0.62% 0.59% 0.75%
</TABLE>
The decrease in commercial net credit losses reflects improved credit
quality in the commercial portfolio and the continued strength of the United
States economy. The increase in consumer net credit losses is primarily the
result of portfolio seasoning. As a percentage of average managed finance
receivables, consumer net credit losses were 0.91% for 1997, versus 0.70% for
1996.
The Company strengthened its credit loss reserve position as the
consolidated reserve for credit losses increased to $235.6 million (1.33% of
finance receivables) at December 31, 1997, from $220.8 million (1.30% of finance
receivables) at December 31, 1996. This increase primarily reflects growth in
finance receivables. The ratio of reserve to current period net credit losses
also improved to 2.33 times at December 31, 1997 from 2.18 times 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.
Chargeoffs are taken after considering such factors as the obligor's financial
condition and the value of underlying collateral and guarantees. Automatic
charge-offs are recorded on consumer finance receivables at intervals beginning
at 180 days of contractual delinquency, based upon historical loss severity,
with charge-offs finalized upon disposition of the foreclosed property. 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 events adversely affecting specific obligors or industries may
necessitate additions to the consolidated reserve for credit losses.
17
<PAGE>
Past Due and Nonperforming Assets
The following table sets forth certain information concerning past due and
total nonperforming assets (and the related percentages of finance receivables)
at December 31, 1997 and 1996.
At December 31,
--------------------------------------
1997 1996
---------------- -----------------
Dollars in Millions
Finance receivables, past due
60 days or more
Commercial ......................... $168.9 1.20% $219.8 1.60%
Consumer ........................... 127.7 3.48% 72.5 2.24%
------ ----- ------ -----
Total ............................ $296.6 1.67% $292.3 1.72%
====== ===== ====== =====
Total nonperforming assets
Commercial ......................... $105.5 0.75% $160.4 1.17%
Consumer ........................... 101.9 2.78% 53.1 1.64%
------ ----- ------ -----
Total ............................ $207.4 1.17% $213.5 1.26%
====== ===== ====== =====
Total nonperforming assets reflect both finance receivables on nonaccrual
status and assets received in satisfaction of loans.
Operating Lease Equipment
The operating lease equipment portfolio was $1.9 billion at December 31,
1997, up 35.9% from December 31, 1996. As a result, depreciation on operating
lease equipment for 1997 was $146.8 million, up from $121.7 million for 1996.
See "Financing and Leasing Assets" for further discussion on operating lease
portfolio growth.
From time to time, financial or operational difficulties may adversely
affect future payments to the Company relating to operating lease equipment. At
December 31, 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 $57.7 million. 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 $178.0
million in 1997, compared with $155.7 million in 1996. The effective income tax
rate for 1997 declined to 36.5%, compared with 37.4% in 1996, as a result of
lower state and local taxes.
18
<PAGE>
Financing and Leasing Assets
Managed assets grew $2.3 billion (11.7%) to $22.3 billion. Financing and
leasing assets rose $1.4 billion (7.5%) to $20.0 billion in 1997, as presented
in the following table.
<TABLE>
<CAPTION>
At December 31, Change
------------------- -------------------
1997 1996 Amount Percent
-------- --------- --------- -------
Dollars in Millions
<S> <C> <C> <C> <C>
Commercial
Equipment Financing and Leasing
Finance receivables
Capital Finance (1) ................. $ 2,400.7 $ 4,302.7 $(1,902.0) (44.2)%
Equipment Financing (1) ............. 7,403.4 5,616.8 1,786.6 31.8
--------- --------- -------- ----
9,804.1 9,919.5 (115.4) (1.2)
--------- --------- -------- ----
Operating lease equipment, net
Capital Finance (1) ................. 1,281.8 975.5 306.3 31.4
Equipment Financing (1) ............. 623.8 426.6 197.2 46.2
--------- --------- -------- ----
1,905.6 1,402.1 503.5 35.9
--------- --------- -------- ----
Total Equipment Financing and Leasing . 11,709.7 11,321.6 388.1 3.4
--------- --------- -------- ----
Factoring
Commercial Services ................. 2,113.1 1,804.7 308.4 17.1
--------- --------- -------- ----
Commercial Finance
Business Credit (2) ................. 1,247.9 1,235.6 12.3 1.0
Credit Finance (2) .................. 889.8 797.8 92.0 11.5
--------- --------- -------- ----
Total Commercial Finance .............. 2,137.7 2,033.4 104.3 5.1
--------- --------- -------- ----
Total commercial .................... 15,960.5 15,159.7 800.8 5.3
--------- --------- -------- ----
Consumer
Consumer Finance ...................... 1,992.3 2,005.5 (13.2) (0.7)
Sales Financing ....................... 1,940.7 1,349.8 590.9 43.8
--------- --------- -------- ----
Total consumer ...................... 3,933.0 3,355.3 577.7 17.2
--------- --------- -------- ----
Corporate and other ................... 65.8 53.0 12.8 24.2
--------- --------- -------- ----
Total financing and leasing assets .. 19,959.3 18,568.0 1,391.3 7.5
--------- --------- -------- ----
Consumer finance receivables previously
securitized and currently managed by
the Company
Consumer Finance .................... 453.8 -- 453.8 100.0
Sales Financing ..................... 1,931.8 1,437.4 494.4 34.4
--------- --------- -------- ----
2,385.6 1,437.4 948.2 66.0
--------- --------- -------- ----
Total managed assets ................ $22,344.9 $20,005.4 $2,339.5 11.7%
========= ========= ======== ====
</TABLE>
- ------------
(1) On January 1, 1997, $1,519.2 million of financing and leasing assets were
transferred from Capital Finance to Equipment Financing.
(2) In October 1997, $95.0 million of finance receivables were transferred from
Business Credit to Credit Finance.
Total commercial financing and leasing assets grew 5.3% due to strong
growth in the operating lease portfolio and an increase in factoring
receivables. The operating lease portfolio growth was focused primarily in
commercial aircraft ($198.7 million), railroad equipment ($155.8 million) and
business aircraft ($127.8 million). Factoring finance receivable growth is
attributable to an improved retail sales environment and strong new business
signings. These increases were partially offset by high customer paydowns in the
commercial financing sector due to the strong economy and the availability of
alternative sources of capital. Portfolio growth was moderated as a result of
the Company's decision to liquidate its oceangoing maritime and power generation
project portfolios. Consumer managed assets increased $1.5 billion to $6.3
billion from $4.8 billion at December 31, 1996. This increase reflects strong
home equity originations, and growth in Sales Financing new business volume,
primarily in recreation vehicle and recreational boat products and the
introduction of wholesale inventory financing.
19
<PAGE>
Financing and Leasing Assets Composition
The Company's ten largest financing and leasing asset accounts at December
31, 1997 in the aggregate represented 4.2% of the Company's total financing and
leasing assets. All ten of such accounts are commercial accounts and are secured
by equipment, accounts receivable and/or inventory.
Geographic Composition
The following table presents financing and leasing assets by customer
location.
At December 31,
-------------------------------------------
1997 1996
------------------- -------------------
Amount Percent Amount Percent
------ ------- ------ -------
Dollars in Millions
United States
West ........................... $ 4,642.1 23.3% $ 4,599.4 24.8%
Northeast ...................... 4,501.9 22.6 4,279.4 23.0
Midwest ........................ 4,290.0 21.5 3,727.1 20.1
Southeast ...................... 2,802.9 14.0 2,814.1 15.1
Southwest ...................... 2,360.7 11.8 2,036.6 11.0
Foreign (principally
commercial aircraft) ........... 1,361.7 6.8 1,111.4 6.0
--------- ----- --------- -----
Total .......................... $19,959.3 100.0% $18,568.0 100.0%
========= ===== ========= =====
The Company's managed asset geographic diversity does not differ
significantly from its owned asset geographic diversity.
The Company's financing and leasing asset portfolio is diversified by
state. At December 31, 1997, with the exception of California (12.8%), New York
(7.9%) and Texas (7.7%), no state represented more than 5.0% of financing and
leasing assets.
Industry Composition
The following table presents financing and leasing assets by major
industry class.
At December 31,
--------------------------------------
1997 1996
---------------- -----------------
Amount Percent Amount Percent
------ ------- ------ -------
Dollars in Millions
Manufacturing(1)
(none greater than 4.4%) ........... $ 4,440.4 22.2% $ 4,472.8 24.0%
Commercial airlines(2) ............... 2,077.6 10.4 1,910.0 10.3
Home mortgage(3) ..................... 1,992.3 10.0 2,005.5 10.8
Retail ............................... 1,807.5 9.1 1,651.1 8.9
Construction equipment ............... 1,791.4 9.0 1,683.1 9.1
Transportation(4) .................... 1,283.7 6.4 1,184.5 6.4
Manufactured housing(5) .............. 1,125.7 5.6 790.3 4.3
Other (none greater than 3.5%)(6) .... 5,440.7 27.3 4,870.7 26.2
Total .............................. $19,959.3 100.0% $18,568.0 100.0%
- -----------
(1) Includes manufacturers of steel and metal products, textiles and apparel,
printing and paper products, and other industries.
(2) See "Concentrations" for a discussion of the commercial airline portfolio.
(3) On a managed asset basis, home mortgage outstandings were $2.4 billion, or
10.9% of managed assets at December 31, 1997 as compared to $2.0 billion or
10.0% at December 31, 1996.
(4) Includes rail, bus, and over-the-road trucking industries, and business
aircraft.
(5) On a managed asset basis, manufactured housing outstandings were $1.5
billion or 6.5% of managed assets at December 31, 1997 as compared to $1.2
billion or 6.0% at December 31, 1996.
(6) On a managed asset basis, recreation vehicle outstandings were $1.6 billion
or 7.2% of managed assets at December 31, 1997 as compared to $1.3 billion
or 6.3% at December 31, 1996. On a managed asset basis, recreational boat
outstandings were $682.5 million or 3.1% of managed assets at December 31,
1997 as compared to $327.8 million or 1.6% of managed assets at December 31,
1996.
20
<PAGE>
Concentrations
Commercial Airline Industry
Commercial airline financing and leasing assets totaled $2.1 billion
(10.4% of total financing and leasing assets) at December 31, 1997, compared
with $1.9 billion (10.3%) in 1996. From 1992 to 1996, the Company limited growth
in the commercial airline portfolio due to a general weakness in the commercial
aerospace industry. Given current industry performance and improved equipment
values, 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. The Company continues to reduce its Stage II exposure as
evidenced by the fact that 93.1% of the portfolio at December 31, 1997 consists
of Stage III aircraft versus 90.7% at December 31, 1996.
The following table presents information about the commercial airline
industry portfolio. See also "--Operating Lease Equipment."
At December 31,
------------------------
1997 1996
--------- --------
Dollars in Millions
Finance receivables
Amount outstanding(1) ................... $1,254.9 $1,286.0
Number of obligors ...................... 54 54
Operating lease equipment, net
Net carrying value ...................... $822.7 $624.0
Number of obligors ...................... 33 32
Total .................................. $2,077.6 $1,910.0
Number of obligors(2) ..................... 67 72
Number of aircraft(3) ..................... 225 239
- -----------
(1) Includes accrued rents on operating leases that are classified as finance
receivables in the 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 that phase out the use of Stage II aircraft in the
United States through the year 2000. The International Civil Aviation
Organization has issued similar requirements for Europe. At year-end 1997,
the portfolio consisted of Stage III aircraft of $1,933.5 million (93.1%)
and Stage II aircraft of $115.7 million (5.6%) 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.
The continued shift in commercial aircraft product mix from secured
financings to operating lease equipment reflects the Company's strong industry
and equipment expertise which enables the Company to compete more effectively in
commercial aircraft operating lease transactions.
Foreign Outstandings
The Company is primarily a domestic lender, with foreign exposures limited
mainly to the commercial airline industry. Financing and leasing assets to
foreign obligors are all U. S. dollar denominated and totaled $1.4 billion at
December 31, 1997. The largest exposures at December 31, 1997 were to obligors
in Mexico, $128.2 million (0.64% of financing and leasing assets), France,
$125.9 million (0.63%), and the Republic of Ireland, $108.9 million (0.55%). 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 ("HLTs")
HLTs which the Company originated and in which it participated totaled
less than 2.0% of financing and leasing assets at both December 31, 1997 and
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 financings were $165.5
million at December 31, 1997, compared with $144.1 million at year-end 1996.
21
<PAGE>
Recent Accounting Pronouncements
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income". This
statement does not change the reporting of net income. However, it requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a separate financial statement
that is displayed with the same prominence as other financial statements. This
statement also requires that an enterprise display the accumulated balance of
other comprehensive income separately from retained earnings and paid-in-capital
in the equity section of a statement of financial position. The Company adopted
this statement on January 1, 1998.
Also in 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information", which is effective for fiscal years
beginning after December 15, 1997. The Statement establishes standards for
reporting information about operating segments in annual financial statements
and requires reporting of selected information about operating segments in
interim financial reports issued to stockholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. The Company plans to adopt Statement of Financial Accounting
Standards No. 131 in the year ended December 31, 1998.
Year 2000 Compliance
The Year 2000 compliance issue arises out of the inability of computers,
software and other equipment utilizing microprocessors to recognize and properly
process data fields containing a 2 digit year. In response to this issue, the
Company has developed a comprehensive project to ensure that its software
applications and systems are Year 2000 compliant. The scope of this project
includes, among other things, the assessment of "at risk" applications and
systems, an assessment of the interdependencies of various systems and the
relative importance of each system to the business, the design and execution of
required modifications to achieve Year 2000 compliance, and the plans for
testing of modifications to verify Year 2000 compliance. The Company expects to
complete substantially all Year 2000 remediation and testing by the end of the
first quarter of 1999. The Company's ability to meet this timetable is in part
dependent upon the ability of third parties, such as software vendors and
developers, to meet their stated deadlines. In addition, the Company is
communicating with other third parties, including vendors, borrowers and
obligors, to determine the status of their Year 2000 compliance in an effort to
reduce the Company's potential exposure to such third parties' Year 2000 issues.
While the Company has made and will continue to make certain investments related
to this project, 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.
Credit Risk Management
The Company has developed systems specifically designed to manage credit
risk in its commercial and consumer business segments. 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
22
<PAGE>
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. The credit audit
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 to 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 adjusted 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, 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.
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 regularly reviewed for
effectiveness 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.
See -- "Provision and Reserve for Credit Losses".
23
<PAGE>
Asset/Liability Management
Management strives to manage interest rate and liquidity risk and optimize
net finance income under formal policies established and monitored by the
Capital Committee, which is comprised of members of senior management, including
the Chief Executive Officer, the Vice Chairman, the Chief Financial Officer and
senior representatives of DKB. 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
the applicable hedge objective, against 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, which are based
on market value. The Executive Credit Committee approves each counterparty and
its related market value and credit exposure limit annually or more frequently
if any changes are recommended. 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 Item 8. Financial Statements and Supplementary Data.
Interest Rate Risk Management
Changes in market interest rates or in the relationships between
short-term and long-term market interest rates or in the relationships 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.
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 both tools in managing interest
rate risk. The decision to use one or the other or a combination of both is
driven by the relationship between the relative interest rate costs and
effectiveness of the alternatives, and 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 thereby matching the fixed rate,
fixed term loan with fixed rate, fixed term debt. 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-
24
<PAGE>
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, which were
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 December 31, 1997, an immediate
hypothetical 100 basis points parallel rise in the yield curve on January 1,
1998 would reduce net income by an estimated $0.1 million after-tax over the
next twelve months. 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, composition and
prepayment characteristics 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 fixed rate
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 fixed interest rate. This creates, in effect, a lower
cost fixed rate medium-term obligation.
Interest rate swaps with notional principal amounts of $3.6 billion at
December 31, 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 that 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 Item 8. Financial Statements and Supplementary Data.
Liquidity
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 funding are commercial paper
borrowings, medium-term notes, other debt securities, and asset-backed
securitizations.
Commercial paper outstanding decreased $267.4 million to $5.6 billion at
December 31, 1997 from $5.8 billion at December 31, 1996.
During 1997, the Company issued $2.0 billion of prime-based variable rate
term debt. During 1997, the Company issued $2.5 billion of fixed rate debt.
Repayments of debt totaled $3.6 billion for 1997.
At December 31, 1997, $6.5 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 Investors Service, Duff & Phelps Credit Rating Company and
Standard & Poor's Corporation.
At December 31, 1997, commercial paper borrowings were supported by $5.0
billion of committed revolving credit-line facilities. At December 31, 1997,
such credit-line facilities represented 91% of operating commercial paper
outstanding (commercial paper outstanding less interest-bearing deposits), as
compared to 90% at December 31, 1996. No borrowings have been made under credit
lines supporting commercial paper since 1970.
25
<PAGE>
As part of the Company's continuing program of accessing the public and
private asset-backed securitization markets as an additional liquidity source,
recreation vehicle, home equity and recreational boat finance receivables of
$1.4 billion were securitized by the Company during 1997. The Company
securitized recreation vehicle finance receivables and recreational boat finance
receivables of $774.9 million in 1996.
The Company had $1.5 billion of registered, but unissued, securities at
December 31, 1997, relating to the Company's asset-backed securitization program
available under shelf registration statements.
Capitalization
The following table presents information regarding the Company's capital
structure.
At December 31,
-------------------------
1997 1996
--------- ---------
Dollars in Millions
Commercial paper ................................... $ 5,559.6 $ 5,827.0
Term debt .......................................... 9,755.3 8,778.7
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust
holding solely debentures of the Company ......... 250.0 --
Stockholders' equity ............................... 2,432.9 2,075.4
--------- ---------
Total capitalization ............................... $17,997.8 $16,681.1
========= =========
Total debt to stockholders' equity and
Company-obligated mandatorily redeemable
preferred securities of subsidiary
trust holding solely debentures of the Company ... 5.71x 7.04x
Total debt and Company-obligated mandatorily
redeemable preferred securities of subsidiary
trust holding solely debentures of the Company
to stockholders' equity ........................ 6.40x 7.04x
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.
In November 1997, the Company issued 36,225,000 shares of Class A common
stock in the Offering. Prior to November 1997, DKB owned 80% of the issued and
outstanding stock of the Company. The remaining 20% of the Company's issued and
outstanding stock was owned by Chase, through a wholly-owned subsidiary. DKB had
an option expiring December 15, 2000 to purchase the remaining 20% common stock
interest from Chase. In November 1997, the Company purchased DKB's option at its
fair market value, exercised the option to purchase the stock held by Chase and
recapitalized the Company by converting the previous common stock to 157,500,000
shares of Class B common stock. Twenty percent of the Class B common stock
shares (which has five votes per share) were converted to Class A common stock
shares (which has one vote per share) and, in addition to an underwriter's
overallotment option, were issued in the Offering. The issuance of Class A
common stock pursuant to the underwriter's overallotment resulted in an increase
to the Company's stockholders' equity of $117.7 million. At December 31, 1997,
DKB owns 100% of the outstanding shares of Class B common stock of the Company,
which are not publicly traded.
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 1997, 1996, and 1995, regular cash dividends of $79.3
million, $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 Chase 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.
In connection with the Offering, the Company terminated its pre existing
dividend policy. It is expected that the dividend in respect of the quarter
ending March 31, 1998, which will be the first dividend following the
consummation of the Offering, will be $0.10 per share (a rate of $0.40
annually).
26
<PAGE>
1996 vs. 1995
Overview
For the year ended December 31, 1996, net income totaled $260.1 million,
an increase of 15.5% from the $225.3 million for 1995, and represented the ninth
consecutive increase in annual earnings and the sixth consecutive year of record
earnings. The 1996 results reflect stronger revenues from increased finance
income 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 was 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
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
----- ----- -------- --------
Dollars in Millions
<S> <C> <C> <C> <C>
Finance income ....................... $ 1,646.2 $ 1,529.2 $ 117.0 7.7%
Interest expense ..................... 848.3 831.5 16.8 2.0
--------- --------- -------- ----
Net finance income ................... $ 797.9 $ 697.7 $ 100.2 14.4%
========= ========= ======== ====
AEA .................................. $16,543.1 $15,377.5 $1,165.6 7.6%
Net finance income as a % of AEA ..... 4.82% 4.54%
</TABLE>
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.
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 with 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.
A comparative analysis of the weighted average principal outstanding and
interest rates paid on the Company's debt before and after the effect of
interest rate swaps is shown in the following table.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------
1996 1995
-------------------------------------- -----------------------------------
Before Swaps After Swaps Before Swaps After Swaps
----------------- ---------------- ---------------- ---------------
Dollars in Millions
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial paper and
variable rate senior notes .. $9,952.2 5.48% $6,774.3 5.42% $9,785.4 6.03% $7,226.0 6.02%
Fixed rate senior and
subordinated notes .......... 3,917.0 6.83% 7,094.9 6.68% 3,194.5 7.09% 5,753.9 6.78%
--------- --------- --------- ---------
Composite ..................... $13,869.2 5.86% $13,869.2 6.06% $12,979.9 6.29% $12,979.9 6.36%
========= ========= ========= =========
</TABLE>
The 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.
27
<PAGE>
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.
Years Ended
December 31,
--------------------------
1996 1995
----- -----
Dollars in Millions
Factoring commissions ......................... $ 91.0 $ 86.3
Fees and other ................................ 74.2 61.6
Gains on sales of leasing equipment
and other investments ....................... 54.6(1) 10.5
Gains on securitizations and sales of
finance receivables ......................... 24.3 26.3
------ ------
$244.1 $184.7
====== ======
- ----------
(1) Includes $15.2 million from the sale of venture capital investments.
Salaries and General Operating Expenses
Salaries and general operating expenses increased $47.4 million or 13.7%
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 was primarily due to strong new
business originations and 10.5% growth in AMA as well as the Company's continued
investment in its consumer related infrastructure.
Years Ended December 31,
-------------------------
1996 1995
----- -----
Dollars in Millions
Efficiency ratio ............................... 42.7% 43.1%
Salaries and general operating expenses
as a percentage of AMA ...................... 2.22% 2.16%
Provision and Reserve for Credit Losses/Credit Quality
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
----- ----------- ---------- ----- ----------- ----------
Dollars in Millions
<S> <C> <C> <C> <C> <C> <C>
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.
28
<PAGE>
Past Due and Nonperforming Assets
The following table sets forth certain information concerning past due and
total nonperforming assets at December 31, 1996 and 1995.
At December 31,
---------------------------------------
1996 1995
------- ------
Dollars in Millions
Finance receivables, past due
60 days or more
Commercial ....................... $219.8 1.60% $228.7 1.70%
Consumer ......................... 72.5 2.24% 35.2 1.50%
------ ---- ------ ----
Total .......................... $292.3 1.72% $263.9 1.67%
====== ==== ====== ====
Total nonperforming assets
Commercial ....................... $160.4 1.17% $178.7 1.33%
Consumer ......................... 53.1 1.64% 24.0 1.02%
------ ---- ------ ----
Total .......................... $213.5 1.26% $202.7 1.28%
====== ==== ====== ====
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 with 38.3% in 1995, as a result of
lower state and local taxes.
29
<PAGE>
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.
At December 31, Change
------------------ -----------------
1996 1995 Amoun Percent
------ ------ -------- --------
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 ..................... 2,005.5 1,039.0 966.5 93.0
Sales Financing ...................... 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
Sales Financing 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%
========= ========= ======== ====
Total 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.
30
<PAGE>
Financing and Leasing Assets Composition
Geographic Composition
The following table presents financing and leasing assets by customer
location.
At December 31,
------------------------------------------
1996 1995
-------------------- -------------------
Amount Percent Amount Percent
-------- ------- ------- -------
Dollars in Millions
United States
West ........................... $ 4,599.4 24.8% $ 4,019.2 23.6%
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 2,653.0 15.5
Southwest ...................... 2,036.6 11.0 1,958.5 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%
========= ===== ========= =====
The Company's managed asset geographic diversity does not differ
significantly from its owned asset geographic diversity.
Industry Composition
The following table presents financing and leasing assets by major
industry class.
At December 31,
----------------------------------------
1996 1995
------------------ -----------------
Amount Percent Amount Percent
-------- ------- ------- -------
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 airlines(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%
========= ===== ========= =====
- ------------
(1) Includes manufacturers of steel and metal products, textiles and apparel,
printing and paper products, and other industries.
(2) See "Concentrations" for a discussion of the commercial airline portfolio.
(3) Includes rail, bus, and over-the-road trucking industries, and business
aircraft.
(4) On a managed asset basis, manufactured housing outstandings were $1.2
billion or 6.0% of managed assets at December 31, 1996 as compared to $1.0
billion or 5.7% at December 31, 1995.
(5) On a managed asset basis, recreation vehicle outstandings were $1.3 billion
or 6.3% of managed assets at December 31, 1996 as compared to $1.1 billion
or 6.4% at December 31, 1995. On a managed asset basis, recreational boat
outstandings were $327.8 million or 1.6% of managed assets at December 31,
1996 as compared to $156.9 million or 1.0% at December 31, 1995.
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>
The following table presents information about the commercial airline
industry portfolio.
At December 31,
------------------------
1996 1995
----- -------
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
- ------------
(1) Includes accrued rents on operating leases that are classified as finance
receivables in the 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 that equals or exceeds $20 million as a highly leveraged
transaction (HLT):
o The transaction at least doubles the borrower's liabilities and results
in a leverage ratio (as defined) higher than 50%, or
o The transaction results in a leverage ratio higher than 75%, or
o The transaction is designated as an HLT by a syndication agent.
A transaction originally reported as an HLT can be removed from this
classification ("delisted") if the leveraged company has demonstrated the
ability to operate successfully as a highly leveraged entity for at least two
years after the original financing and meets one of the following criteria:
o The original financing has been repaid using cash flow from operations,
planned asset sales, or a capital infusion, or
o The debt has been serviced without undue reliance on unplanned asset
sales, and certain leverage ratios (related to the original criteria
under which the financing qualified as an HLT) have been maintained.
32
<PAGE>
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 financings were $144.1 million at
December 31, 1996, compared with $220.4 million at year-end 1995.
At December 31, 1996, the HLT portfolio consisted of 27 obligors in 3
different industry groups, with 29.5% 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.
Forward-Looking Statements
Certain statements contained herein under "Business", "Legal Proceedings"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations", including, without limitation, those concerning the Company's (i)
liquidity, (ii) Year 2000 compliance, (iii) credit risk management, (iv)
asset/liability risk management, (v) operational and legal risks and (vi) 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.
33
<PAGE>
Item 8. Financial Statements and Supplementary Data.
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors of
The CIT Group, Inc.:
We have audited the accompanying consolidated balance sheets of The CIT
Group, Inc. and subsidiaries as of December 31, 1997 and 1996, 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, 1997.
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 of 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, 1997 and 1996, and the results of
their operations and cash flows for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Short Hills, New Jersey
January 28, 1998
34
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Assets
December 31,
-------------------
1997 1996
----- -----
Dollars in Millions
Financing and leasing assets
Loans
Commercial ...................................... $ 9,922.5 $10,195.6
Consumer ........................................ 3,664.8 3,239.0
Lease receivables ................................... 4,132.4 3,562.0
--------- ---------
Finance receivables (Note 3) ..................... 17,719.7 16,996.6
Reserve for credit losses (Note 4) .................. (235.6) (220.8)
--------- ---------
Net finance receivables .......................... 17,484.1 16,775.8
Operating lease equipment, net (Note 5) ............. 1,905.6 1,402.1
Consumer finance receivables held for sale .......... 268.2 116.3
Cash and cash equivalents ........................... 140.4 103.1
Other assets ........................................ 665.8 535.2
--------- ---------
Total assets ................................ $20,464.1 $18,932.5
========= =========
Liabilities and Stockholders' Equity
Debt (Notes 6 and 7)
Commercial paper .................................... $ 5,559.6 $ 5,827.0
Variable rate senior notes .......................... 2,861.5 3,717.5
Fixed rate senior notes ............................. 6,593.8 4,761.2
Subordinated fixed rate notes ....................... 300.0 300.0
--------- ---------
Total debt .................................. 15,314.9 14,605.7
Credit balances of factoring clients ................ 1,202.6 1,134.1
Accrued liabilities and payables .................... 660.1 594.0
Deferred federal income taxes (Note 12) ............. 603.6 523.3
--------- ---------
Total liabilities ........................... 17,781.2 16,857.1
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust
holding solely debentures of the Company
(Note 8) .......................................... 250.0 --
Stockholders' equity (Notes 1 and 9)
Common stock - 1,000 shares authorized,
issued and outstanding ............................ -- 250.0
Class A common stock, par value $0.01 per share,
700,000,000 shares authorized and 37,173,527
issued and outstanding ............................ 0.4 --
Class B common stock, par value $0.01 per
share, 510,000,000 shares authorized and
126,000,000 issued and outstanding ................ 1.3 --
Paid-in capital ..................................... 948.3 573.3
Retained earnings ................................... 1,482.9 1,252.1
--------- ---------
Total stockholders' equity .................. 2,432.9 2,075.4
--------- ---------
Total liabilities and stockholders' equity .. $20,464.1 $18,932.5
========= =========
See accompanying notes to consolidated financial statements.
35
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
----------------------------------
1997 1996 1995
-------- -------- --------
Dollars in Millions
(except per share amounts)
Finance income ............................. $1,824.7 $1,646.2 $1,529.2
Interest expense ........................... 937.2 848.3 831.5
-------- -------- --------
Net finance income ..................... 887.5 797.9 697.7
Fees and other income (Note 10) ............ 247.8 244.1 184.7
Gain on sale of equity interest acquired
in loan workout .......................... 58.0 -- --
-------- -------- --------
Operating revenue ...................... 1,193.3 1,042.0 882.4
-------- -------- --------
Salaries and general operating expenses
(Note 11) ................................ 428.4 393.1 345.7
Provision for credit losses (Note 4) ....... 113.7 111.4 91.9
Depreciation on operating lease equipment
(Note 5) ................................. 146.8 121.7 79.7
Minority interest in subsidiary trust
holding solely debentures of the
Company (Note 8) ......................... 16.3 -- --
-------- -------- --------
Operating expenses ..................... 705.2 626.2 517.3
-------- -------- --------
Income before provision for income taxes 488.1 415.8 365.1
Provision for income taxes (Note 12) ....... 178.0 155.7 139.8
-------- -------- --------
Net income ............................. $ 310.1 $ 260.1 $ 225.3
======== ======== ========
Net income per basic share (Note 13) ....... $ 1.96 $ 1.65 $ 1.43
Net income per diluted share (Note 13) .... $ 1.95 $ 1.64 $ 1.43
See accompanying notes to consolidated financial statements.
36
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Class A Class B Total
Common Common Common Paid-in Treasury Retained Stockholders'
Stock Stock Stock Capital Stock Earnings Equity
-------- ------- ------- ------- ------- -------- -----------
Dollars in Millions
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 250.0 $ 408.3 $ 1,134.7 $ 1,793.0
Net income 225.3 225.3
Cash dividends (104.1) (104.1)
------- ----- ----- ------- -------- -------- --------
Balance, December 31, 1995 250.0 408.3 1,255.9 1,914.2
Net income 260.1 260.1
Cash dividends-regular (98.9) (98.9)
Cash dividends-special (165.0) (165.0)
Capital contribution 165.0 165.0
------- ----- ----- ------- -------- -------- --------
Balance, December 31, 1996 250.0 573.3 1,252.1 2,075.4
Net income 310.1 310.1
Cash dividends (79.3) (79.3)
Recapitalization to
Class B common
stock shares (Note 1) (250.0) $ 1.6 248.4 0.0
Twenty percent of Class
B common shares bought
pursuant to option agreement
(Note 1) (0.3) $ (808.0) (808.3)
Conversion of Class B
treasury stock shares to
Class A common stock
shares and issuance of
Class A to the public
(Note 1) $ 0.3 808.0 808.3
Issuance of underwriters
over-allotment of Class
A common stock shares,
net (Note 1) 0.1 117.6 117.7
Restricted Class A
common stock grants 9.0 9.0
------- ----- ----- ------- -------- -------- --------
Balance, December 31, 1997 $ 0.0 $ 0.4 $ 1.3 $ 948.3 $ 0.0 $1,482.9 $2,432.9
======= ===== ===== ======= ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1997 1996 1995
----- ----- -----
Dollars in Millions
<S> <C> <C> <C>
Cash flows from operations
Net income ........................................................ $ 310.1 $ 260.1 $ 225.3
Adjustments to reconcile net income to net cash
flows from operations:
Provision for credit losses ................................. 113.7 111.4 91.9
Depreciation and amortization ............................... 168.6 140.3 88.7
Provision for deferred federal income taxes ................. 80.3 54.1 42.5
Gains on asset and receivable sales ......................... (137.7) (78.9) (36.8)
Increase in accrued liabilities and payables ................ 66.1 108.1 131.2
Increase in other assets .................................... (54.0) (65.9) (17.7)
Other ....................................................... 8.0 (3.7) (22.7)
---------- --------- --------
Net cash flows provided by operations .............. 555.1 525.5 502.4
---------- --------- --------
Cash flows from investing activities
Loans extended .................................................... (33,332.9) (32,647.2) (31,292.7)
Collections on loans .............................................. 31,419.7 31,132.2 29,463.7
Proceeds from asset and receivable sales .......................... 1,747.5 1,144.9 816.8
Purchases of assets to be leased .................................. (802.8) (431.2) (354.7)
Net (increase) decrease in short-term factoring receivables ....... (238.8) (0.3) 123.6
Purchases of finance receivables portfolios ....................... (176.6) (661.3) (22.7)
Proceeds from sales of assets received in satisfaction of loans ... 37.7 76.7 26.2
Purchases of investment securities ................................ (27.5) (20.8) (12.1)
Other ............................................................. (23.1) (25.5) (43.4)
---------- --------- --------
Net cash flows used for investing activities ................... (1,396.8) (1,432.5) (1,295.3)
---------- --------- --------
Cash flows from financing activities
Proceeds from the issuance of variable and fixed rate notes ....... 4,532.7 4,776.0 3,698.6
Repayments of variable and fixed rate notes ....................... (3,556.1) (3,461.8) (2,966.0)
Proceeds from issuance of common stock, net ....................... 926.0 -- --
Purchase of Class B common stock pursuant to
option agreement ............................................... (808.3) -- --
Net (decrease) increase in commercial paper ....................... (267.4) (278.6) 445.4
Proceeds from the issuance of Company-obligated
mandatorily redeemable preferred securities of
subsidiary trust holding solely debentures of the Company ....... 250.0 -- --
Repayments of nonrecourse leveraged lease debt .................... (162.3) (146.2) (135.7)
Cash dividends paid ............................................... (79.3) (263.9) (104.1)
Proceeds from nonrecourse leveraged lease debt .................... 43.7 58.1 9.7
Capital contribution from stockholders ............................ -- 165.0 --
---------- --------- --------
Net cash flows provided by financing activities ..... 879.0 848.6 947.9
---------- --------- --------
Net increase (decrease) in cash and cash equivalents .............. 37.3 (58.4) 155.0
Cash and cash equivalents, beginning of year ...................... 103.1 161.5 6.5
---------- --------- --------
Cash and cash equivalents, end of year ............................ $ 140.4 $ 103.1 $ 161.5
========== ========= ========
Supplemental disclosures
Interest paid ..................................................... $ 917.5 $ 842.6 $ 958.8
Federal and state and local income taxes paid ..................... $ 102.1 $ 102.5 $ 95.0
Noncash transfer of finance receivables to finance receivables
held for sale ................................................. $ -- $ 246.6 $ 243.6
Noncash transfers of finance receivables to assets
received in satisfaction of loans ............................. $ 26.0 $ 91.8 $ 30.8
Noncash transfer of assets received in satisfaction of .
loans to finance receivables .................................. $ 5.4 $ 10.9 $ 40.6
Noncash transfer of finance receivables to operating
lease equipment ............................................... $ -- $ 14.4 $ --
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE>
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.
In November 1997, the Company issued 36,225,000 shares of Class A common
stock in an initial public offering (the "Offering"). Prior to November 1997,
The Dai-Ichi Kangyo Bank, Limited ("DKB") owned 80% of the issued and
outstanding stock of the Company. The remaining 20% of the Company's issued and
outstanding stock was owned by The Chase Manhattan Corporation ("Chase"). DKB
had an option expiring December 15, 2000 to purchase the remaining 20% common
stock interest from Chase. In November 1997, the Company purchased DKB's option
at its fair market value, exercised the option to purchase the stock held by
Chase and recapitalized the Company by converting the previous common stock to
157,500,000 shares of Class B common stock. Twenty percent of the Class B common
stock shares (which has five votes per share) were converted to Class A common
stock shares (which has one vote per share)and, in addition to an underwriter's
overallotment option, were issued in the Offering. The issuance of Class A
common stock pursuant to the underwriter's overallotment resulted in an increase
to the Company's stockholders' equity of $117.7 million. At December 31, 1997,
DKB owns 100% of the outstanding shares of Class B common stock of the Company,
77.2% of the economic interest in the Company, and 94.4% of the combined voting
power of all classes of voting stock of the Company.
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 Balance Sheets and 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. The amounts
outstanding on loans and leases are referred to as finance receivables and, when
combined with consumer finance receivables held for sale, net book value of
operating lease equipment, and certain investments, 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 on commercial finance receivables is
suspended and an account is placed on nonaccrual status either when: (i) a
payment of principal and/or interest is contractually delinquent for 90 days or
more or (ii) at the time, in the opinion of management, full collection of all
principal and interest due is doubtful. Given the nature of revolving credit
facilities, including those combined with term loan facilities (advances and
interest accruals increase revolving loan balances and payments reduce revolving
loan balances), the placement of revolving credit facilities on nonaccrual
status includes the review of other qualitative and quantitative factors, and
generally does not result in the reversal of any accrued interest. Accrued but
uncollected income at the date an account is placed on nonaccrual status is
reversed and charged against income to the extent the estimated fair value of
collateral does not satisfy both the principal and
39
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
accrued income outstanding. Such accrued but uncollected income is not
significant. 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. The accrual of finance income on consumer loans is suspended,
and all previously accrued but uncollected income is reversed, when payment of
principal and/or interest on consumer finance receivables is contractually
delinquent for 90 days or more.
Fees and other income includes: (1) factoring commissions, (2) commitment,
facility, letters of credit and syndication fees, (3) servicing fees and (4)
gains and losses from the sales of equipment, other investments, and the sales
and securitizations of finance receivables.
Lease Financing
Direct financing leases are recorded at the aggregate future minimum lease
payments plus estimated residual values less unearned finance income. Operating
lease equipment is carried at cost less accumulated depreciation and is
depreciated to estimated residual value using the straight-line method over the
lease term or projected economic life of the asset. Equipment acquired in
satisfaction of loans and subsequently placed on operating lease is recorded at
the lower of carrying value or estimated fair value when acquired. 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. Leveraged leases are
recorded at the aggregate value of future minimum lease payments plus estimated
residual value, less amounts due to nonrecourse 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 consolidated reserve for credit losses is periodically reviewed for
adequacy based on the nature and characteristics of 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. Charge-offs
are taken after considering such factors as the obligor's financial condition
and the value of underlying collateral and guarantees (including recourse to
dealers and manufacturers). Therefore, changes in economic conditions or other
discrete events adversely affecting specific obligors or industries may
necessitate additions to the consolidated reserve for credit losses.
Charge-off of Finance Receivables
Finance receivables are reviewed periodically to determine the probability
of loss. Charge-offs are taken after considering such factors as the borrower's
financial condition and the value of underlying collateral and guarantees
(including recourse to dealers and manufacturers). Such charge-offs are deducted
from the carrying value of the related finance receivables. To the extent that
an unrecovered balance remains due, a final charge-off is taken at the time
collection efforts are no longer deemed useful. Automatic charge-offs are
recorded on consumer finance receivables beginning at 180 days of contractual
delinquency based upon historical loss severity, with charge-offs finalized upon
disposition of foreclosed assets.
Impaired Loans
Impaired loans are measured based upon 1) the present value of expected
future cash flows discounted at the loan's effective interest rate or, 2) at the
fair value of the collateral, if the loan is collateral dependent.
Impaired loans include any loan transaction on nonaccrual status or any
troubled debt restructuring entered into after December 31, 1994, subject to
periodic review by the Company's Asset Quality Review Committee ("AQR"). The AQR
is comprised of members of senior management, which reviews 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-
40
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 providing a provision for credit losses.
Long-Lived Assets
A review for impairment of long-lived assets, such as operating lease
equipment, is 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.
Other Assets
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, 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 as servicing assets the portion of
previously recognized excess servicing assets that did not exceed contractually
specified servicing fees. The remaining balances of previously recognized excess
servicing assets are included in other assets 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 adoption of SFAS 125 did not have a significant impact on the
Company's financial position or results of operations.
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
"interest-only receivables" with related gain recognized. The Company, in its
estimation of residual cash flows and interest-only receivables, inherently
employs a variety of financial assumptions, including loan pool credit losses,
prepayment speeds and discount rates. These assumptions are empirically
supported by both the Company's historical experience and anticipated trends
relative to the particular products securitized. Subsequent to the recognition
of interest-only receivables, the Company regularly reviews such assets for
valuation impairment. These reviews are performed on a disaggregated basis. Fair
values of interest-only receivables are calculated utilizing current and
anticipated credit losses, prepayment speeds and discount rates and are then
compared to the Company's carrying values. Carrying value of the Company's
interest-only receivables at December 31, 1997 approximated fair value.
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 charge-off. 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.
41
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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 finance
receivables.
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. Such credits are amortized as a
reduction of the provision for income taxes using an actuarial method over the
related lease term.
Consolidated Statements of Cash Flows
Cash and cash equivalents includes cash and interest-bearing deposits,
which generally represent overnight money market investments of excess cash
borrowed in the commercial paper market and maintained for liquidity purposes.
Cash inflows and outflows from commercial paper borrowings and most factoring
receivables are presented on a net basis in the Statements of Cash Flows as
their term is generally less than 90 days.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the
42
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1997 and 1996 are leveraged
lease receivables of $716.5 million and $648.8 million, respectively. Leveraged
lease receivables exclude the portion of lease receivables offset by related
nonrecourse debt payable to third party lenders of $1.9 billion and $2.1 billion
at December 31, 1997 and 1996, respectively, including amounts owed to
affiliates of DKB that totaled $459.0 million at year-end 1997, and $486.6
million at year-end 1996. Also excluded from finance receivables are $2.4
billion of consumer finance receivables at December 31, 1997 ($1.4 billion in
1996) previously securitized and currently managed by the Company.
Commercial and consumer loans are presented net of unearned income of
$605.8 million and $540.4 million at December 31, 1997 and 1996, respectively.
Lease receivables are presented net of unearned income of $1.1 billion and $1.0
billion at December 31, 1997 and 1996.
The following table sets forth the contractual maturities of finance
receivables.
At December 31,
--------------------------------------------
1997 1996
------------------ ------------------
Amount Percent Amount Percent
-------- ------- ------- -------
Dollars in Millions
Due Within One Year ............. $ 6,540.9 36.9% $ 5,698.2 33.5%
Due Within One to Two Years ..... 2,797.1 15.8 2,515.6 14.8
Due Within Two to Four Years .... 3,288.0 18.6 3,647.0 21.5
Due After Four Years ............ 5,093.7 28.7 5,135.8 30.2
--------- ----- ---------- -----
Total .......................... $17,719.7 100.0% $ 16,996.6 100.0%
========= ===== ========== =====
Information about concentrations of credit risk is set forth in
"Geographic Composition", "Industry Composition" and "Concentration" in Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
The following table sets forth information regarding total nonperforming
assets.
At December 31,
---------------------
1997 1996
---- ----
Dollars in Millions
Nonaccrual finance receivables:
Commercial ........................................... $ 79.5 $119.6
Consumer ............................................. 84.9 46.0
------ ------
....................................................... 164.4 165.6
------ ------
Assets received in satisfaction of loans:
Commercial ........................................... 26.0 40.8
Consumer ............................................. 17.0 7.1
------ ------
....................................................... 43.0 47.9
------ ------
Total nonperforming assets ......................... $207.4 $213.5
------ ------
Percent to finance receivables ......................... 1.17% 1.26%
====== ======
The amount of finance income recognized on year-end commercial nonaccrual
finance receivables totaled $6.8 million, $8.5 million and $8.0 million in 1997,
1996 and 1995, respectively. The amount of finance income that would have been
recorded under contractual terms for such commercial nonaccrual finance
receivables totaled $27.6 million, $24.7 million, and $29.3 million in 1997,
1996 and 1995,
43
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
respectively. Finance income recognized on and the amount of finance income that
would have been recorded under contractual terms for year-end consumer
nonaccrual finance receivables for 1997, 1996 and 1995, respectively, was not
significant.
At December 31, 1997 and 1996, the recorded investment in impaired loans,
which are generally collateral dependent, totaled $53.2 million and $103.9
million, respectively. Given that 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, no SFAS 114 reserve for credit losses was
required. The average monthly recorded investment in the impaired loans was
$71.6 million, $89.4 million and $116.9 million for the years ended December 31,
1997, 1996 and 1995, respectively. There was no finance income recorded on these
loans during 1997 or 1996 after being classified as impaired. During 1995,
finance income of $1.0 million was recognized on these loans after being
classified as impaired loans.
Note 4--Reserve for Credit Losses
The following table presents changes in the reserve for credit losses.
At December 31,
--------------------------------
1997 1996 1995
---- ---- ----
Dollars in Millions
Balance, January 1 ......................... $ 220.8 $ 206.0 $ 192.4
-------- -------- --------
Finance receivables charged-off ............ (123.5) (122.2) (96.9)
Recoveries on finance receivables
previously charged-off ................... 22.5 20.7 19.7
-------- -------- --------
Net credit losses .................... (101.0) (101.5) (77.2)
-------- -------- --------
Provision for credit losses ................ 113.7 111.4 91.9
Portfolio acquisitions
(dispositions), net ...................... 2.1 4.9 (1.1)
-------- -------- --------
Net addition to the reserve for
credit losses ....................... 115.8 116.3 90.8
-------- -------- --------
Balance, December 31 ....................... $ 235.6 $ 220.8 $ 206.0
-------- -------- --------
Reserve for credit losses as a percentage
of finance receivables ................... 1.33% 1.30% 1.30%
======== ======== ========
Note 5--Operating Lease Equipment
The following table provides an analysis of operating lease equipment by
equipment type, net of accumulated depreciation of $375.6 million in 1997 and
$287.7 million in 1996.
At December 31,
-------------------
1997 1996
---- ----
Dollars in Millions
Commercial aircraft .......................... $ 822.7 $ 624.0
Railroad equipment ........................... 429.0 273.2
Business aircraft ............................ 295.6 167.8
Trucks, trailers and buses ................... 172.2 160.1
Other ........................................ 186.1 177.0
---------- ----------
Total ....................................... $ 1,905.6 $ 1,402.1
========== ==========
Included in the preceding table is equipment not currently subject to
lease agreements of $2.4 million and $1.9 million at December 31, 1997 and 1996,
respectively.
Rental income on operating leases, included in finance income, totaled
$231.8 million in 1997, $182.4 million in 1996 and $128.8 million in 1995. The
following table presents future minimum lease rentals on noncancellable
operating leases as of December 31, 1997. Excluded from this table are variable
rentals calculated on the level of asset usage, re-leasing rentals, and expected
sales proceeds from remarketing
44
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
operating lease equipment at lease expiration, all of which are important
components of operating lease profitability.
Years Ended December 31,
------------------------
Dollars in Millions
1998 .................................. $ 257.8
1999 .................................. 209.1
2000 .................................. 171.1
2001 .................................. 143.5
2002 .................................. 94.6
Thereafter ............................ 143.8
---------
Total ........................... $ 1,019.9
=========
Note 6--Debt
The following table presents data on commercial paper borrowings.
At December 31,
------------------------------
1997 1996 1995
---- ---- ----
Dollars in Millions
Borrowings outstanding ................. $ 5,559.6 $ 5,827.0 $ 6,105.6
Weighted average interest rate ......... 5.86% 5.45% 5.75%
Weighted average maturity .............. 43 days 32 days 45 days
For the Years ended December 31,
------------------------------
1997 1996 1995
---- ---- ----
Daily average borrowings ............... $ 6,245.7 $ 5,817.7 $ 5,800.1
Maximum amount outstanding ............. $ 6,964.4 $ 6,591.3 $ 6,672.1
Weighted average interest rate ......... 5.56% 5.44% 5.95%
(excluding amounts related to
interest-bearing deposits)
The following tables present the contractual maturities of total debt at
December 31, 1997.
<TABLE>
<CAPTION>
At December 31,
----------------------
Commercial Variable rate 1997 1996
paper senior notes Total Total
----- ------------ ----- ----
Dollars in Millions
<S> <C> <C> <C> <C>
Due in 1997 (rates ranging from
5.25% to 5.76%) ...................... $ -- $ -- $ -- $ 8,683.0
Due in 1998 (rates ranging from
5.47% to 5.90%)(1) ................... 5,559.6 2,461.5 8,021.1 461.5
Due in 1999 (rates ranging from
5.48% to 5.94%) ...................... -- 380.0 380.0 380.0
Due after 2002 (rate of 5.96%) .......... -- 20.0 20.0 20.0
--------- --------- --------- ---------
Total ............................. $ 5,559.6 $ 2,861.5 $ 8,421.1 $ 9,544.5
========= ========= ========= =========
</TABLE>
- ----------
(1) $61.5 million may be repaid at the option of the holder upon 30 days'
notice.
45
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
At December 31,
----------------------
Fixed rate notes 1997 1996
Senior Subordinated Total Total
------ ------------ ----- -----
<S> <C> <C> <C> <C>
Due in 1997 (rates ranging from
5.50% to 8.75%) ........................... $ -- $ -- $ -- $ 700.2
Due in 1998 (rates ranging from
5.63% to 8.75%)(1) ........................ 1,550.0 100.0 1,650.0 1,550.0
Due in 1999 (rates ranging from
5.38% to 6.63%) ........................... 1,881.0 -- 1,881.0 1,070.0
Due in 2000 (rates ranging from
6.13% to 6.80%) ........................... 1,095.0 -- 1,095.0 20.0
Due in 2001 (rates ranging from
5.63% to 9.25%) ........................... 500.0 200.0 700.0 700.0
Due in 2002 (rates ranging from
6.15% to 7.13%) ........................... 950.0 -- 950.0 300.0
Due after 2002 (rates ranging from
5.53% to 6.98%) ........................... 628.6 -- 628.6 728.6
--------- ------- --------- ---------
Face amount of maturities .................... 6,604.6 300.0 6,904.6 5,068.8
Issue discount ............................... (10.8) -- (10.8) (7.6)
--------- ------- --------- ---------
Total .................................. $ 6,593.8 $ 300.0 $ 6,893.8 $ 5,061.2
========= ======= ========= =========
</TABLE>
- ----------
(1) $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, 1997,
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, 1997 and 1996 were 6.39% and 6.52%,
respectively. Variable rate senior notes outstanding at December 31, 1997 with
interest rates ranging from 5.48% to 5.96% mature at various dates through 2003.
The consolidated weighted average interest rates on variable rate senior notes
at December 31, 1997 and 1996 were 5.66% and 5.44%, respectively.
The following table represents information on unsecured revolving lines of
credit with 53 banks that support commercial paper borrowings at December 31,
1997.
Maturity Amount
----------------
Dollars in Millions
April 1998 ...................................... $ 1,240.0
April 2002 ...................................... 3,720.0
---------
Total credit lines .............................. $ 4,960.0
=========
The credit line agreements contain clauses that 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.
46
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 7--Derivative Financial Instruments
As part of managing the exposure to changes in market interest rates, the
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 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.
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, 1997.
<TABLE>
<CAPTION>
Years ending Floating to Fixed to Floating to
December 31, Fixed Rate Floating Rate Floating Rate
- ------------ ----------------------------- ---------------------------- ---------------------------
Notional Amounts in Millions
Notional Receive Pay Notional Receive Pay Notional Receive Pay
Amount Rate Rate Amount Rate Rate Amount Rate Rate
-------- ------- ---- -------- ------- ---- ------- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 ........... $ 700.0 5.75% 6.61% $ -- -- -- $ -- -- --
1999 ........... 925.0 5.85% 6.15% -- -- -- 130.0 5.57% 6.11%
2000 ........... 700.0 5.90% 7.05% 20.0 6.15% 6.13% -- -- --
2001 ........... 631.0 5.93% 6.66% 200.0 5.82% 5.82% -- -- --
2002 ........... 95.0 5.86% 6.16% -- -- -- -- -- --
2003-2008 ...... -- -- -- 200.0 5.92% 5.97% -- -- --
-------- ----- ---- ------ ---- ---- ------- ---- ----
$3,051.0 $420.0 $ 130.0
======== ====== =======
Weighted
average rate ... 5.85% 6.71% 5.88% 5.91% 5.57% 6.11%
==== ==== ==== ==== ==== ====
</TABLE>
All rates were those in effect at December 31, 1997. Variable rates are
based on the contractually determined rate or other market rate indices and may
change significantly, affecting future cash flows.
47
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents the notional principal amounts of interest
rate swaps by class and the corresponding hedged liability position.
Notional
Amounts
Interest Rate Swaps in Millions Comments
- ------------------- ----------- ---------
Floating to fixed rate swaps
Hedging commercial paper $2,401.0 Effectively converts the interest
rate on an equivalent amount of
commercial paper to a fixed rate.
Hedging variable rate notes 650.0 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 3,051.0
--------
Fixed to floating rate swaps
Hedging fixed rate notes 420.0 Effectively converts the interest
rate on an equivalent amount of
fixed rate notes to a variable rate.
Basis swaps
Hedging variable rate debt 130.0 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 $3,601.0
========
The Company's hedging activity increased interest expense by $24.2
million, $27.8 million and $7.8 million in 1997, 1996 and 1995, 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 that would also tend to increase interest
expense.
Basis swap agreements involve the exchange of two different floating rate
interest payment obligations and are used to manage the basis risk between
floating rate indices.
Additionally, there were cross-currency interest rate swaps with a
notional principal amount of $218.6 million on which the Company was paying
interest at a weighted average rate of 5.93% at December 31, 1997 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 which totaled
$6.4 million at December 31, 1997, reduced by the effects of master netting
agreements as presented in Note 18 -- 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--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).
48
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Both the Capital Securities issued by the Trust and the Debentures of the
Company owned by the Trust are redeemable in whole or in part on or after
February 15, 2007 or at any time 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. The Company records distributions payable on the
Capital Securities as an operating expense in the Consolidated Statements of
Income.
Note 9--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 10--Fees and Other Income
The following table sets forth the components of fees and other income.
Years Ended December 31,
-------------------------------
1997 1996 1995
------- ------- -------
Dollars in Millions
Factoring commissions ...................... $ 95.2 $ 91.0 $ 86.3
Fees and other ............................. 72.9 74.2 61.6
Gains on sales of leasing equipment
and other investments ..................... 46.9 54.6 10.5
Gains on securitizations and sales
of finance receivables .................... 32.8 24.3 26.3
------- ------- -------
Total ...................................... $ 247.8 $ 244.1 $ 184.7
======= ======= =======
Note 11--Salaries and General Operating Expenses
The following table sets forth the components of salaries and general
operating expenses.
Years Ended December 31,
-------------------------------
1997 1996 1995
------ ------- -------
Dollars in Millions
Salaries and employee benefits ............. $ 253.5 $ 223.0 $ 193.4
General operating expenses ................. 174.9 170.1 152.3
------- ------- -------
Total ...................................... $ 428.4 $ 393.1 $ 345.7
======= ======= =======
49
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 12--Income Taxes
The effective tax rate of the Company varied from the statutory federal
corporate income tax rate as follows:
Years Ended December 31,
----------------------------------
1997 1996 1995
------ ------- ------
Percentage of Pretax Income
Federal income tax rate .................. 35.0% 35.0% 35.0%
Increase (decrease) due to:
State and local income taxes,
net of federal income tax benefit ..... 3.7 4.5 5.1
Investment tax credits ................. (0.2) (0.3) (0.3)
Other .................................. (2.0) (1.8) (1.5)
---- ---- ----
Effective tax rate ..................... 36.5% 37.4% 38.3%
==== ==== ====
The provision for income taxes is comprised of the following:
Years Ended December 31,
----------------------------------
1997 1996 1995
------ ------- ------
Dollars in Millions
Current federal income tax provision ..... $ 70.0 $ 72.9 $ 68.5
Deferred federal income tax provision .... 80.3 54.1 42.5
------ ------ ------
Total federal income taxes ............... 150.3 127.0 111.0
State and local income taxes ............. 27.7 28.7 28.8
------ ------ ------
Total provision for income taxes ....... $178.0 $155.7 $139.8
====== ====== ======
The tax effects of temporary differences that give rise to significant
portions of the deferred federal income tax assets and liabilities are presented
below.
At December 31,
-----------------------
1997 1996
----- -----
Dollars in Millions
ASSETS
Provision for credit losses ..................... $(93.3) $(83.8)
Loan origination fees ........................... (9.2) (10.5)
Other ........................................... (47.1) (37.8)
------ ------
Total deferred tax assets ..................... (149.6) (132.1)
------ ------
LIABILITIES
Leasing transactions ............................ 679.0 610.0
Market discount income .......................... 55.8 23.8
Amortization of intangibles ..................... 9.9 9.2
Depreciation of fixed assets .................... 1.5 2.7
Prepaid pension costs ........................... 1.0 2.0
Other ........................................... 1.8 2.7
------ ------
Total deferred tax liabilities ................ 749.0 650.4
------ ------
Net deferred tax liability ........................ $599.4 $518.3
====== ======
Also, included in deferred federal income taxes on the Consolidated
Balance Sheets are unamortized investment tax credits of $4.2 million and $5.0
million at December 31, 1997 and 1996, respectively. Included in the accrued
liabilities and payables caption in the Consolidated Balance Sheets are state
and local deferred tax liabilities of $103.6 million and $97.4 million at
December 31, 1997 and 1996, respectively, arising from the temporary differences
shown in the above tables.
50
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 13--Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards 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. Basic EPS is computed by dividing net
income by the weighted-average number of common shares outstanding for the
period. The diluted EPS computation includes the potential impact of dilutive
securities including stock options and restricted stock grants. The dilutive
effect of stock options is computed using the treasury stock method which
assumes the repurchase of common shares by the Company at the average market
price for the period. The reconciliation of the numerator and denominator of
basic EPS with that of diluted EPS is presented only for the years ended
December 31, 1997 and 1996, as the Company had no dilutive securities in 1995.
Restricted stock, discussed in Note 14-Postretirement and Other Benefit Plans,
is not included in the EPS calculation for 1995 as the restricted stock was
issued in conjunction with the termination of the 1996-1998 Career Incentive
Plan and the Company's Offering.
For the year ended December 31, 1997
---------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
Dollars in Millions
(except per share amounts)
Basic EPS
Income available to common
shareholders ........................ $310.1 158,134,315 $ 1.96
Effect of Dilutive Securities:
Restricted shares .................... -- 948,527 (0.01)
Stock options ........................ -- 71,440 --
------ ----------- ------
Diluted EPS .......................... $310.1 159,154,282 $ 1.95
====== =========== ======
For the year ended December 31, 1996
---------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
Dollars in Millions
(except per share amounts)
Basic EPS
Income available to common
shareholders ........................ $260.1 157,500,000 $ 1.65
Effect of Dilutive Securities:
Restricted shares .................... -- 948,527 (0.01)
------ ----------- ------
Diluted EPS .......................... $260.1 158,448,527 $ 1.64
====== =========== ======
Note 14--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 it qualifies for an income
tax deduction. Such funding is charged to salaries and employee benefits
expense.
51
<PAGE>
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,
--------------------------------------
1997 1996 1995
------ ------- ------
Dollars in Millions
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation including vested
benefits of $65.6 in 1997, $54.8 in 1996,
and $54.0 in 1995 ................................. $ 73.4 $ 61.6 $ 58.1
====== ====== ======
Plan assets at fair market value .................... $128.5 $109.9 $101.2
Projected benefit obligation ........................ (100.4) (84.0) (79.9)
------ ------ ------
Excess plan assets .................................. 28.1 25.9 21.3
Unrecognized prior service cost ..................... (1.6) (1.8) (1.9)
Unrecognized net gain ............................... (18.2) (15.9) (10.5)
------ ------ ------
Prepaid pension cost ................................ $ 8.2 $ 8.2 $ 8.9
====== ====== ======
Pension cost included the following components:
Service cost-benefits earned during the period ...... $ 5.2 $ 5.3 $ 3.8
Interest cost on projected benefit obligation ....... 6.2 5.7 4.9
Actual return on plan assets ........................ (21.4) (11.5) (21.9)
Net amortization and deferral ....................... 10.0 1.2 14.1
------ ------ ------
Pension cost ........................................ $ -- $ 0.7 $ 0.9
====== ====== ======
</TABLE>
The following assumptions were used for calculating
the projected benefit obligations.
1997 1996 1995
------ ------- ------
Discount rate ........................... 7.00% 7.50% 7.25%
Rate of increase in compensation ........ 4.50% 4.50% 4.50%
Expected long-term rate of return
on plan assets ......................... 10.00% 10.00% 10.00%
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.
The postretirement benefit liability at December 31, 1997 and 1996 is set
forth in the following table.
At December 31,
--------------------
1997 1996
----- -----
Dollars in Millions
Accumulated postretirement benefit
obligation ("APBO"):
Retirees ........................................... $20.5 $ 22.5
Fully eligible, active plan participants ........... 4.2 4.1
Other active plan participants ..................... 10.3 8.3
----- -----
Unfunded postretirement obligation ................... 35.0 34.9
Unrecognized net gain ................................ 8.3 7.7
Unrecognized transition obligation ................... (24.6) (26.2)
----- -----
Accrued postretirement benefit obligation ............ $18.7 $16.4
===== =====
52
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of net periodic postretirement benefit cost were as
follows.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1997 1996 1995
---- ---- ----
Dollars in Millions
<S> <C> <C> <C>
Service cost-benefits earned during the period ...... $1.3 $1.1 $1.1
Interest cost on accumulated postretirement
benefit obligation ................................ 2.3 2.4 3.2
Amortization of unrecognized transition obligation .. 1.7 1.7 1.7
Amortization of gain ................................ (0.8) (0.6) --
Amortization of unrecognized prior service cost ..... -- -- (0.1)
---- ---- ----
Net periodic postretirement benefit cost ............ $4.5 $4.6 $5.9
==== ==== ====
The following assumptions were used for calculating the APBO.
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Discount rate ....................................... 7.00% 7.50% 7.25%
Rate of increase in compensation .................... 4.50% 4.50% 4.50%
Assumed health care cost trend rate:
Retirees prior to reaching age 65 ................. 8.20% 9.00% 10.00%
Retirees older than 65 ............................ 5.70% 6.00% 7.00%
</TABLE>
For 1997, the assumed health care cost trend rates decline to an ultimate
level of 4.50% in 2004 for all retirees; for 1996, 4.75% in 2001 for retirees
prior to reaching age 65 and 4.75% in 1998 for retirees older than 65; and for
1995, 4.75% in 2003 for retirees prior to reaching age 65 and 4.75% in 2000 for
retirees older than 65.
If the health care cost trend rate were increased by 1%, the APBO relating
to the medical benefits as of December 31, 1997, would be increased by $2.4
million (10.0%), and the sum of the service cost and interest cost components of
net periodic postretirement benefit cost relating to the medical benefits for
1997 would be increased by $0.3 million (13.0%).
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 $9.0
million, $9.1 million and $8.2 million for 1997, 1996 and 1995, respectively.
Corporate Annual Bonus Plan
The CIT Group Bonus Plan ("Bonus Plan") is an annual bonus plan covering
certain executive officers and other employees. 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. For the years ended December 31, 1997, 1996 and 1995, amounts charged
to expense for the Bonus Plan amounted to $18.5 million, $17.4 million and $13.7
million, respectively.
53
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-Term Equity Compensation Plan
The Company sponsors a Long-Term Equity Compensation Plan (the "ECP"). The
ECP allows the Company to issue to directors and employees up to 12,503,000
shares of Class A Common Stock through grants of annual incentive awards,
incentive and non-qualified stock options, stock appreciation rights, restricted
stock, performance shares and performance units. Class A common stock issued
under the ECP may be either authorized but unissued shares, treasury shares or
any combination thereof.
The ECP was established in November 1997 in conjunction with the Offering.
In November 1997, the Company granted 4,047,816 non-qualified stock options
pursuant to the ECP with an option price per share equal to the fair market
value on the date of grant ($27.00 per share). No compensation expense related
to stock option grants was recorded as the option exercise price was equal to
the fair market value on the date of grant. All of the options have 10 year
terms. Options of 2,867,516 will vest one-third on the first anniversary of the
date of grant (1998), an additional one-third on the second anniversary of the
date of grant (1999), and in full on the third anniversary of the date of grant
(2000). The remaining 1,180,300 options will vest one-third on the third
anniversary of the date of grant (2000), an additional one-third on the fourth
anniversary of the date of grant (2001) and in full on the fifth anniversary of
the date of grant (2002). Options exercisable at December 31, 1997 were 1,062
and 9,518 options were forfeited during 1997.
Restricted Stock
In November 1997, the Company issued 948,527 shares of restricted Class A
Common Stock in connection with the termination of the CIT Career Incentive
Plan. All restricted shares were outstanding at December 31, 1997. Such shares
were issued at fair market value, which was $27.00 per share on the issue date.
These shares vest on the third anniversary of the date of grant. The holder of
restricted stock generally has the rights of a stockholder of the Company,
including the right to vote and to receive cash dividends.
CIT Career Incentive Plan
Phantom shares granted under the CIT Career Incentive Plan entitled the
participant to receive, at the end of the three year performance period, a
specified amount of cash. Following the end of the performance period, one-third
of the phantom shares vested immediately and one-third vested at the end of each
of the next two years. In conjunction with the Offering, the Company terminated
the CIT Career Incentive Plan as of November 13, 1997 and extinguished all
phantom shares of stock, by cash payment (payable in 1998) and the granting of
restricted shares of Class A common stock and stock options. At the employee's
option, all or part of the cash component of the termination could either be
paid in 1998 in cash or deferred in up to five annual installments. For the
years ended December 31, 1997, 1996 and 1995, amounts charged to expense for the
CIT Career Incentive Plan amounted to $20.1 million, $9.5 million and $3.8
million, respectively. All charges relating to the termination of the Career
Incentive Plan are included in 1997 expense.
Accounting for Stock-Based Compensation Plans
The Company has elected to apply Accounting Principles Board Opinion 25
("APB 25") rather than the optional provisions of Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS
123") in accounting for its stock-based compensation plans. Under APB 25, the
Company does not recognize compensation expense on the issuance of its stock
options because the option terms are fixed and the exercise price equals the
market price of the underlying stock on the grant date. As required by SFAS 123,
the Company has determined the pro forma information as if the Company had
accounted for stock options granted under the fair value method of SFAS 123. Had
the compensation cost of the Company's stock-based compensation plans been
determined based on the operational provisions of SFAS 123, the Company's net
income for 1997 and net income per diluted share would have been $288.7 million
and $1.81, compared to $310.1 million and $1.95, as reported. The weighted
average fair value of all options granted during 1997 was $8.32 and fair value
was determined at the date of grant using the Black-
54
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Scholes option-pricing model that assumed a dividend yield of 1.33%, expected
volatility range of 29.48%-31.39%, a risk free interest rate range of
5.76%-5.90% and an expected option life range of 3-7 years.
Note 15--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, 1997.
Years Ended December 31, Dollars in Millions
----------------------- -------------------
1998 ............................................ $ 24.4
1999 ............................................ 21.2
2000 ............................................ 17.7
2001 ............................................ 15.3
2002 ............................................ 14.2
Thereafter ...................................... 48.5
-------
Total ......................................... $ 141.3
=======
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 $16.6 million due in the future under noncancellable subleases.
Rental expense, net of sublease income on premises and equipment, was as
follows.
Years Ended December 31,
-----------------------------------
1997 1996 1995
---- ---- ----
Dollars in Millions
Premises ............................ $ 19.6 $18.0 $ 18.0
Equipment ........................... 6.0 6.3 5.7
Less sublease income ................ (1.2) (1.2) (1.3)
------ ------ ------
Total ............................. $ 24.4 $ 23.1 $ 22.4
====== ====== ======
Note 16--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 17--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 will be the contractual
amount outstanding less the value of all underlying collateral and guarantees.
55
<PAGE>
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>
At December 31,
-----------------------------------------------------------
Due to expire
---------------------------- Total Total
Within After outstanding outstanding
one year one year 1997 1996
------------ ----------- ----------- ------------
Dollars in Millions
<S> <C> <C> <C> <C>
Unused commitments to extend credit
Loans .......................................... $ 1,508.2 $ 2.9 $ 1,511.1 $ 1,487.4
Leases ......................................... 97.1 -- 97.1 50.9
Letters of credit and acceptances
Standby letters of credit ...................... 208.7 0.9 209.6 151.6
Other letters of credit ........................ 170.2 10.9 181.1 231.7
Acceptances .................................... 24.0 -- 24.0 14.6
Guarantees ....................................... 5.3 23.9 29.2 79.9
Foreign exchange contracts ....................... 1.1 -- 1.1 0.8
</TABLE>
Note 18--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 17, 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.
56
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Estimated fair values, recorded carrying values and various assumptions
used in valuing the Company's financial instruments at December 31, 1997 and
1996 are set forth below.
<TABLE>
<CAPTION>
1997 1996
--------------------------- ------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
---------- ----------- --------- ----------
Asset Asset Asset Asset
(Liability) (Liability) (Liability) (Liability)
---------- ----------- --------- ----------
Dollars in Millions
<S> <C> <C> <C> <C>
Finance receivables - loans(a) ..................... $13,406.7 $13,607.0 $13,275.2 $13,480.1
Consumer finance receivables held for sale ......... 268.2 268.2 116.3 116.3
Other assets(b) .................................... 383.9 420.9 273.4 308.1
Commercial paper(c) ................................ (5,559.6) (5,559.6) (5,827.0) (5,827.0)
Fixed rate senior notes and subordinated
fixed rate notes(d) ............................. (6,893.8) (6,924.1) (5,061.2) (5,091.6)
Variable rate notes(d) ............................. (2,861.5) (2,856.5) (3,717.5) (3,714.3)
Credit balances of factoring clients & accrued
liabilities and payables(e) ..................... (1,714.0) (1,714.0) (1,578.9) (1,578.9)
Company-obligated mandatorily
redeemable preferred securities of
subsidiary trust holding solely debentures
of the Company(f) ............................... (250.0) (253.8) -- --
Derivative Financial Instruments(g)
Interest Rate Swaps
Off-balance sheet assets .......................... -- 1.2 -- 6.3
Off-balance sheet liabilities ..................... -- (46.6) -- (64.6)
Cross currency assets ............................. -- 5.2 -- 14.1
Cross currency liabilities ........................ -- (12.0) -- --
</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 8.21% to 9.20% for 1997 and 7.96% to 9.37%
for 1996. 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 value approximates
carrying value. The net carrying value of lease finance receivables not
subject to fair value disclosure totaled $4.1 billion in 1997 and $3.5
billion in 1996.
(b) Other assets subject to fair value disclosure include accrued interest
receivable and investment securities. The carrying amount of accrued
interest receivable approximates fair value. Investment securities
actively traded in a secondary market were valued using quoted available
market prices. 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 $281.9 million in 1997 and $261.8 million in
1996.
(c) The estimated fair value of commercial paper approximates carrying value
due to the relatively short maturities.
(d) Fixed rate notes were valued using a present value discounted cash flow
analysis with a discount rate approximating current market rates for
issuances by the Company of similar term debt at the end of the year.
Discount rates used in the present value calculation ranged from 5.23% to
6.60% in 1997 and 5.53% to 6.95% in 1996. 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 that approximates carrying value. The carrying value of other
liabilities not subject to fair value disclosure totaled $752.3 million in
1997 and $672.5 million in 1996.
(f) Company-obligated mandatorily redeemable preferred capital securities of
subsidiary trust holding solely debentures of the Company were valued
using a present value discounted cash flow analysis with a discount rate
approximating current market rates of similar issuances at the end of the
year.
(g) 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 $3.6 billion at December 31, 1997 ($0.8
billion of which related to interest rate swaps whose fair market value
represented an asset and $2.8 billion related to interest rate swaps whose
fair market value represented a liability, after adjusting for master
netting agreements) and $5.3 billion at December 31, 1996 ($1.8 billion of
assets and $3.5 billion of liabilities). The notional principal amount of
cross currency interest rate swaps totaled $218.6 million at December 31,
1997 and 1996, respectively. 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.
57
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 19--Investments in Debt and Equity Securities
At December 31, 1997 and 1996, the Company's investments in debt and
equity securities designated as available for sale and subject to the provisions
of Statement of Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" totaled $146.1 million and $24.4
million, respectively. The Company's investments in debt and equity securities
designated as trading totaled $38.2 million at December 31, 1997. Unrealized
gains and losses, representing the difference between carrying value and current
fair market value were not significant.
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. From time to time, the Company may maintain such deposits with DKB or
Chase.
At December 31, 1997, the Company's credit line coverage with 53 banks
totaled $5.0 billion of committed facilities. Additional information regarding
these credit lines can be found in Note 6--Debt. At December 31, 1997, DKB was a
committed bank under a $1.2 billion revolving credit facility and a $3.7 billion
revolving credit facility (together, the "Facilities"), with commitments of
$71.2 million and $213.8 million, respectively. Chase is both the agent and a
committed bank under the Facilities with commitments of $63.8 million and $191.2
million, respectively.
At December 31, 1996, the Company's credit line coverage with 60 banks
totaled $5.2 billion of committed facilities. 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 was the agent
under the $244.0 million facility and the $81.0 million facility. Chase was 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.
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, 1997, the
notional principal amount outstanding on interest rate swap agreements with DKB
and Chase totaled $220.0 million and $475.0 million, respectively. 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. The notional principal amount outstanding on foreign currency
swaps totaled $168.0 million with DKB at both year-end 1997 and 1996.
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.
At December 31, 1997 and 1996, the Company held a $9.0 million letter of
credit from Chase as additional collateral on a $20.8 million and $22.2 million
business aircraft loan to a third party. Chase is also indebted to the Company
in the amount of $6.7 million and $7.3 million for financing relating to the
purchase of a business aircraft by Chase, at December 31, 1997 and 1996,
respectively.
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 1998, $0.4 million in 1999, and $0.1 million in 2000. Rental
expense paid to Chase totaled $0.5 million, $0.5 million and $0.6 million in
1997, 1996 and 1995, respectively.
58
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1997 and 1996, the Company had entered into credit-related
commitments with DKB in the form of letters of credit totaling $15.2 million and
$19.8 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.
During 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, which had a remaining balance
of $1.1 billion at December 31, 1997.
The Company purchased finance receivables totaling $39.6 million and $33.4
million from Chase during 1997 and 1996, respectively.
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, 1997 and 1996, the principal amount outstanding on
the cash collateral loans was $45.8 million and $40.7 million, respectively. The
Company has entered into multiple trust agreements with Chase with respect to
certain securitization transactions.
Note 21--Business Segment Information
The Company's primary business activities are comprised of commercial and
consumer operations. The Company's 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.
At December 31,
----------------------------------
1997 1996 1995
----- ------ -----
Dollars in Millions
Total Assets
Commercial ............................ $16,010.2 $15,143.2 $14,590.5
Consumer .............................. 4,301.7 3,563.4 2,587.7
Other ................................. 152.2 225.9 242.1
--------- --------- ---------
Total ............................... $20,464.1 $18,932.5 $17,420.3
========= ========= =========
For the Years Ended December 31,
----------------------------------
1997 1996 1995
----- ------ -----
Dollars in Millions
Total Revenues
Commercial ............................ $1,675.5 $1,542.6 $1,443.0
Consumer .............................. 425.0 325.6 264.4
Other ................................. 30.0 22.1 6.5
-------- -------- --------
Total ............................... $2,130.5 $1,890.3 $1,713.9
======== ======== ========
Operating Income (Loss)
Commercial ............................ $465.3 $390.2 $341.5
Consumer .............................. 72.0 67.4 63.9
Other ................................. (49.2) (41.8) (40.3)
------ ------ ------
Total ............................... $488.1 $415.8 $365.1
====== ====== ======
59
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 22--Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
1997
----------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
--------- -------- -------- -------- -------
Dollars in Millions (except per share data)
<S> <C> <C> <C> <C> <C>
Net finance income ............................. $ 214.0 $ 218.3 $ 226.0 $ 229.2 $ 887.5
Fees and other income .......................... 57.7 49.4 78.9 61.8 247.8
Gain on sale of equity interest acquired
in loan workout ............................. -- 58.0 -- -- 58.0
Salaries and general operating expenses ........ 99.9 110.6 103.6 114.3 428.4
Provision for credit losses .................... 27.0 29.0 35.8 21.9 113.7
Depreciation on operating
lease equipment ............................. 32.1 33.9 42.3 38.5 146.8
Minority interest in subsidiary
trust holding solely debentures
of the Company .............................. 1.9 4.8 4.8 4.8 16.3
Provision for income taxes ..................... 40.7 53.7 43.1 40.5 178.0
Net income ..................................... $70.1 $93.7 $75.3 $71.0 $310.1
Net income per diluted share ................... $0.44 $0.59 $0.48 $0.44 $ 1.95
<CAPTION>
1996
----------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
--------- -------- -------- -------- -------
Dollars in Millions (except per share data)
<S> <C> <C> <C> <C> <C>
Net finance income ............................. $195.4 $197.3 $201.4 $203.8 $797.9
Fees and other income .......................... 52.7 73.2 50.9 67.3 244.1
Salaries and general operating expenses ........ 95.9 97.6 97.9 101.7 393.1
Provision for credit losses .................... 27.8 26.6 24.2 32.8 111.4
Depreciation on operating lease equipment ...... 27.5 28.8 28.0 37.4 121.7
Provision for income taxes ..................... 37.1 45.1 37.1 36.4 155.7
Net income ..................................... $ 59.8 $ 72.4 $ 65.1 $ 62.8 $260.1
Net income per diluted share ................... $ 0.38 $ 0.45 $ 0.41 $ 0.40 $ 1.64
</TABLE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
60
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information called for by Item 10 is incorporated by reference from
the information under the caption "Election of Directors" and "Election of
Directors -- Executive Officers of the Company" in the Company's Proxy Statement
for its 1998 annual meeting of shareholders.
Item 11. Executive Compensation.
The information called for by Item 11 is incorporated by reference from
the information under the caption "Compensation of Directors and Executive
Officers" in the Company's Proxy Statement for its 1998 annual meeting of
shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information called for by Item 12 is incorporated by reference from
the information under the caption "Principal Shareholders" in the Company's
Proxy Statement for its 1998 annual meeting of shareholders.
Item 13. Certain Relationships and Related Transactions.
The information called for by Item 13 is incorporated by reference from
the information under the caption "Certain Relationships and Related
Transactions" in the Company's Proxy Statement for its 1998 annual meeting of
shareholders.
61
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.
(a) The following documents are filed with the Securities and Exchange
Commission as part of this report:
1. The financial statements of The CIT Group, Inc. and Subsidiaries as
set forth on pages 34-60.
2. All schedules are omitted because they are not applicable or
because the required information appears in the consolidated
financial statements or the notes thereto.
3. The following is an index of the Exhibits required by Item 601 of
Regulation S-K filed with the Securities and Exchange Commission as
part of this report:
3.1 Amended and Restated Certificate of Incorporation of The CIT
Group, Inc., dated November 12, 1997 (incorporated by
reference to Exhibit 3.1 to Form 8-A filed by the Company on
October 29, 1997).
3.2 By-Laws of The CIT Group, Inc., dated November 12, 1997
(incorporated by reference to Exhibit 3.2 to Form 8-A filed
by the Company on October 29, 1997).
4.1 Form of certificate of Class A Common Stock (incorporated by
reference to Exhibit 4.1 to Form 8-A filed by the Company on
October 29, 1998).
4.2 Upon the request of the Securities and Exchange Commission,
the Company will furnish a copy of all instruments defining
the rights of holders of long-term debt of the Registrant.
10.1 Regulatory Compliance Agreement, dated November 18, 1997
(incorporated by reference to Exhibit 10.4 to Amendment No.
2 to Form S-2 filed by the Company on November 12, 1997).
10.2 Registration Rights Agreement, dated November 18, 1997
(incorporated by reference to Exhibit 10.5 to Amendment No.
2 to Form S-2 filed by the Company on November 12, 1997).
10.3 Employment Agreement of Albert R. Gamper, Jr., dated April
1, 1997, comparable to the agreement for Joseph A. Pollicino
(incorporated by reference to Exhibit 10.6 to Amendment No.
2 to Form S-2 filed by the Company on November 12, 1997).
10.4 Employment Agreement of Joseph M. Leone, dated December 6,
1996, comparable to the agreements for William M. O'Grady
and Ernest D. Stein (incorporated by reference to Exhibit
10.7 to Amendment No. 2 to Form S-2 filed by the Company on
November 12, 1997).
10.5 The CIT Group Bonus Plan (incorporated by reference to
Exhibit 10 (d) to Form 10-K filed by the Company for the
fiscal year ended December 31, 1992).
10.6 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 fiscal year ended December 31,
1992).
10.7 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 fiscal year ended December 31,
1992).
10.8 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 fiscal year ended December 31,
1992).
10.9 The CIT Group Holdings, Inc. Executive Retirement Plan and
New Executive Retirement Plan, each effective as of January
1, 1995 (incorporated by reference to Exhibit 10.12 to
Amendment No. 2 to Form S-2 filed by the Company on November
12, 1997).
62
<PAGE>
10.10 The CIT Group, Inc. Long-Term Equity Compensation Plan,
dated November 1, 1997 (incorporated by reference to Exhibit
10.13 to Amendment No. 2 to Form S-2 filed by the Company on
November 12, 1997).
12 Computation of Ratios of Earnings to Fixed Charges.
21 Subsidiaries of the Registrant.
23 Consent of KPMG Peat Marwick LLP.
24 Powers of Attorney
27 Financial Data Schedule (filed electronically)
(b) A Current Report on Form 8-K, dated October 14, 1997 was filed with the
Commission reporting the Corporation's announcement of results for the quarter
ended September 30, 1997.
A Current Report on Form 8-K, dated November 12, 1997, was filed with
the Commission reporting the Corporation's announcement of its initial public
offering of its Class A Common Stock and setting forth the "Business" and "Risk
Management" sections from the Prospectus.
63
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE CIT GROUP, INC.
By: /S/ DONALD J. RAPSON
--------------------------------
Donald J. Rapson
Senior Vice President,
Assistant General Counsel
and Assistant Secretary
March 17, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature and Title Date
------------------- ----
ALBERT R. GAMPER, JR.*
- -------------------------------
President, Chief Executive
Officer and Director
(principal executive officer)
HISAO KOBAYASHI*
- -------------------------------
Director
DANIEL P. AMOS*
- -------------------------------
Director
YOSHIRO AOKI*
- -------------------------------
Director
TAKASUKE KANEKO* *By: /s/ DONALD J. RAPSON March 17, 1998
- ------------------------------- --------------------
Director Donald J. Rapson
Attorney-In-Fact
JOSEPH A. POLLICINO*
- -------------------------------
Director
PAUL N. ROTH*
- -------------------------------
Director
PETER J. TOBIN*
- -------------------------------
Director
TOHRU TONOIKE*
- -------------------------------
Director
KEIJI TORII*
- -------------------------------
Director
/S/ JOSEPH M. LEONE March 17, 1998
- -------------------------------
Joseph M. Leone
Executive Vice President and
Chief Financial Officer
(principal accounting officer)
Original powers of attorney authorizing Albert R. Gamper, Jr., Ernest D.
Stein, and Donald J. Rapson and each of them to sign on behalf of the
above-mentioned directors are held by the Corporation and available for
examination by the Securities and Exchange Commission pursuant to Item 302(b) of
Regulation S-T.
64
EXHIBIT 12
THE CIT GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Year Ended December 31,
------------------------------
1997 1996 1995
---- ---- ----
Dollars in millions
Net income ................................... $ 310.1 $ 260.1 $ 225.3
Provision for income taxes ................... 178.0 155.7 139.8
-------- -------- --------
Earnings before provision for income taxes ... 488.1 415.8 365.1
-------- -------- --------
Fixed Charges:
Interest and debt expenses on indebtedness .. 937.2 848.3 831.5
Minority interest in subsidiary trust
holding solely debentures of the Company ... 16.3 -- --
Interest factor - one-third of rentals
on real and personal properties ............ 8.5 8.1 7.9
-------- -------- --------
Total fixed charges .......................... 962.0 856.4 839.4
-------- -------- --------
Total earnings before provisions for
income taxes and fixed charges ........... $1,450.1 $1,272.2 $1,204.5
======== ======== ========
Ratios of Earnings to Fixed Charges .......... 1.51x 1.49x 1.44x
EXHIBIT 21
THE CIT GROUP, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
December 31, 1997
Jurisdiction of
Name of Subsidiary Incorporation
------------------ -------------
The CIT Group/Credit Finance, Inc. ...................... Delaware
The CIT Group/CrF Securities Investment, Inc. ......... New Jersey
The CIT Group/Sales Financing, Inc. ..................... Delaware
The CIT Group/Consumer Finance, Inc. .................... Delaware
Equipment Credit Services, Inc. ......................... Delaware
North American Exchange, Inc. ........................... Delaware
C.I.T. Corporation (Maine) .............................. Maine
C.I.T. Corporation of the South, Inc. ................... Delaware
William Iselin & Company, Inc. (N.Y.) ................... New York
The CIT Group/Commercial Services, Inc. ................. New York
The CIT Group/CmS Securities Investment, Inc. ......... New Jersey
C.I.T Foreign Sales Corporation One, Ltd. ............. Barbados
CIT FSC Two, Ltd. ..................................... Bermuda
CIT FSC Three, Ltd. ................................... Bermuda
CIT FSC Four, Ltd. .................................... Bermuda
CIT FSC Seven, Ltd. ................................... Bermuda
CIT FSC Nine, Ltd. .................................... Bermuda
CIT FSC Ten, Ltd. ..................................... Bermuda
The CIT Group/Capital Aircraft, Inc. .................. Delaware
The CIT Group/Factoring One, Inc. ..................... New York
CIT FSC Five, Ltd. .................................. Bermuda
The CIT Group/Capital Transportation, Inc. ............ Delaware
The CIT Group/Commercial Services (Asia), Ltd. ........ Hong Kong
The CIT Group, Inc. (NJ) ................................ New Jersey
The CIT Group/Capital Investments, Inc. ................. New York
Assurers Exchange, Inc. ................................. Delaware
C.I.T. Financial Management, Inc. ....................... New York
The CIT Group/FM Securities Investment, Inc. .......... New Jersey
The CIT Group/Capital Finance, Inc. ..................... Delaware
Banord Limited ........................................ United Kingdom
Equipment Acceptance Corporation ...................... New York
The CIT Group/Asset Management, Inc. .................... Delaware
Commercial Investment Trust Corporation ................. Delaware
The CIT Group/Business Credit, Inc ...................... New York
The CIT Group/BC Securities Investment, Inc. .......... New Jersey
Meinhard-Commercial Corporation ......................... New York
650 Management Corp. .................................... New Jersey
The CIT Group/Equity Investments, Inc. .................. New Jersey
The CIT Group/Venture Capital, Inc. ................... New Jersey
The CIT Group/Equipment Financing, Inc. ................. New York
C.I.T. Realty Corporation ............................. Delaware
CIT FSC Eleven, Ltd. .................................. Bermuda
CIT FSC Twelve, Ltd. .................................. Bermuda
CIT FSC Fourteen, Ltd. ................................ Bermuda
CIT FSC Fifteen, Ltd. ................................. Bermuda
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT (Continued)
December 31, 1997
Jurisdiction of
Name of Subsidiary Incorporation
------------------ -------------
CIT FSC Sixteen, Ltd. ................................. Bermuda
CIT FSC Seventeen, Ltd. ............................... Bermuda
CIT FSC Eighteen, Ltd. ................................ Bermuda
CIT FSC Nineteen, Ltd. ................................ Bermuda
CIT FSC Twenty, Ltd. .................................. Bermuda
The CIT Group/El Paso Refinery, Inc. .................. Delaware
The CIT Group/Securities Investment, Inc. ............. Delaware
Bunga Bebaru, Ltd. .................................. Bermuda
CIT Leasing (Bermuda), Ltd. ......................... Bermuda
The CIT Group/Corporate Aviation, Inc. ................ Delaware
Arctic Shipping Co., Inc. .............................. Delaware
Atlantic Shipping Co., Inc. ........................... Delaware
Baltic Shipping Co., Inc. ............................. Delaware
Indian Shipping Co., Inc. ............................. Delaware
Mediterranean Shipping Co., Inc. ................... Delaware
Bering Shipping Co., Inc. ............................. Delaware
Ross Shipping Co., Inc. ............................... Delaware
Sargasso Shipping Co., Inc. ........................... Delaware
Caspian Shipping Co., Inc. ............................ Delaware
Baffin Shipping Co., Inc. ............................. Delaware
Caribbean Shipping Co., Inc. .......................... Delaware
Tasman Shipping Co., Inc. ............................. Delaware
Sulu Shipping Co., Inc. ............................... Delaware
Hudson Shipping Co., Inc. ............................. Delaware
Arabian Shipping Co., Inc. ............................ Delaware
C.I.T. Leasing Corporation ............................ Delaware
The CIT Group/LsC Securities Investment, Inc. ....... New Jersey
CIT FSC Six, Ltd. ................................... Bermuda
CIT FSC Eight, Ltd. ................................. Bermuda
Kelbourne, Limited .................................. Ireland
The CIT Group Holdings, Inc. ............................ Delaware
The CIT Group Securitization Corporation ................ Delaware
The CIT Group/Consumer Finance, Inc. (NY) ............... New York
C.I.T. Financial International, N. V. ................... Netherlands
Antilles
C.I.T. Financial Overseas, B. V. ........................ Netherlands
Antilles
The CIT Group Securitization Corporation II ............. Delaware
The CIT GP Corporation .................................. Illinois
GFSC Aircraft Acquisition Financing Corporation ......... Delaware
The CIT Group Securitization Corporation IV ............. Delaware
The CIT GP Corporation II ............................... Delaware
The CIT GP Corporation V ................................ Delaware
The CIT GP Corporation VI ............................... Delaware
Crestpointe Financial Corp. ............................. Delaware
The CIT Group GP Corporation III ........................ Delaware
The CIT Group Securitization Corporation III ............ Delaware
CIT Capital Trust I ..................................... Delaware
The CIT Group/Consumer Finance, Inc. (TN) ............... Tennessee
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
To the Stockholders and Board of Directors
of The CIT Group, Inc.:
We consent to the incorporation by reference in Registration Statements
No. 33-85224, No. 333-70249, No. 333-36061, No. 333-22283 and No. 333-27465 on
Form S-3 of The CIT Group, Inc. of our report dated January 28, 1998, relating
to the consolidated balance sheets of The CIT Group, Inc. and subsidiaries as of
December 31, 1997 and 1996, 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, 1997, which report appears in the December
31, 1997 Annual Report on Form 10-K of The CIT Group, Inc.
KPMG PEAT MARWICK LLP
Short Hills, New Jersey
March 17, 1998
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of THE CIT GROUP, INC., a Delaware corporation (the "Company"), which is
about to file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Act of 1934, as amended, an annual report
on Form 10-K for the year ended December 31, 1997:
Hereby acknowledges that the undersigned director of the Company has
reviewed and approved copies of the Company's annual report on Form 10-K
for the year ended December 31, 1997, to be filed with the Securities and
Exchange Commission; and
Hereby authorizes ALBERT R. GAMPER, JR., ERNEST D. STEIN, and DONALD J.
RAPSON, and each of them with full power to act without the others, to
execute, in the name and on behalf of the Company and on behalf of the
Principal Executive Officer or Officers and/or the Principal Accounting
Officer and/or any other Officer of the Company, the annual report on Form
10-K for the year ended December 31, 1997, and any and all amendments
thereof, with power where appropriate to affix the corporate seal of the
Company thereto and to attest to said seal, and to file such report, when
so executed, including any exhibits required in connection therewith, with
the Securities and Exchange Commission; and
Hereby constitutes and appoints ALBERT R. GAMPER, JR., ERNEST D. STEIN,
and DONALD J. RAPSON, and each of them with full power to act without the
others, his true and lawful attorneys-in-fact and agents, for him and in
his name, place, and stead, in any and all capacities, to sign such Form
10-K and any and all amendments thereof, and to file such Form 10-K and
each such amendment, with all exhibits thereto, and any and all other
documents in connection therewith, with the Securities and Exchange
Commission; and
Hereby grants unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform any and all acts and things
requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person; and
Hereby ratifies and confirms all that said attorneys-in-fact and agents,
or any of them, may lawfully do or cause to be done by virtue hereby.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the 5th
day of March, 1998.
/s/ Albert R. Gamper, Jr.
-------------------------------
Albert R. Gamper, Jr.
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of THE CIT GROUP, INC., a Delaware corporation (the "Company"), which is
about to file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Act of 1934, as amended, an annual report
on Form 10-K for the year ended December 31, 1997:
Hereby acknowledges that the undersigned director of the Company has
reviewed and approved copies of the Company's annual report on Form 10-K
for the year ended December 31, 1997, to be filed with the Securities and
Exchange Commission; and
Hereby authorizes ALBERT R. GAMPER, JR., ERNEST D. STEIN, and DONALD J.
RAPSON, and each of them with full power to act without the others, to
execute, in the name and on behalf of the Company and on behalf of the
Principal Executive Officer or Officers and/or the Principal Accounting
Officer and/or any other Officer of the Company, the annual report on Form
10-K for the year ended December 31, 1997, and any and all amendments
thereof, with power where appropriate to affix the corporate seal of the
Company thereto and to attest to said seal, and to file such report, when
so executed, including any exhibits required in connection therewith, with
the Securities and Exchange Commission; and
Hereby constitutes and appoints ALBERT R. GAMPER, JR., ERNEST D. STEIN,
and DONALD J. RAPSON, and each of them with full power to act without the
others, his true and lawful attorneys-in-fact and agents, for him and in
his name, place, and stead, in any and all capacities, to sign such Form
10-K and any and all amendments thereof, and to file such Form 10-K and
each such amendment, with all exhibits thereto, and any and all other
documents in connection therewith, with the Securities and Exchange
Commission; and
Hereby grants unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform any and all acts and things
requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person; and
Hereby ratifies and confirms all that said attorneys-in-fact and agents,
or any of them, may lawfully do or cause to be done by virtue hereby.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the 5th
day of March, 1998.
/s/ Hisao Kobayashi
-------------------------------
Hisao Kobayashi
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of THE CIT GROUP, INC., a Delaware corporation (the "Company"), which is
about to file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Act of 1934, as amended, an annual report
on Form 10-K for the year ended December 31, 1997:
Hereby acknowledges that the undersigned director of the Company has
reviewed and approved copies of the Company's annual report on Form 10-K
for the year ended December 31, 1997, to be filed with the Securities and
Exchange Commission; and
Hereby authorizes ALBERT R. GAMPER, JR., ERNEST D. STEIN, and DONALD J.
RAPSON, and each of them with full power to act without the others, to
execute, in the name and on behalf of the Company and on behalf of the
Principal Executive Officer or Officers and/or the Principal Accounting
Officer and/or any other Officer of the Company, the annual report on Form
10-K for the year ended December 31, 1997, and any and all amendments
thereof, with power where appropriate to affix the corporate seal of the
Company thereto and to attest to said seal, and to file such report, when
so executed, including any exhibits required in connection therewith, with
the Securities and Exchange Commission; and
Hereby constitutes and appoints ALBERT R. GAMPER, JR., ERNEST D. STEIN,
and DONALD J. RAPSON, and each of them with full power to act without the
others, his true and lawful attorneys-in-fact and agents, for him and in
his name, place, and stead, in any and all capacities, to sign such Form
10-K and any and all amendments thereof, and to file such Form 10-K and
each such amendment, with all exhibits thereto, and any and all other
documents in connection therewith, with the Securities and Exchange
Commission; and
Hereby grants unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform any and all acts and things
requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person; and
Hereby ratifies and confirms all that said attorneys-in-fact and agents,
or any of them, may lawfully do or cause to be done by virtue hereby.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the 5th
day of March, 1998.
/s/ Daniel P. Amos
-------------------------------
Daniel P. Amos
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of THE CIT GROUP, INC., a Delaware corporation (the "Company"), which is
about to file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Act of 1934, as amended, an annual report
on Form 10-K for the year ended December 31, 1997:
Hereby acknowledges that the undersigned director of the Company has
reviewed and approved copies of the Company's annual report on Form 10-K
for the year ended December 31, 1997, to be filed with the Securities and
Exchange Commission; and
Hereby authorizes ALBERT R. GAMPER, JR., ERNEST D. STEIN, and DONALD J.
RAPSON, and each of them with full power to act without the others, to
execute, in the name and on behalf of the Company and on behalf of the
Principal Executive Officer or Officers and/or the Principal Accounting
Officer and/or any other Officer of the Company, the annual report on Form
10-K for the year ended December 31, 1997, and any and all amendments
thereof, with power where appropriate to affix the corporate seal of the
Company thereto and to attest to said seal, and to file such report, when
so executed, including any exhibits required in connection therewith, with
the Securities and Exchange Commission; and
Hereby constitutes and appoints ALBERT R. GAMPER, JR., ERNEST D. STEIN,
and DONALD J. RAPSON, and each of them with full power to act without the
others, his true and lawful attorneys-in-fact and agents, for him and in
his name, place, and stead, in any and all capacities, to sign such Form
10-K and any and all amendments thereof, and to file such Form 10-K and
each such amendment, with all exhibits thereto, and any and all other
documents in connection therewith, with the Securities and Exchange
Commission; and
Hereby grants unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform any and all acts and things
requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person; and
Hereby ratifies and confirms all that said attorneys-in-fact and agents,
or any of them, may lawfully do or cause to be done by virtue hereby.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the 5th
day of March, 1998.
/s/ Yoshiro Aoki
-------------------------------
Yoshiro Aoki
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of THE CIT GROUP, INC., a Delaware corporation (the "Company"), which is
about to file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Act of 1934, as amended, an annual report
on Form 10-K for the year ended December 31, 1997:
Hereby acknowledges that the undersigned director of the Company has
reviewed and approved copies of the Company's annual report on Form 10-K
for the year ended December 31, 1997, to be filed with the Securities and
Exchange Commission; and
Hereby authorizes ALBERT R. GAMPER, JR., ERNEST D. STEIN, and DONALD J.
RAPSON, and each of them with full power to act without the others, to
execute, in the name and on behalf of the Company and on behalf of the
Principal Executive Officer or Officers and/or the Principal Accounting
Officer and/or any other Officer of the Company, the annual report on Form
10-K for the year ended December 31, 1997, and any and all amendments
thereof, with power where appropriate to affix the corporate seal of the
Company thereto and to attest to said seal, and to file such report, when
so executed, including any exhibits required in connection therewith, with
the Securities and Exchange Commission; and
Hereby constitutes and appoints ALBERT R. GAMPER, JR., ERNEST D. STEIN,
and DONALD J. RAPSON, and each of them with full power to act without the
others, his true and lawful attorneys-in-fact and agents, for him and in
his name, place, and stead, in any and all capacities, to sign such Form
10-K and any and all amendments thereof, and to file such Form 10-K and
each such amendment, with all exhibits thereto, and any and all other
documents in connection therewith, with the Securities and Exchange
Commission; and
Hereby grants unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform any and all acts and things
requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person; and
Hereby ratifies and confirms all that said attorneys-in-fact and agents,
or any of them, may lawfully do or cause to be done by virtue hereby.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the 5th
day of March, 1998.
/s/ Takasuke Kaneko
-------------------------------
Takasuke Kaneko
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of THE CIT GROUP, INC., a Delaware corporation (the "Company"), which is
about to file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Act of 1934, as amended, an annual report
on Form 10-K for the year ended December 31, 1997:
Hereby acknowledges that the undersigned director of the Company has
reviewed and approved copies of the Company's annual report on Form 10-K
for the year ended December 31, 1997, to be filed with the Securities and
Exchange Commission; and
Hereby authorizes ALBERT R. GAMPER, JR., ERNEST D. STEIN, and DONALD J.
RAPSON, and each of them with full power to act without the others, to
execute, in the name and on behalf of the Company and on behalf of the
Principal Executive Officer or Officers and/or the Principal Accounting
Officer and/or any other Officer of the Company, the annual report on Form
10-K for the year ended December 31, 1997, and any and all amendments
thereof, with power where appropriate to affix the corporate seal of the
Company thereto and to attest to said seal, and to file such report, when
so executed, including any exhibits required in connection therewith, with
the Securities and Exchange Commission; and
Hereby constitutes and appoints ALBERT R. GAMPER, JR., ERNEST D. STEIN,
and DONALD J. RAPSON, and each of them with full power to act without the
others, his true and lawful attorneys-in-fact and agents, for him and in
his name, place, and stead, in any and all capacities, to sign such Form
10-K and any and all amendments thereof, and to file such Form 10-K and
each such amendment, with all exhibits thereto, and any and all other
documents in connection therewith, with the Securities and Exchange
Commission; and
Hereby grants unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform any and all acts and things
requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person; and
Hereby ratifies and confirms all that said attorneys-in-fact and agents,
or any of them, may lawfully do or cause to be done by virtue hereby.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the 5th
day of March, 1998.
/s/ Joseph A. Pollicino
-------------------------------
Joseph A. Pollicino
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of THE CIT GROUP, INC., a Delaware corporation (the "Company"), which is
about to file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Act of 1934, as amended, an annual report
on Form 10-K for the year ended December 31, 1997:
Hereby acknowledges that the undersigned director of the Company has
reviewed and approved copies of the Company's annual report on Form 10-K
for the year ended December 31, 1997, to be filed with the Securities and
Exchange Commission; and
Hereby authorizes ALBERT R. GAMPER, JR., ERNEST D. STEIN, and DONALD J.
RAPSON, and each of them with full power to act without the others, to
execute, in the name and on behalf of the Company and on behalf of the
Principal Executive Officer or Officers and/or the Principal Accounting
Officer and/or any other Officer of the Company, the annual report on Form
10-K for the year ended December 31, 1997, and any and all amendments
thereof, with power where appropriate to affix the corporate seal of the
Company thereto and to attest to said seal, and to file such report, when
so executed, including any exhibits required in connection therewith, with
the Securities and Exchange Commission; and
Hereby constitutes and appoints ALBERT R. GAMPER, JR., ERNEST D. STEIN,
and DONALD J. RAPSON, and each of them with full power to act without the
others, his true and lawful attorneys-in-fact and agents, for him and in
his name, place, and stead, in any and all capacities, to sign such Form
10-K and any and all amendments thereof, and to file such Form 10-K and
each such amendment, with all exhibits thereto, and any and all other
documents in connection therewith, with the Securities and Exchange
Commission; and
Hereby grants unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform any and all acts and things
requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person; and
Hereby ratifies and confirms all that said attorneys-in-fact and agents,
or any of them, may lawfully do or cause to be done by virtue hereby.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the 5th
day of March, 1998.
/s/ Paul N. Roth
-------------------------------
Paul N. Roth
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of THE CIT GROUP, INC., a Delaware corporation (the "Company"), which is
about to file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Act of 1934, as amended, an annual report
on Form 10-K for the year ended December 31, 1997:
Hereby acknowledges that the undersigned director of the Company has
reviewed and approved copies of the Company's annual report on Form 10-K
for the year ended December 31, 1997, to be filed with the Securities and
Exchange Commission; and
Hereby authorizes ALBERT R. GAMPER, JR., ERNEST D. STEIN, and DONALD J.
RAPSON, and each of them with full power to act without the others, to
execute, in the name and on behalf of the Company and on behalf of the
Principal Executive Officer or Officers and/or the Principal Accounting
Officer and/or any other Officer of the Company, the annual report on Form
10-K for the year ended December 31, 1997, and any and all amendments
thereof, with power where appropriate to affix the corporate seal of the
Company thereto and to attest to said seal, and to file such report, when
so executed, including any exhibits required in connection therewith, with
the Securities and Exchange Commission; and
Hereby constitutes and appoints ALBERT R. GAMPER, JR., ERNEST D. STEIN,
and DONALD J. RAPSON, and each of them with full power to act without the
others, his true and lawful attorneys-in-fact and agents, for him and in
his name, place, and stead, in any and all capacities, to sign such Form
10-K and any and all amendments thereof, and to file such Form 10-K and
each such amendment, with all exhibits thereto, and any and all other
documents in connection therewith, with the Securities and Exchange
Commission; and
Hereby grants unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform any and all acts and things
requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person; and
Hereby ratifies and confirms all that said attorneys-in-fact and agents,
or any of them, may lawfully do or cause to be done by virtue hereby.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the 5th
day of March, 1998.
/s/ Peter J. Tobin
-------------------------------
Peter J. Tobin
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of THE CIT GROUP, INC., a Delaware corporation (the "Company"), which is
about to file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Act of 1934, as amended, an annual report
on Form 10-K for the year ended December 31, 1997:
Hereby acknowledges that the undersigned director of the Company has
reviewed and approved copies of the Company's annual report on Form 10-K
for the year ended December 31, 1997, to be filed with the Securities and
Exchange Commission; and
Hereby authorizes ALBERT R. GAMPER, JR., ERNEST D. STEIN, and DONALD J.
RAPSON, and each of them with full power to act without the others, to
execute, in the name and on behalf of the Company and on behalf of the
Principal Executive Officer or Officers and/or the Principal Accounting
Officer and/or any other Officer of the Company, the annual report on Form
10-K for the year ended December 31, 1997, and any and all amendments
thereof, with power where appropriate to affix the corporate seal of the
Company thereto and to attest to said seal, and to file such report, when
so executed, including any exhibits required in connection therewith, with
the Securities and Exchange Commission; and
Hereby constitutes and appoints ALBERT R. GAMPER, JR., ERNEST D. STEIN,
and DONALD J. RAPSON, and each of them with full power to act without the
others, his true and lawful attorneys-in-fact and agents, for him and in
his name, place, and stead, in any and all capacities, to sign such Form
10-K and any and all amendments thereof, and to file such Form 10-K and
each such amendment, with all exhibits thereto, and any and all other
documents in connection therewith, with the Securities and Exchange
Commission; and
Hereby grants unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform any and all acts and things
requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person; and
Hereby ratifies and confirms all that said attorneys-in-fact and agents,
or any of them, may lawfully do or cause to be done by virtue hereby.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the 5th
day of March, 1998.
/s/ Tohru Tonoike
-------------------------------
Tohru Tonoike
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of THE CIT GROUP, INC., a Delaware corporation (the "Company"), which is
about to file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Act of 1934, as amended, an annual report
on Form 10-K for the year ended December 31, 1997:
Hereby acknowledges that the undersigned director of the Company has
reviewed and approved copies of the Company's annual report on Form 10-K
for the year ended December 31, 1997, to be filed with the Securities and
Exchange Commission; and
Hereby authorizes ALBERT R. GAMPER, JR., ERNEST D. STEIN, and DONALD J.
RAPSON, and each of them with full power to act without the others, to
execute, in the name and on behalf of the Company and on behalf of the
Principal Executive Officer or Officers and/or the Principal Accounting
Officer and/or any other Officer of the Company, the annual report on Form
10-K for the year ended December 31, 1997, and any and all amendments
thereof, with power where appropriate to affix the corporate seal of the
Company thereto and to attest to said seal, and to file such report, when
so executed, including any exhibits required in connection therewith, with
the Securities and Exchange Commission; and
Hereby constitutes and appoints ALBERT R. GAMPER, JR., ERNEST D. STEIN,
and DONALD J. RAPSON, and each of them with full power to act without the
others, his true and lawful attorneys-in-fact and agents, for him and in
his name, place, and stead, in any and all capacities, to sign such Form
10-K and any and all amendments thereof, and to file such Form 10-K and
each such amendment, with all exhibits thereto, and any and all other
documents in connection therewith, with the Securities and Exchange
Commission; and
Hereby grants unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform any and all acts and things
requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person; and
Hereby ratifies and confirms all that said attorneys-in-fact and agents,
or any of them, may lawfully do or cause to be done by virtue hereby.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the 5th
day of March, 1998.
/s/ Keiji Torii
-------------------------------
Keiji Torii
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