================================================================================
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, 1998
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
5 7/8% Notes Due October 15, 2008...................... New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No _____.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the New York Stock Exchange Composite Transaction
closing price of the Class A Common Stock ($29.50 per share) on February 26,
1999, was $2,349,107,745. 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 26, 1999, 162,114,331 shares of the Company's Class A
Common Stock, par value $0.01 per share, were outstanding.
List hereunder the following documents if incorporated by reference and
the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document
is incorporated: (1) any annual report to stockholders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933.
None
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<PAGE>
TABLE OF CONTENTS
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Part I
Item 1. Business ......................................................... 1
Overview ...................................................... 1
Industry Concentration ........................................ 8
Competition ................................................... 8
Regulation .................................................... 8
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
and Condition and Results of Operations ........................... 14
Item 7A. Quantitative and Qualitative Disclosure about
Market Risk ................................................... 14
Item 8. Financial Statements and Supplementary Data ...................... 29
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ........................... 57
Part III
Item 10. Directors and Executive Officers of the Registrant ............... 58
Item 11. Executive Compensation ........................................... 60
Item 12. Security Ownership of Certain Beneficial Owners
and Management ................................................ 65
Item 13. Certain Relationships and Related Transactions ................... 67
Part IV
Item 14. Exhibits, Financial Statement Schedule and Reports
on Form 8-K.................................................... 69
Forward-Looking Statements
Certain statements contained in this filing are forward-looking statements
concerning our operations, economic performance and financial condition.
Forward-looking statements are included, for example, in the discussions about:
o our liquidity,
o our credit risk management,
o our asset/liability risk management,
o our operational and legal risks,
o Year 2000 issues, and
o how we may be affected by certain legal proceedings.
These statements involve risks and uncertainties that may be difficult to
predict. Therefore, actual results may differ materially from those expressed or
implied in those statements. Factors that could cause such differences include,
but are not limited to:
o economic conditions and trends,
o changes in market interest rates, in the relationship between
short-term rates and long-term rates, or in the relationship between
different interest rate indices,
o industry cycles and trends,
o changes in the market for equipment and other collateral due to
market conditions, oversupply, obsolescence or other factors,
o disruptions in the commercial paper or capital markets,
o changes in laws or regulations, and
o competitive conditions and trends.
i
<PAGE>
PART I
Item 1. Business
OVERVIEW
The CIT Group, Inc., ("we," "our," "us," or "CIT"), a Delaware
corporation, is a leading diversified finance organization with over $26 billion
of managed assets at December 31, 1998. We offer 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. We
commenced operations in 1908 and have 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. Our principal
executive offices are located at 1211 Avenue of the Americas, New York, New York
10036 and our telephone number is (212) 536-1390.
Our business focus is commercial and consumer finance and we offer a broad
array of products to our customers, including loans and leases. We operate
through three business segments:
o Equipment Financing and Leasing
o Commercial Finance
o Consumer
Each segment conducts its operations through strategic business units
which market its products and services to satisfy the financing needs of
specific customers, industries and markets.
Our business segments are described in greater detail below.
Recent Developments
On March 8, 1999, we announced that we would acquire Newcourt Credit
Group, Inc. ("Newcourt") in an exchange of common stock. Under the terms of the
transaction, which will be accounted for on a purchase basis, 0.92 shares of our
common stock will be exchanged for each outstanding share of Newcourt common
stock. Based upon the closing price of $30.75 on March 5, 1999, the value of the
acquisition is approximately $4.2 billion. Following the acquisition, CIT
stockholders will own 54% of the combined company and Newcourt stockholders will
own 46%. The transaction is expected to close during the third quarter of 1999,
and is conditioned upon, among other things, regulatory and stockholder
approval.
Newcourt is headquartered in Toronto, Canada and its stock is traded on
the New York, Toronto, and Montreal Stock Exchanges. Newcourt is an independent,
non-bank financial services enterprise with operations primarily in the United
States, Canada and Europe. Newcourt orginates, invests in and sells asset-based
financings including secured loans, leases and conditional sales contracts.
Newcourt's origination activities focus on the commercial and corporate finance
segments of the asset-based financing market.
Common Stock
In November 1998, The Dai-Ichi Kangyo Bank, Limited ("DKB") sold
55,000,000 shares of Class A Common Stock in a secondary public offering (the
"Secondary Offering") for which it received all the proceeds. Prior to the sale,
DKB converted all of its Class B Common Stock into an identical number of shares
of Class A Common Stock, which is now the only class of common stock
outstanding. DKB held 94.4% of the combined voting power and 77.2% of the
economic interest of all of our outstanding common stock prior to the sale. At
December 31, 1998, DKB held 43.8% of the voting power and economic interest of
our outstanding common stock.
In November 1997, we issued 36,225,000 shares of Class A Common Stock in
an initial public offering (the "IPO"). Prior to the IPO, DKB owned 80% of our
issued and outstanding stock, and The Chase Manhattan Corporation, ("Chase")
owned the remaining 20% common stock interest. DKB had an option expiring
December 15, 2000 to purchase the remaining 20% common stock interest from
Chase. In November 1997, we purchased DKB's option at its fair market value,
exercised the option to purchase the stock held by Chase and recapitalized by
converting the outstanding common stock to 157,500,000 shares of Class B Common
Stock. Twenty percent of the Class B Common Stock shares (which had five votes
per
1
<PAGE>
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 IPO. The issuance of Class A Common Stock pursuant to the underwriter's
overallotment resulted in an increase to stockholders' equity of $117.7 million.
Commercial Segments
Our 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 our 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.
The following table sets forth the financing and leasing assets of our
commercial operations at December 31 of each of the years in the five-year
period ended December 31, 1998.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Dollars in Millions
<S> <C> <C> <C> <C> <C>
Equipment Financing and Leasing ...... $13,367.0 $11,709.7 $11,321.6 $10,591.6 $ 9,631.1
Commercial Finance ................... 4,996.2 4,250.8 3,838.1 3,973.0 4,057.9
--------- --------- --------- --------- ---------
$18,363.2 $15,960.5 $15,159.7 $14,564.6 $13,689.0
========= ========= ========= ========= =========
</TABLE>
Commercial transactions are generated through direct calling efforts with
borrowers, lessees, equipment end-users, manufacturers and distributors and
through referral sources and other intermediaries. In addition, our strategic
business units jointly structure transactions and refer or cross-sell
transactions to other CIT units to best meet customers' overall financing needs.
Our marketing efforts are supplemented by the Multi-National Marketing Group,
which promotes our 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. We also buy and sell participations in and
syndications of finance receivables and/or lines of credit. In addition, from
time to time in the normal course of business, we purchase finance receivables
in bulk to supplement our originations and sell selected finance receivables and
equipment under operating leases for risk management and/or other balance sheet
management purposes.
Equipment Financing and Leasing
Our Equipment Financing and Leasing operations had total financing and
leasing assets of $13.4 billion at December 31, 1998, representing 56.4% of
total financing and leasing assets. We conduct our Equipment Financing and
Leasing operations through two strategic business units:
o The CIT Group/Equipment Financing ("Equipment Financing"), offers
secured equipment financing and leasing and focuses on the broad
distribution of its products through manufacturers,
dealers/distributors, intermediaries and direct calling efforts
primarily with the construction, transportation and machine tool
industries.
o The CIT Group/Capital Finance ("Capital Finance") offers secured
equipment financing and leasing and focuses on the direct marketing
of customized transactions, particularly operating leases, 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 purchases of new
equipment, maintenance and repairs, residual value estimation and remarketing
via releasing or sale. Equipment Financing's and Capital Finance's equipment and
industry expertise enable them to evaluate effectively residual value risk. For
example, Capital Finance can repossess commercial aircraft, if necessary, obtain
any required maintenance and repairs for such aircraft, and recertify such
aircraft with appropriate authorities. They manage the equipment, residual
value, and/or the risk of equipment remaining idle for extended periods of time
or in amounts that could materially impact profitability by locating alternative
equipment users and/or purchasers. For each year in the period 1994 through
1998, Equipment Financing and Capital Finance have realized in excess of 100% of
the aggregate booked residual values in connection with their equipment sales.
2
<PAGE>
The following table sets forth certain information concerning the
financing and leasing assets of our Equipment Financing and Leasing segment at
December 31 of each of the years in the five-year period ended December 31,
1998.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Dollars in Millions
<S> <C> <C> <C> <C> <C>
Finance receivables - loans ........... $ 6,419.3 $ 6,091.7 $ 6,357.5 $ 6,383.4 $5,852.6
Finance receivables - leases .......... 4,173.6 3,712.4 3,562.0 3,095.2 2,910.6
Operating lease equipment, net ........ 2,774.1 1,905.6 1,402.1 1,113.0 867.9
--------- --------- --------- --------- --------
Total financing and leasing
assets ............................ $13,367.0 $11,709.7 $11,321.6 $10,591.6 $9,631.1
========= ========= ========= ========= ========
</TABLE>
On January 1, 1997, $1,519.2 million of financing and leasing assets and
related marketing and servicing operations were transferred from Capital Finance
to Equipment Financing. The transferred financing and leasing assets and
operations were considered more complementary to the Equipment Financing
business and the transfers were undertaken to increase Equipment Financing's
nationwide market reach and further utilize its existing systems and
infrastructure. The transfer also enabled Capital Finance to focus on the
specialized commercial aircraft and railcar markets.
Equipment Financing
Equipment Financing is the largest of our strategic business units with
total financing and leasing assets of $9.3 billion at December 31, 1998,
representing 39.1% of our 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, 1998, 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 transportation. The Equipment Financing portfolio at December
31, 1998 included many different types of equipment, including construction,
transportation, manufacturing equipment and business aircraft.
Products are originated through direct calling on customers and through
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, 1998.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Dollars in Millions
<S> <C> <C> <C> <C> <C>
Finance receivables - loans ......... $5,683.6 $5,042.8 $3,859.0 $3,657.0 $3,081.7
Finance receivables - leases ........ 2,814.0 2,360.6 1,757.8 1,272.9 1,188.0
Operating lease equipment, net ...... 765.1 623.8 426.6 363.0 219.2
-------- -------- -------- -------- --------
Total financing and leasing
assets ......................... $9,262.7 $8,027.2 $6,043.4 $5,292.9 $4,488.9
======== ======== ======== ======== ========
</TABLE>
Capital Finance
Capital Finance had financing and leasing assets of $4.1 billion at
December 31, 1998, which represented 17.3% of our total financing and leasing
assets. Capital Finance specializes in customized leasing and secured financing,
including operating leases, single investor leases, equity portions of leveraged
leases, sale and leaseback arrangements, as well as loans secured by equipment
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. This provides Capital Finance with access to technical
information, which supports customer service and provides opportunities to
finance new business.
3
<PAGE>
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, and has a significant direct calling effort on all railroads and
rail shipping 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, plastic pellets and cement;
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. Capital Finance also has a fleet of locomotives on lease to U.S.
railroads.
New business is generated by Capital Finance through:
o direct calling efforts with equipment end-users and borrowers,
including major airlines, railroads and shippers,
o relationships with aerospace, railcar and other manufacturers and
o intermediaries and other referral sources.
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, 1998.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Dollars in Millions
<S> <C> <C> <C> <C> <C>
Finance receivables - loans ......... $ 735.7 $1,048.9 $2,498.5 $2,726.4 $2,770.9
Finance receivables - leases ........ 1,359.6 1,351.8 1,804.2 1,822.3 1,722.6
Operating lease equipment, net ...... 2,009.0 1,281.8 975.5 750.0 648.7
-------- -------- -------- -------- --------
Total financing and leasing
assets ......................... $4,104.3 $3,682.5 $5,278.2 $5,298.7 $5,142.2
======== ======== ======== ======== ========
</TABLE>
Commercial Finance
At December 31, 1998, the financing and leasing assets of our Commercial
Finance segment totaled $5.0 billion, representing 21.1% of total financing and
leasing assets. We conduct our Commercial Finance operations through three
strategic business units, all of which focus on accounts receivable and
inventories as the primary source of security for their lending transactions.
o The CIT Group/Commercial Services ("Commercial Services"), which
provides secured financing as well as factoring and
receivable/collection management products to companies in apparel,
textile, furniture, home furnishings, and other industries.
o The CIT Group/Business Credit ("Business Credit"), which provides
secured financing primarily to middle-market to larger-sized
borrowers.
o The CIT Group/Credit Finance ("Credit Finance"), which provides
secured financing primarily to smaller-sized to middle-market
borrowers.
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, 1998.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Dollars in Millions
<S> <C> <C> <C> <C> <C>
Commercial Services .................. $2,481.8 $2,113.1 $1,804.7 $1,743.3 $1,896.2
Business Credit ...................... 1,477.9 1,247.9 1,235.6 1,471.0 1,442.1
Credit Finance ....................... 1,036.5 889.8 797.8 758.7 719.6
-------- -------- -------- -------- --------
Total financing and leasing
assets ........................... $4,996.2 $4,250.8 $3,838.1 $3,973.0 $4,057.9
======== ======== ======== ======== ========
</TABLE>
In October 1997, $95.0 million of small ticket commercial finance
receivables were transferred from Business Credit to Credit Finance.
4
<PAGE>
Commercial Services
Commercial Services had total financing and leasing assets of $2.5 billion
at December 31, 1998, which represented 10.5% of our total financing and leasing
assets. Commercial Services offers a full range of domestic and international
customized credit protection, lending and outsourcing services that include
working capital and term loans, factoring, receivable management outsourcing,
bulk purchases of accounts receivable, import and export financing and letter of
credit programs.
Financing is provided to clients through the purchase of accounts
receivable owed to clients by their customers, 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 which is commensurate with the underlying degree
of credit risk and recourse, and which is 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 efforts and referrals from existing clients
and other sources.
Business Credit
Financing and leasing assets of Business Credit totaled $1.5 billion at
December 31, 1998 and represented 6.2% of our 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. Clients use such loans 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 $1.0 billion at
December 31, 1998 and represented 4.4% of our 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.
5
<PAGE>
Business is originated through the sales and regional offices as well as
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, 1998, our consumer segment financing and leasing assets
totaled $5.3 billion, representing 22.2% of total financing and leasing assets.
Total consumer managed assets were $7.8 billion at December 31, 1998,
representing 29.6% of our total managed assets. In addition to on balance sheet
receivables, leases, consumer finance receivables held for sale, and certain
investments, managed assets include consumer loans previously securitized and
still serviced by us.
Our 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 consumer
products sold through dealers is performed by The CIT Group/Sales Financing
("Sales Financing") business unit. Sales Financing began providing wholesale
inventory financing to manufactured housing and recreational boat dealers
utilizing its dealer and manufacturer relationships in 1997, and to recreation
vehicle dealers in 1998. 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 our consumer
business segment at December 31 for each of the years in the five-year period
ended December 31, 1998.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Dollars in Millions
<S> <C> <C> <C> <C> <C>
Consumer Finance
Financing and leasing assets ........ $2,244.4 $1,992.3 $2,005.5 $1,039.0 $ 570.8
Finance receivables previously
securitized and currently
managed by us .................... 607.6 453.8 -- -- --
-------- -------- -------- -------- -------
Managed assets ................ $2,852.0 $2,446.1 $2,005.5 $1,039.0 $ 570.8
======== ======== ======== ======== ========
Sales Financing
Financing and leasing assets ........ $3,009.9 $1,940.7 $1,349.8 $1,416.9 $1,471.2
Finance receivables previously
securitized and currently
managed by us .................... 1,909.3 1,931.8 1,437.4 916.5 306.7
-------- -------- -------- -------- -------
Managed assets ................ $4,919.2 $3,872.5 $2,787.2 $2,333.4 $1,777.9
======== ======== ======== ======== ========
Total financing & leasing assets ....... $5,254.3 $3,933.0 $3,355.3 $2,455.9 $2,042.0
Consumer finance receivables
previously securitized and
currently managed by us ............. 2,516.9 2,385.6 1,437.4 916.5 306.7
-------- -------- -------- -------- -------
Total managed assets ................... $7,771.2 $6,318.6 $4,792.7 $3,372.4 $2,348.7
======== ======== ======== ======== ========
</TABLE>
Consumer Finance
Financing and leasing assets of Consumer Finance aggregated $2.2 billion
at December 31, 1998 and represented 9.5% of our total financing and leasing
assets. The managed assets of Consumer Finance were $2.9 billion at December 31,
1998, or 10.9% of our 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. Consumer Finance primarily
originates, purchases and sells loans secured by first or second liens on
detached, single family residential properties. Customers borrow 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 primarily originates loans through
brokers, as well on a direct marketing basis and through correspondents.
6
<PAGE>
We believe that the network of Consumer Finance offices, located in most
major U.S. markets, enables us 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 relationships.
Sales Financing
The financing and leasing assets of Sales Financing, which aggregated $3.0
billion at December 31, 1998, represented 12.7% of our total financing and
leasing assets. The managed assets of Sales Financing were $4.9 billion at
December 31, 1998, or 18.8% of total managed assets. Sales Financing provides
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, and to recreation vehicle dealers in
1998. 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, 1998.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Dollars in Millions
<S> <C> <C> <C> <C> <C>
Retail finance receivables
Recreation vehicles ................. $1,884.6 $1,596.5 $1,256.9 $1,144.2 $1,016.3
Manufactured housing ................ 1,695.9 1,471.9 1,202.5 1,032.3 690.0
Recreational boat ................... 1,038.6 682.5 327.8 156.9 71.6
Wholesale inventory financing ......... 300.1 121.6 -- -- --
-------- -------- -------- -------- --------
Total managed assets .................. $4,919.2 $3,872.5 $2,787.2 $2,333.4 $1,777.9
======== ======== ======== ======== ========
</TABLE>
Servicing
The ASC centrally services and collects substantially all of our 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, 1998, the consumer finance servicing portfolio
included $1.0 billion of finance receivables serviced for third parties.
Securitization Program
We generally fund our operations through offerings of commercial paper and
medium-term and longer term notes in the capital markets. In an effort to
broaden funding sources and to provide an additional source of liquidity, we
established a securitization program in 1992 to supplement our funding by
accessing periodically the public and private asset backed securitization
markets. Current products utilized in this program include consumer loans
secured by recreation vehicles, recreational boats and residential real estate.
We have sold $4.1 billion of finance receivables since the inception of the
asset backed securitization program, and the remaining pool balance at December
31, 1998 was $2.5 billion or 9.6% of our total managed assets.
Under a typical asset backed securitization, we sell a "pool" of secured
loans to a special purpose entity. The special purpose entity, in turn, issues
certificates and/or notes that are collateralized by the loan pool and entitle
the holders thereof to participate in certain loan pool cash flows. We retain
the servicing of the securitized loans, for which we earn a servicing fee. We
also participate 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, we estimate the "residual" cash flows to
be received over the life of the securitization, record the present value of
these cash flows as an interest-only receivable, or I/O (a retained interest in
the securitization), and recognize a gain. The I/O is then amortized through
earnings over the estimated life of the related loan pool.
In estimating residual cash flows and the value of the related I/Os, we
make a variety of financial assumptions, including loan pool credit losses,
prepayment speeds and discount rates. These assumptions are empirically
supported by both our historical experience and anticipated trends relative to
the particular
7
<PAGE>
products securitized. Subsequent to recording the I/Os, we regularly review 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 our
carrying values. Our I/Os had a carrying value at December 31, 1998 of $153.9
million, which 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 $81.9
million at December 31, 1998.
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
Our markets are highly competitive and are characterized by competitive
factors that vary based upon product and geographic region. 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 us. 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 our competitors are large companies that have substantial capital,
technological and marketing resources. Some of these competitors are larger than
us and may have access to capital at a lower cost than us. Also, our 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 us. Competition has been
enhanced in recent years by a strong economy and growing marketplace liquidity.
The markets for most of our products are characterized by a large number of
competitors. However, with respect to some of our products, competition is more
concentrated.
We compete primarily on the basis of pricing, terms and structure. From
time to time, our competitors seek to compete aggressively on the basis of these
factors and we may lose market share to the extent we are unwilling to match
competitor pricing and terms in order to maintain interest margins and/or credit
standards.
Other primary competitive factors include industry experience and client
service and relationships. In addition, demand for our products with respect to
certain industries, such as the commercial airline industry, will be affected by
demand for such industry's services and products and by industry regulations.
REGULATION
DKB is a bank holding company within the meaning of the Bank Holding
Company Act of 1956 (the "Act"), and is registered as such with the Board of
Governors of the Federal Reserve. As a result, we are subject to certain
provisions of the Act and are subject to examination by the Federal Reserve
System (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." Our 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 our permissible
activities. We have entered into an agreement with DKB in order to facilitate
DKB's compliance with applicable U.S. and Japanese banking laws, and with the
regulations,
8
<PAGE>
interpretations, policies, guidelines, requests, directives and orders of the
applicable regulatory authorities or their staffs thereof or a court
(collectively, the "Banking Laws"). That agreement prohibits us from engaging in
any new activity or entering into any transaction for which prior approval,
notice or filing is required under Banking Laws, unless the required prior
approval is obtained, prior notice is given or made by DKB and accepted or such
filings are made. We are also prohibited from engaging in any activity that
would cause DKB, CIT or any affiliate of DKB or CIT to violate any Banking Laws.
If, at any time, it is determined by DKB that any of our activities is
prohibited by any Banking Law, we are required to take all reasonable steps to
cease such activities. Under the terms of that agreement, DKB is responsible for
making all determinations as to compliance with applicable Banking Laws.
Two of our subsidiaries are investment companies organized under Article
XII of the New York Banking Law. 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 our voting
stock.
Our operations 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.
Our 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 our
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 us 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 and regulates certain practices with respect to certain
types of loans; (ii) the Real Estate Settlement Procedures Act and 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 our ability 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 us to damages and
administrative sanctions.
The above federal and state regulation and supervision could limit our
discretion in operating our 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
9
<PAGE>
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 we charge will not
rise to state maximum levels, the effect of any of which could be to adversely
affect our business or results of operations. Under certain circumstances, the
Federal Reserve has the authority to issue orders which could restrict our
ability 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 CIT 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 our needs. We
utilize, or plan to utilize in the foreseeable future, substantially all of our
leased office space.
Item 3. Legal Proceedings
We are a defendant in various lawsuits arising in the ordinary course of
our business. We aggressively manage our litigation and evaluate appropriate
responses to our lawsuits in light of a number of factors, including the
potential impact of the actions on the conduct of our operations. In the opinion
of management, none of the pending matters is expected to have a material
adverse effect on our 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
We did not submit any matters to a vote of security holders during the
fourth quarter of 1998.
10
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our Class A Common Stock was priced at $27.00 per share and was listed on
the New York Stock Exchange on November 13, 1997. There are no shares of the
Class B Common Stock of CIT issued and outstanding. The following table sets
forth the high and low last reported sale prices for the Class A Common Stock
for the periods indicated.
1998 1997
--------------------- --------------------
Common Stock Prices High Low High Low
- ------------------- ---- ---- ---- ----
First Quarter ............... $33 $29 7/16 -- --
Second Quarter .............. $37 1/2 $31 1/4 -- --
Third Quarter ............... $36 1/4 $25 3/8 -- --
Fourth Quarter .............. $31 13/16 $19 1/8 $32 5/8 $29 3/4
The declaration and payment of dividends by us is subject to the
discretion of the Board of Directors, which seeks to pay a reasonable dividend
rate while retaining sufficient capital to support foreseeable growth. Prior to
our IPO, we operated under a policy requiring the payment of dividends equal to
and not exceeding 30% of net operating earnings on a quarterly basis to our two
principal shareholders. Such dividends were paid to DKB and Chase based upon
their respective stock ownership in CIT. In connection with the IPO in November
1997, we terminated our dividend policy. By agreement with DKB and Chase, the
final cash dividend under our 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 IPO.
Below are the dividends paid during the past two years:
Dividends Paid 1998 1997
------------- ---- ----
(per share) (Millions)
First Quarter .............................. * $ 21.0
Second Quarter ............................. $ 0.10 27.6
Third Quarter .............................. 0.10 23.2
Fourth Quarter ............................. 0.10 7.5
------ ------
Year ..................................... $ 0.30 $ 79.3
====== ======
As of February 16, 1999, there were approximately 16,500 stockholders of
CIT, including both record holders and individual participants holding through a
registered clearing agency.
- ----------
* No dividends were paid to stockholders.
11
<PAGE>
Item 6. Selected Financial Data
The following table sets forth selected consolidated financial information
regarding our 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,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Dollars in Millions, except per share data
<S> <C> <C> <C> <C> <C>
Results of Operations
Net finance income ..................... $ 974.3 $ 887.5 $ 797.9 $ 697.7 $ 649.8
Operating revenue ...................... 1,229.7 1,193.3(1) 1,042.0 882.4 824.2
Salaries and general
operating expenses .................. 417.8 428.4 393.1 345.7 337.9
Provision for credit losses ............ 99.4 113.7 111.4 91.9 96.9
Net income ............................. 338.8 310.1 260.1 225.3 201.1
Net income per diluted share ........... 2.08 1.95 1.64 1.43 1.28
<CAPTION>
At December 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Dollars in Millions
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Finance receivables:
Commercial ............................. $15,589.1 $14,054.9 $13,757.6 $13,451.5 $12,821.2
Consumer ............................... 4,266.9 3,664.8 3,239.0 2,344.0 1,973.2
--------- --------- --------- --------- ---------
Total finance receivables .............. $19,856.0 $17,719.7 $16,996.6 $15,795.5 $14,794.4
Reserve for credit losses .............. 263.7 235.6 220.8 206.0 192.4
Operating lease equipment, net ......... 2,774.1 1,905.6 1,402.1 1,113.0 867.9
Total assets ........................... 24,303.1 20,464.1 18,932.5 17,420.3 15,959.7
Commercial paper ....................... 6,144.1 5,559.6 5,827.0 6,105.6 5,660.2
Variable rate senior notes ............. 4,275.0 2,861.5 3,717.5 3,827.5 3,812.5
Fixed rate senior notes ................ 8,032.3 6,593.8 4,761.2 3,337.0 2,619.4
Subordinated fixed rate notes .......... 200.0 300.0 300.0 300.0 300.0
Company-obligated mandatorily
redeemable preferred securities of
subsidiary trust holding solely
debentures of the Company. ........... 250.0 250.0 -- -- --
Stockholders' equity ................... 2,701.6 2,432.9 2,075.4 1,914.2 1,793.0
<CAPTION>
At or for the Years Ended December 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Selected Data and Ratios
Profitability
Net interest margin as a percentage
of average earning assets
("AEA") (2) .......................... 4.75% 4.87% 4.82% 4.54% 4.77%
Return on average stockholders'
equity ............................... 13.2% 14.0%(5) 13.0% 12.1% 11.5%
Return on AEA (2) ...................... 1.65% 1.70%(5) 1.57% 1.46% 1.48%
Ratio of earnings to fixed charges ..... 1.49x 1.51x 1.49x 1.44x 1.52x
Salaries and general operating
expenses as a percentage of
average managed assets ("AMA")(3) .... 1.82% 2.16%(5) 2.22% 2.16% 2.44%
Efficiency ratio (4) 40.1% 41.6%(5) 42.7% 43.1% 44.5%
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
At or for the Years Ended December 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Credit Quality
60+ days contractual delinquency
as a percentage of finance
receivables ............................ 1.75% 1.67% 1.72% 1.67% 1.20%
Net credit losses as a percentage of
average finance receivables ............ 0.42% 0.59% 0.62% 0.50% 0.61%
Reserve for credit losses as a
percentage of finance receivables ...... 1.33% 1.33% 1.30% 1.30% 1.30%
Ratio of reserve for credit losses to
trailing 12 months net credit losses ... 3.35x 2.33x 2.18x 2.67x 2.29x
Leverage
Total debt to stockholders' equity and
Company-obligated mandatorily
redeemable preferred securities
of subsidiary trust holding solely
debentures of the Company .............. 6.32x 5.71x 7.04x 7.09x 6.91x
Total debt to stockholders' equity (6) ... 7.00x 6.40x 7.04x 7.09x 6.91x
Other
Total managed assets (in millions) (7) ... $26,216.3 $22,344.9 $20,005.4 $17,978.6 $16,072.1
Employees ................................ 3,230 3,025 2,950 2,750 2,700
</TABLE>
- --------------------------------------------------------------------------------
(1) Includes a 1997 gain of $58.0 million on the sale of an equity interest
acquired in connection with a loan workout.
(2) "AEA" means 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" means average earning assets plus the average of consumer finance
receivables previously securitized and currently managed by us.
(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) Excluding the gain of $58.0 million on the sale of an equity interest
acquired in a loan workout and certain nonrecurring expenses, (i) the
return on average stockholders' equity would have been 13.1% for the year
ended December 31, 1997, (ii) the return on AEA would have been 1.58% for
the year ended December 31, 1997, (iii) the efficiency ratio would have
been 42.0% for the year ended December 31, 1997 and (iv) salaries and
general operating expenses as a percentage of AMA would have been 2.06%
for the year ended December 31, 1997.
(6) 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.
(7) "Managed assets" include (i) financing and leasing assets and (ii)
off-balance sheet consumer finance receivables previously securitized and
currently managed by us.
13
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
and
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Overview
For the year ended December 31, 1998, our net income totaled $338.8
million, increasing from $310.1 million in 1997 and $260.1 million in 1996. The
1998 earnings represented the eleventh consecutive increase in annual earnings,
and the eighth consecutive year of record earnings. The 1998 results reflect
continued significant portfolio growth, lower commercial credit losses and
further improvements in operating efficiency. The improvements in 1997 over 1996
resulted from stronger revenues from a higher level of financing and leasing
assets and the 1997 special items described below.
The following table summarizes our net income and related data, excluding
the 1997 special items:
1998 1997 1996
------ ------ ------
Net income (Dollars in Millions) .................. $338.8 $287.5 $260.1
Earnings per diluted share (EPS) .................. $ 2.08 $ 1.81 $ 1.64
Return of average stockholders' equity (ROE) ...... 13.2% 13.1% 13.0%
Return on average earning assets (ROA) ............ 1.65% 1.58% 1.57%
1997 Special Items -- The 1997 earnings included a one-time $58.0 million
pretax gain on the sale of an equity interest acquired in a loan workout
partially offset by certain non-recurring expenses which principally related to
our 1997 fourth quarter IPO. Including these special items, net income was
$310.1 million, with EPS of $1.95, ROE of 14.0% and an ROA of 1.70%.
Managed assets totaled $26.2 billion in 1998, $22.3 billion in 1997, and
$20.0 billion in 1996. The 1998 increase of 17.3% over 1997 reflects record
internally generated new business, with strong performances across all three
segments. The 1997 increase of 11.7% over 1996 was principally the result of
strong growth in consumer receivables and operating leases. See "--Financing and
Leasing Assets" for additional information.
Net Finance Income
We earn finance income on the loans and leases we provide to our borrowers
and equipment users. The interest expense is the cost to us of borrowing funds
used to make loans and purchase equipment to lease to customers. The excess of
finance income over interest expense is net margin or "Net Finance Income."
Growing net finance income is a key to increasing our earnings and
profitability. A comparison of the components of 1998, 1997, and 1996 net
finance income is set forth below.
Years Ended December 31,
--------------------------------------
1998 1997 1996
-------- ----------- -----------
Dollars in Millions
Finance income ........................ $ 2,015.1 $ 1,824.7 $ 1,646.2
Interest expense ...................... 1,040.8 937.2 848.3
--------- --------- ---------
Net finance income .................... $ 974.3 $ 887.5 $ 797.9
========= ========= =========
Average earning assets ("AEA") ........ $20,495.8 $18,224.5 $16,543.1
Net finance income as a % of AEA ...... 4.75% 4.87% 4.82%
Net finance income increased 9.8% in 1998 from 1997, and 11.2% in 1997
from 1996. The increases primarily reflect growth in our loans and leases, which
we refer to as earning assets, slightly offset by lower margins as a result of
the highly competitive environment.
Finance income totaled $2,015.1 million in 1998, $1,824.7 million in 1997,
and $1,646.2 million in 1996. As a percentage of AEA (excluding interest income
relating to short-term interest bearing deposits), finance income was 9.69% in
1998, 9.92% in 1997 and 9.90% in 1996. The decline in yield in 1998 is
principally due to the 1998 decline in market interest rates and the highly
competitive marketplace.
14
<PAGE>
Interest expense totaled $1,040.8 million in 1998, $937.2 million in 1997
and $848.3 million in 1996. As a percentage of AEA, interest expense (excluding
interest expense relating to short-term interest-bearing deposits and dividends
related to preferred capital securities) was 4.94% in 1998, 5.05% in 1997 and
5.08% in 1996, reflecting lower market interest rates. We seek to mitigate
interest rate risk by matching the repricing characteristics of our assets with
our liabilities, which is in part done through the use of interest rate swaps.
For further discussion, see "--Asset Liability Management."
Fees and Other Income
Fees and other income improved to $255.4 million during 1998, from $247.8
million during 1997, and $244.1 million during 1996 as set forth in the
following table.
Years Ended December 31,
------------------------------------
1998 1997 1996
-------- -------- -------
Dollars in Millions
Factoring commissions ................... $ 95.7 $ 95.2 $ 91.0
Fees and other income ................... 90.7 73.8 83.6
Gains on sales of leasing
equipment ............................ 45.2 30.1 36.6
Gains on securitizations ................ 12.5 32.0 14.9
Gains on sales of venture
capital investments .................. 11.3 16.7 18.0
------ ------ ------
$255.4 $247.8 $244.1
====== ====== ======
The 1998 increase reflects higher fees from servicing and commercial
businesses and improved gains on the sale of equipment coming off lease. We
realized in excess of 100% of equipment residual book value in 1998, 1997 and
1996. These increases were offset by sharply lower gains on reduced
securitization activity. Our fees and other income increased in 1997 from 1996
primarily due to higher factoring commissions and gains from higher levels of
securitization activity, offset by lower gains on the sale of equipment coming
off lease.
Gain On Sale of Equity Interest Acquired in Loan Workout
We 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 us and a co-lender. In 1991, we received all
amounts due and retained an equity interest in such telecommunications company,
which we sold in the second quarter of 1997 at a pretax gain of $58.0 million.
Salaries and General Operating Expenses
Salaries and general operating expenses were $417.8 million in 1998,
$428.4 million in 1997, and $393.1 million in 1996. The 1997 expense included a
$10.0 million pretax charge relating to the termination of a long-term incentive
plan in connection with the IPO, higher performance based incentive accruals,
and a provision for vacant leased space. Without these items, 1997 salaries and
general operating expenses would have been $408.4 million.
Our personnel increased to 3,230 at December 31, 1998, from 3,025 at
December 31, 1997 and 2,950 at December 31, 1996.
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 us. These ratios, excluding the
non-recurring pretax gain and expenses previously described, are set forth in
the following table.
Years Ended December 31,
-----------------------------
1998 1997 1996
------ ------ ------
Efficiency ratio ............................ 40.1% 42.0% 42.7%
Salaries and general operating
expenses as a percentage of AMA ........... 1.82% 2.06% 2.22%
The improvement in the ratios reflects our continuing focus on cost
containment and ability to leverage our existing operating structure and
investments in technology.
15
<PAGE>
We manage expenditures using a comprehensive budgetary process. Expenses
are monitored closely by business unit management and are reviewed monthly with
our senior management. 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 evaluations.
Reserve and Provision for Credit Losses/Credit Quality
Our consolidated reserve for credit losses increased to $263.7 million
(1.33% of finance receivables) at December 31, 1998, from $235.6 million (1.33%
of finance receivables) at December 31, 1997, and from $220.8 million (1.30% of
finance receivables) at December 31, 1996. These increases primarily reflect
growth in finance receivables in each year.
The relationship of the consolidated reserve for credit losses to
nonaccrual finance receivables was 124.7% for 1998, 143.3% for 1997, and 133.3%
for 1996. Another measure of reserve adequacy and strength used by us and in our
industry is the ratio of the balance sheet reserve for credit losses to trailing
twelve month net credit losses (recent credit loss experience). This ratio
improved to 3.35 times at December 31, 1998, from 2.33 times at December 31,
1997 and 2.18 times at December 31, 1996.
Our consolidated reserve for credit losses is periodically reviewed for
adequacy considering economic conditions, collateral values and credit quality
indicators, including charge-off experience and levels of past due loans and
nonperforming assets. It is management's judgment that the consolidated reserve
for credit losses is adequate to provide for potential credit losses. We review
finance receivables periodically to determine the probability of loss, and take
charge-offs 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
affecting specific obligors or industries may necessitate additions or
deductions to the consolidated reserve for credit losses.
The provision for credit losses was $99.4 million for 1998, $113.7 million
for 1997, and $111.4 million for 1996. Net credit losses were $78.8 million for
1998, $101.0 million for 1997, and $101.5 million for 1996. Our net credit loss
experience is provided in the following table.
Years Ended December 31,
-------------------------------
1998 1997 1996
------ ------ ------
Net credit losses as a percentage of
average finance receivables excluding
consumer finance receivables held
for sale
Equipment Financing and Leasing .............. 0.18% 0.50% 0.56%
Commercial Finance ........................... 0.31% 0.41% 0.67%
Consumer ..................................... 1.18% 1.09% 0.75%
---- ---- ----
Total ...................................... 0.42% 0.59% 0.62%
==== ==== ====
The decrease in our commercial segments' net credit losses reflects
continued improvement in credit quality in our commercial portfolio, sustained
strength of the United States economy, and higher recoveries. The increase in
our consumer net credit losses is primarily the result of portfolio seasoning
and changes in product mix, including an increase in wholesale inventory
financing losses. As a percentage of average managed finance receivables,
consumer net credit losses were 0.92% for 1998, 0.91% for 1997, and 0.70% for
1996.
16
<PAGE>
Past Due and Nonperforming Assets
The following table sets forth certain information concerning our past due
and nonperforming assets (and the related percentages of finance receivables) at
December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
Dollars in Millions
<S> <C> <C> <C> <C> <C> <C>
Finance receivables, past due
60 days or more
Equipment Financing and Leasing ................ $149.9 1.41% $127.3 1.30% $150.8 1.52%
Commercial Finance ............................. 32.1 0.64% 41.6 0.98% 69.0 1.80%
Consumer ....................................... 166.0 3.89% 127.7 3.48% 72.5 2.24%
------ ---- ------ ---- ------ ----
Total ........................................ $348.0 1.75% $296.6 1.67% $292.3 1.72%
====== ==== ====== ==== ====== ====
Nonperforming assets
Equipment Financing and Leasing ................ $135.2 1.27% $ 81.6 0.83% $112.0 1.13%
Commercial Finance ............................. 14.5 0.29% 23.9 0.56% 48.4 1.26%
Consumer ....................................... 129.0 3.02% 101.9 2.78% 53.1 1.64%
------ ---- ------ ---- ------ ----
Total ........................................ $278.7 1.40% $207.4 1.17% $213.5 1.26%
====== ==== ====== ==== ====== ====
</TABLE>
Nonperforming assets reflect both finance receivables on nonaccrual status
and assets received in satisfaction of loans.
The increase in consumer delinquencies and nonperforming assets from 1997
to 1998 primarily relates to the seasoning of home equity receivables and the
growth and expansion of the wholesale inventory financing product line. During
1998, Equipment Financing and Leasing nonperforming assets increased to a more
normal level from the particularly low 1997 year-end balance.
From time to time, financial or operational difficulties may adversely
affect future payments relating to operating lease equipment. Such operating
lease equipment is not included in the totals for past due and nonperforming
assets. At December 31, 1998, operations at an oil refinery were subject to such
difficulties. The carrying value of this asset was $27.0 million at December 31,
1998. We do not believe these difficulties will have a material effect on our
consolidated financial position or results of operations.
Depreciation on Operating Lease Equipment
The operating lease equipment portfolio was $2.8 billion at December 31,
1998, up from $1.9 billion at December 31, 1997 (a 45.6% increase), and $1.4
billion at December 31, 1996 (a 35.9% increase from 1996 to 1997). As a result
of this growth, depreciation on operating lease equipment was $169.5 million in
1998, $146.8 million in 1997, and $121.7 million in 1996. See "--Financing and
Leasing Assets" for further discussion on growth of our operating lease
portfolio.
Income Taxes
The provision for federal and state and local income taxes totaled $185.0
million in 1998, compared with $178.0 million in 1997, and $155.7 million in
1996. The effective income tax rate for 1998 declined to 35.3%, compared with
36.5% in 1997, and 37.4% in 1996, primarily as a result of lower state and local
taxes.
17
<PAGE>
Financing and Leasing Assets
Our managed assets grew $3.9 billion (17.3%) to $26.2 billion in 1998, and
$2.3 billion (11.7%) to $22.3 billion in 1997. Financing and leasing assets grew
$3.7 billion (18.7%) to $23.7 billion in 1998, and grew $1.4 billion (7.5%) to
$20.0 billion in 1997. Managed assets include finance receivables, operating
lease equipment, consumer finance receivables held for sale, certain
investments, and consumer finance receivables previously securitized and still
serviced by us. The managed assets of our business segments and the
corresponding strategic business units are presented in the following table.
<TABLE>
<CAPTION>
At December 31, % Change
------------------------------------- --------
1998 1997 1996 '98 vs.'97 '97 vs.'96
---- ---- ---- ---------- ----------
Dollars in Millions
<S> <C> <C> <C> <C> <C>
Equipment Financing:
Finance receivables (1) .................... $ 8,497.6 $ 7,403.4 $ 5,616.8 14.8% 31.8%
Operating lease equipment, net (1) ......... 765.1 623.8 426.6 22.7% 46.2%
---------- ---------- ---------- ---- ----
Total .................................... 9,262.7 8,027.2 6,043.4 15.4% 32.8%
---------- ---------- ---------- ---- ----
Capital Finance:
Finance receivables (1) .................... 1,655.4 1,755.5 3,413.5 (5.7%) (48.6%)
Operating lease equipment, net (1) (2) ..... 1,982.0 1,251.8 912.0 58.3% 37.3%
---------- ---------- ---------- ---- ----
3,637.4 3,007.3 4,325.5 21.0% (30.5%)
Liquidating portfolio (2) (3) .............. 466.9 675.2 952.7 (30.9%) (29.1%)
---------- ---------- ---------- ---- ----
Total .................................... 4,104.3 3,682.5 5,278.2 11.5% (30.2%)
---------- ---------- ---------- ---- ----
Total Equipment Financing
and Leasing .............................. 13,367.0 11,709.7 11,321.6 14.2% 3.4%
---------- ---------- ---------- ---- ----
Commercial Services .......................... 2,481.8 2,113.1 1,804.7 17.4% 17.1%
Business Credit (4) .......................... 1,477.9 1,247.9 1,235.6 18.4% 1.0%
Credit Finance (4) ........................... 1,036.5 889.8 797.8 16.5% 11.5%
---------- ---------- ---------- ---- ----
Total Commercial Finance ................... 4,996.2 4,250.8 3,838.1 17.5% 10.8%
---------- ---------- ---------- ---- ----
Total Commercial Segments .................. 18,363.2 15,960.5 15,159.7 15.1% 5.3%
---------- ---------- ---------- ---- ----
Other - Equity Investments ................... 81.9 65.8 53.0 24.5% 24.2%
---------- ---------- ---------- ---- ----
Consumer Finance ............................. 2,244.4 1,992.3 2,005.5 12.7% (0.7%)
Sales Financing .............................. 3,009.9 1,940.7 1,349.8 55.1% 43.8%
---------- ---------- ---------- ---- ----
Total Consumer Segment ..................... 5,254.3 3,933.0 3,355.3 33.6% 17.2%
---------- ---------- ---------- ---- ----
Total Financing and Leasing Assets ......... 23,699.4 19,959.3 18,568.0 18.7% 7.5%
---------- ---------- ---------- ---- ----
Finance receivables previously securitized:
Consumer Finance ........................... 607.6 453.8 -- 33.9% 100.0%
Sales Financing ............................ 1,909.3 1,931.8 1,437.4 (1.2%) 34.4%
---------- ---------- ---------- ---- ----
Total ...................................... 2,516.9 2,385.6 1,437.4 5.5% 66.0%
Total Managed Assets - Consumer
Segment .................................. 7,771.2 6,318.6 4,792.7 23.0% 31.8%
---------- ---------- ---------- ---- ----
Total Managed Assets ....................... $ 26,216.3 $ 22,344.9 $ 20,005.4 17.3% 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) Operating lease equipment, net, of $27.0 million, $30.0 million and $63.5
million are included in the liquidating portfolio for 1998, 1997, and
1996, respectively.
(3) Consists primarily of ocean going maritime and project finance. We
discontinued marketing to these sectors in 1997.
(4) In October 1997, $95.0 million of finance receivables were transferred
from Business Credit to Credit Finance.
Total commercial segments grew 15.1% from 1997 to 1998. Excluding the
liquidating portfolio, the equipment financing and leasing segment grew 16.9%.
Growth in finance receivables was principally due to increases in transportation
($.3 billion), and construction ($.1 billion), and the purchase of a
telecommunications leasing portfolio ($.2 billion). The operating lease
portfolio grew primarily in railroad equipment ($.4 billion) and commercial
aircraft ($.3 billion). The commercial finance segment growth (17.5%) was
primarily due to higher new business generation, moderated by high customer
paydowns.
18
<PAGE>
The consumer segment managed assets grew 23.0% in 1998 reflecting strong
home equity originations and strong growth in Sales Financing new business
volume, particularly in recreation vehicle, recreational boat, and wholesale
inventory financing.
Total commercial financing and leasing assets grew 5.3% in 1997, as
compared to 1996, due to strong growth in the operating lease portfolio and
commercial finance receivables. The operating lease portfolio grew primarily in
commercial aircraft ($.2 billion), railroad equipment ($.2 billion), and
business aircraft ($.1 billion). Commercial finance receivable growth was
attributable to an improved 1997 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
because we decided in 1997 to liquidate the oceangoing maritime and power
generation project portfolios. We determined that the discontinued portfolios do
not generate sufficient returns to justify their risk profile.
Consumer managed assets increased $1.5 billion to $6.3 billion in 1997
from $4.8 billion in 1996. This increase reflects strong originations in home
equity, recreation vehicle, and recreational boat products and the introduction
of wholesale inventory financing.
Financing and Leasing Assets Composition
Our ten largest financing and leasing asset accounts in the aggregate
represented 4.5% of our total financing and leasing assets at December 31, 1998,
and 4.2% at December 31, 1997. All ten accounts were commercial accounts and
were secured by equipment, accounts receivable and/or inventory.
Geographic Composition
The following table presents our financing and leasing assets by customer
location.
At December 31,
----------------------------------------------
1998 1997
--------------------- -------------------
Amount Percent Amount Percent
-------- ------- ------- -------
Dollars in Millions
United States
West ....................... $ 5,583.2 23.6% $ 4,642.1 23.3%
Northeast .................. 5,143.9 21.7 4,501.9 22.6
Midwest .................... 4,895.3 20.7 4,290.0 21.5
Southeast .................. 3,492.3 14.7 2,802.9 14.0
Southwest .................. 2,993.3 12.6 2,360.7 11.8
Foreign (principally
commercial aircraft) ....... 1,591.4 6.7 1,361.7 6.8
--------- ----- --------- -----
Total ...................... $23,699.4 100.0% $19,959.3 100.0%
========= ===== ========= =====
Our managed asset geographic diversity does not differ significantly from
our owned asset geographic diversity.
Additionally, our financing and leasing asset portfolio is diversified by
state. At December 31, 1998, with the exception of California (12.5%), Texas
(8.7%), and New York (8.1%), no state represented more than 4.6% of financing
and leasing assets. Our 1996 managed and owned asset geographic composition did
not significantly differ from our 1997 managed and owned asset geographic
composition.
19
<PAGE>
Industry Composition
The following table presents our financing and leasing assets by major
industry class.
At December 31,
----------------------------------------
1998 1997
------------------ ------------------
Amount Percent Amount Percent
------ ------- ------ -------
Dollars in Millions
Manufacturing(1)
(none greater than 4.4%) .......... $ 5,117.0 21.6% $ 4,440.4 22.2%
Commercial airlines (2) ............. 2,325.4 9.8 2,077.6 10.4
Home mortgage (3) ................... 2,244.4 9.5 1,992.3 10.0
Construction equipment .............. 1,947.4 8.2 1,791.4 9.0
Retail .............................. 1,882.1 7.9 1,807.5 9.1
Transportation (4) .................. 1,777.6 7.5 1,283.7 6.4
Manufactured housing (5) ............ 1,417.5 6.0 1,125.7 5.6
Other (none greater than
4.1%) (6) ......................... 6,988.0 29.5 5,440.7 27.3
--------- ----- --------- -----
Total ............................... $23,699.4 100.0% $19,959.3 100.0%
========= ===== ========= =====
- --------------------------------------------------------------------------------
(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 $2.9 billion, or
10.9% of managed assets at December 31, 1998, compared to $2.4 billion or
10.9% at December 31, 1997.
(4) Includes rail, bus, and over-the-road trucking industries, and business
aircraft.
(5) On a managed asset basis, manufactured housing outstandings were $1.7
billion or 6.5% of managed assets at December 31, 1998, compared to $1.5
billion or 6.5% at December 31, 1997.
(6) On a managed asset basis, recreation vehicle outstandings were $1.9
billion or 7.2% of managed assets at December 31, 1998, compared to $1.6
billion or 7.2% at December 31, 1997. On a managed asset basis,
recreational boat outstandings were $1.0 billion or 4.0% of managed assets
at December 31, 1998, compared to $682.5 million or 3.1% of managed assets
at December 31, 1997.
Our 1996 managed and owned asset industry composition did not differ
significantly from our 1997 managed and owned asset industry composition.
Concentrations
Commercial Airline Industry
Commercial airline financing and leasing assets totaled $2.3 billion (9.8%
of our total financing and leasing assets) at December 31, 1998, compared with
$2.1 billion (10.4%) in 1997. This portfolio is secured by commercial aircraft
and related equipment. From 1992 through mid-1997, we limited the growth of the
aerospace portfolio due to weakness in the commercial airline industry, industry
overcapacity and declining equipment values. In 1997, we decided to resume
growing the aerospace portfolio, but will continue to monitor this growth
relative to our total financing and leasing assets. We continue to reduce our
Stage II exposure so that 96.6% of our portfolio at December 31, 1998 consists
of Stage III aircraft versus 93.1% at December 31, 1997.
20
<PAGE>
The following table presents information about the commercial airline
industry portfolio. See also "--Operating Lease Equipment."
At December 31,
----------------------
1998 1997
-------- ---------
Dollars in Millions
Finance receivables
Amount outstanding(1) ........................... $1,230.7 $1,254.9
Number of obligors .............................. 54 54
Operating lease equipment, net
Net carrying value .............................. $1,094.7 $ 822.7
Number of obligors .............................. 33 33
Total ............................................ $2,325.4 $2,077.6
Number of obligors(2) .............................. 65 67
Number of aircraft(3) .............................. 206 225
- --------------------------------------------------------------------------------
(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 by the year 2000. Similar restrictions in
Europe phase out the use of Stage II aircraft by the year 2001. At
year-end 1998, the portfolio consisted of Stage III aircraft of $2,246.0
million (96.6%) and Stage II aircraft of $55.9 million (2.4%) versus Stage
III aircraft of $1,933.5 million (93.1%) and Stage II aircraft of $115.7
million (5.6%) at year-end 1997.
We continue to shift our commercial aircraft product mix from secured
financings to operating lease equipment, relying on our strong industry and
equipment management and remarketing expertise to compete effectively in
commercial aircraft operating lease transactions. Operating lease transactions
accounted for 47.1% of the total commercial airline portfolio outstandings at
December 31, 1998, 39.6% at December 31, 1997, and 32.7% at December 31, 1996.
Foreign Outstandings
We are primarily a domestic lender, with foreign exposure limited mainly
to the commercial airline industry. Financing and leasing assets to foreign
obligors were all U. S. dollar denominated and totaled $1.6 billion at December
31, 1998. The largest exposures at December 31, 1998 were to obligors in
Belgium, $142.4 million (0.60% of financing and leasing assets), France, $136.4
million (0.58%), Mexico, $104.1 million (0.44%), the Republic of Ireland, $103.9
million (0.44%), Canada, $100.5 million (0.42%), Brazil, $93.9 million (0.40%),
England, $93.0 million (0.39%), and the Netherlands, $90.3 million (0.38%). Our
remaining foreign exposure was geographically dispersed, with no other
individual country exposure greater than $90.0 million.
At December 31, 1997, financing and leasing assets to foreign obligors
totaled $1.4 billion. The largest exposures at December 31, 1997 were to
obligors in Mexico, $128.2 million (0.64%), France, $125.9 million (0.63%), the
Republic of Ireland, $108.9 million (0.55%), England, $91.7 million (0.46%), and
Australia, $90.6 million (0.46%). The remaining foreign exposure was
geographically dispersed with no other individual country exposure greater than
$90.0 million of financing and leasing assets. At December 31, 1996, foreign
exposure was geographically dispersed with no individual country exposure
greater than 0.76% of financing and leasing assets.
Highly Leveraged Transactions ("HLTs")
We use the following criteria to classify a buyout financing or
recapitalization which equals or exceeds $20 million as an 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.
HLTs that we originated or in which we participated totaled $561.1 million
(2.4% of financing and leasing assets) at December 31, 1998, up from $341.1
million (1.7%) at December 31, 1997. The increase in HLT outstandings during the
year ended December 31, 1998 was due to new originations. Our HLT outstandings
are generally secured by collateral, as distinguished from HLTs that rely
primarily on cash flows
21
<PAGE>
from operations. Our unfunded commitments to lend in secured HLT transactions
were $287.6 million at December 31, 1998, compared with $165.5 million at
year-end 1997. At December 31, 1996, HLT's that we originated or in which we
participated totaled less than 2.0% of financing and leasing assets.
Risk Management
Our business activities contain elements of risk. We consider the
principal types of risk to be credit risk (including credit, collateral and
equipment risk) and asset/liability risk (including interest rate and liquidity
risk).
We consider the management of risk essential to conducting our commercial
and consumer businesses and to maintaining profitability. Accordingly, our risk
management systems and procedures are designed to identify and analyze risks, to
set appropriate policies and limits and to continually monitor these risks and
limits by means of reliable administrative and information systems and other
policies and programs.
Credit Risk Management
We have developed systems specifically designed to manage credit risk in
our commercial and consumer business segments. We evaluate financing and leasing
assets for credit and collateral risk during the credit granting process and
periodically after the advancement of funds.
Our Executive Credit Committee ("ECC") delegates credit authority to each
of our strategic business units. 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, members of the ECC
must approve all transactions above the strategic business units' credit
authority and all transactions outside of certain established target market
definitions and risk acceptance criteria.
Each of our 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:
o Acceptable maximum credit line;
o Selected target markets and products;
o Creditworthiness of borrowers, including credit history, financial
condition, adequacy of cash flow and quality of management; and
o The type and value of underlying collateral and guarantees (including
recourse from dealers and manufacturers.)
We also employ a risk adjusted pricing process where the perceived credit
risk is a factor in determining the interest rate and/or fees charged for our
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 our 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 CIT and to the
Audit Committee.
Commercial. We have developed systems specifically designed to effectively
manage credit risk in our two commercial segments. 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 of 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 thoroughly evaluate the customer's borrowing and
repayment ability.
22
<PAGE>
Borrowers are graded according to credit quality based upon our uniform credit
grading system, which grades both the borrower's financial condition and the
underlying collateral. Credit facilities are subject to approval within our
overall credit approval and underwriting guidelines and are issued commensurate
with the credit evaluation performed on each borrower.
We review and monitor credit exposures on an ongoing basis to identify, as
early as possible, those customers that may be experiencing declining
creditworthiness or financial difficulty. We periodically evaluate our
commercial segments' finance receivables based upon credit criteria developed
under our uniform credit grading system. We monitor concentrations by borrower,
industry, geographic region and equipment type and management adjusts limits as
conditions warrant to seek to minimize the risk of credit loss.
Our Asset Quality Review Committee is comprised of members of senior
management, including the Vice Chairman, the Executive Vice President-Credit
Administration and the Chief Financial Officer. Periodically, the Committee will
meet with the President and CEO of CIT to review, among other topics, levels of
geographic, industry and customer concentrations. In addition, the Committee
periodically meets with senior executives of our strategic business units, and
reviews the status of financing and leasing assets greater than $500,000 to
obligors with higher risk profiles.
Consumer. For consumer loans, our 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. Our credit criteria includes
reliance on credit scores, including those based upon both our 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. We regularly evaluate the consumer loan portfolio
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 our 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 "--Reserve and Provision for Credit Losses/Credit Quality".
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. The Capital Committee is comprised of members of senior
management, including the Chief Executive Officer, the Vice Chairman, and the
Chief Financial Officer. Three members of the Capital Committee are also members
of our 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.
We use off-balance sheet derivatives for hedging purposes only, and do 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. Our 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.
23
<PAGE>
We manage our derivative positions so that the exposure to interest rate,
credit or foreign exchange risk is in accordance with the overall operating
goals established by our 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 our
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.
Our 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 our liquidity needs. 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, we may enter into a hedge
that has an inverse correlation to the interest rate sensitivity created,
whereby we 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.
We continuously monitor and simulate through computer modeling our degree
of interest rate sensitivity by measuring the repricing characteristics of
interest-sensitive assets, liabilities, and off-balance sheet derivatives. The
Capital Committee reviews the results of this modeling monthly. The interest
rate sensitivity modeling techniques employed by us essentially include the
creation of prospective twelve month "baseline" and "rate shocked" net interest
income simulations. At the date that interest rate sensitivity is modeled,
"baseline" net interest income is derived considering the current level of
interest-sensitive assets and related run-off (including both contractual
repayment and historical prepayment experience), the current level of
interest-sensitive liabilities and related maturities and the current level of
off-balance sheet derivatives. The "baseline" simulation 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 calculated, 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 our 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, 1998, an immediate hypothetical 100 basis point
parallel rise in the yield curve on January 1, 1999 would increase net income by
an estimated $3.4 million after-tax over the next twelve months. Although
management believes that this measure provides a meaningful estimate of our
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 our computer modeling. Further, it does not
necessarily represent management's current view of future market interest rate
movements.
24
<PAGE>
We periodically enter 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 $4.3 billion at
December 31, 1998 and $3.6 billion at December 31, 1997 were designated as
hedges against outstanding debt and were principally used to, in effect, convert
the interest rate on variable rate debt to a fixed rate that sets our fixed rate
term debt borrowing cost over the life of the swap. These hedges reduce our
exposure to rising interest rates, but also reduce the benefits from lower
interest rates.
A comparative analysis of the weighted average principal outstanding and
interest rates paid on our debt before and after the effect of interest rate
swaps is shown in the following table.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------
Before Swaps
----------------------------------------------------------
1998 1997 1996
----------------- ----------------- ---------------
Dollars in Millions
<S> <C> <C> <C> <C> <C> <C>
Commercial paper and variable
rate senior notes ............................ $ 9,672.6 5.53% $ 9,574.2 5.61% $ 9,952.2 5.48%
Fixed rate senior and subordinated
notes ........................................ 7,476.5 6.31% 5,497.6 6.52% 3,917.0 6.83%
--------- --------- ---------
Composite ...................................... $17,149.1 5.87% $15,071.8 5.94% $13,869.2 5.86%
========= ========= =========
<CAPTION>
At December 31,
----------------------------------------------------------
After Swaps
----------------------------------------------------------
1998 1997 1996
----------------- ----------------- ---------------
Dollars in Millions
<S> <C> <C> <C> <C> <C> <C>
Commercial paper and variable
rate senior notes ............................ $ 7,069.9 5.47% $ 6,443.2 5.54% $ 6,774.3 5.42%
Fixed rate senior and subordinated
notes ........................................ 10,079.2 6.39% 8,628.6 6.52% 7,094.9 6.68%
-------- -------- --------
Composite ...................................... $17,149.1 6.01% $15,071.8 6.10% $13,869.2 6.06%
======== ======== ========
</TABLE>
Our interest rate swaps principally convert floating rate debt to fixed
rate debt. The weighted average composite interest rate after swaps increased
from the composite interest rate before swaps in each period, primarily because
a larger proportion of our debt, after giving effect to interest rate swaps, was
subject to a fixed interest rate. However, the weighted average interest rates
before swaps do not necessarily reflect the interest expense that would have
been incurred had we chosen to manage interest rate risk without the use of such
swaps.
Interest rate swaps are further discussed in "Note 7--Derivative Financial
Instruments" in Item 8. Financial Statements and Supplementary Data.
Liquidity
We manage liquidity risk by monitoring the relative maturities of assets
and liabilities and by borrowing funds, primarily in the U. S. money and capital
markets. We use such cash 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 increased $584.5 million to $6.1 billion at
December 31, 1998 from $5.6 billion at December 31, 1997. During 1998, we issued
$3.9 billion of variable rate term debt and $3.0 billion of fixed rate term
debt. Repayments of debt totaled $4.1 billion for 1998. At December 31, 1998,
$4.8 billion of registered, but unissued, debt securities remained available
under shelf registration statements, including $2.0 billion of European
Medium-Term Notes.
25
<PAGE>
Our 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, 1998, commercial paper borrowings were
supported by $5.0 billion of committed revolving credit-line facilities. At
December 31, 1998, such credit-line facilities represented 81% of operating
commercial paper outstanding (commercial paper outstanding less interest-bearing
deposits), as compared to 91% at December 31, 1997.
As part of our continuing program of accessing the public and private
asset-backed securitization markets as an additional liquidity source,
recreation vehicle, recreational boat, and home equity finance receivables of
$866.0 million were securitized during 1998. We securitized recreation vehicle,
home equity and recreational boat finance receivables of $1.4 billion in 1997.
The decrease in securitization activity from 1997 to 1998 was primarily due to
less attractive market conditions.
At December 31, 1998, we had $2.0 billion of registered, but unissued,
securities available under shelf registration statements relating to our
asset-backed securitization program. In February 1999, we securitized $424.3
million of recreational boat receivables included in assets held for sale at
December 31, 1998.
Capitalization
The following table presents information regarding our capital structure.
At December 31,
-----------------------
1998 1997
--------- ---------
Dollars in Millions
Commercial paper ..................................... $ 6,144.1 $ 5,559.6
Term debt ............................................ 12,507.3 9,755.3
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust
holding solely debentures of the Company ........... 250.0 250.0
Stockholders' equity ................................. 2,701.6 2,432.9
--------- ---------
Total capitalization ................................. $21,603.0 $17,997.8
========= =========
Total debt to stockholders' equity and
Company-obligated mandatorily redeemable
preferred securities of subsidiary
trust holding solely debentures of
the Company ........................................ 6.32x 5.71x
Total debt and Company-obligated mandatorily
redeemable preferred securities of
subsidiary trust holding solely
debentures of the Company to
stockholders' equity ............................... 7.00x 6.40x
The Company-obligated mandatorily redeemable preferred securities are
7.70% Preferred Capital Securities of CIT Capital Trust I, a wholly-owned
subsidiary of ours. CIT Capital Trust I invested the proceeds of that issue in
Junior Subordinated Debentures of CIT having identical rates and payment dates.
In November 1998, DKB sold 55,000,000 shares of Class A Common Stock in
the Secondary Offering for which it received all the proceeds. Prior to the
sale, DKB converted all of its Class B Common Stock into an identical number of
shares of Class A Common Stock, which is now the only class of common stock
outstanding. DKB held 94.4% of the combined voting power and 77.2% of the
economic interest of all of our outstanding common stock prior to the sale. At
December 31, 1998, DKB held 43.8% of the voting power and economic interest of
our outstanding common stock.
In November 1997, we issued 36,225,000 shares of Class A Common Stock in
the IPO. Prior to the IPO, DKB owned 80% of our issued and outstanding stock,
and Chase owned the remaining 20% common stock interest. DKB had an option
expiring December 15, 2000 to purchase the remaining 20% common stock interest
from Chase. In November 1997, we purchased DKB's option at its fair market
value, exercised the option to purchase the stock held by Chase and
recapitalized by converting the outstanding common stock to 157,500,000 shares
of Class B Common Stock. Twenty percent of the Class B Common Stock shares
(which had 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 IPO. The issuance of Class A Common
Stock pursuant to the underwriter's overallotment resulted in an increase in
stockholders' equity of $117.7 million.
26
<PAGE>
Recent Accounting Pronouncements
In 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). This statement standardizes the accounting for derivative instruments and
hedging activities, including certain derivative instruments embedded in other
contracts. Under the standard, entities are required to carry all derivative
instruments in the statement of financial position at fair value. The accounting
for changes in the fair value (i.e., gains or losses) of a derivative instrument
depends on whether it has been designated and qualifies as part of a hedging
relationship and, if so, on the reason for holding it.
If certain conditions are met, entities may elect to designate a
derivative instrument as a hedge of exposures to changes in fair values, cash
flows, or foreign currencies. If the hedged exposure is a fair value exposure,
the gain or loss on the derivative instrument is recognized in earnings in the
period of change together with the offsetting gain or loss on the hedged item
attributable to the risk being hedged. If the hedged exposure is a cash flow
exposure, the effective portion of the gain or loss on the derivative instrument
is reported initially as a component of other comprehensive income and
subsequently reclassified into earnings when the forecasted transaction affects
earnings. If the hedged exposure is a foreign currency exposure, the gain or
loss on the derivative instrument is reported in other comprehensive income as
part of the cumulative translation adjustment. For a derivative not designated
as a hedging instrument, the gain or loss is recognized in earnings in the
period of change. SFAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. We have not yet determined the impact of SFAS
133. However, we anticipate that adoption of the statement will not have a
material impact on our financial position or results of operations.
Year 2000 Compliance
Institutions around the world are reviewing and modifying their computer
systems to ensure they are Year 2000 compliant. The issue, in general terms, is
that many existing computer systems, both information technology systems and
non-information technology systems, contain date-based functions which use only
two digits to identify a year in the date field with the assumption that the
first two digits of the year are always "19". Consequently, on January 1, 2000,
systems that are not Year 2000 compliant may read the year as 1900. Systems that
calculate, compare or sort using the incorrect date may malfunction.
We continue to address the Year 2000 issue as it relates to our systems
and business. We have developed a comprehensive Year 2000 project to remediate
our information technology ("IT") systems and to address Year 2000 issues in our
non-IT systems. The process of remediation includes the following phases:
o Planning
o Assessing
o Designing (as necessary)
o Programming (as necessary)
o Testing and validation
We have categorized our IT systems as high, medium or low priority with
respect to our ability to conduct business. As of December 31, 1998, we had
successfully completed:
o the planning, assessing and designing phases for all of our IT
systems
o the programming phase for 97% of our high and medium priority IT
systems and 96% of all our IT systems
o the testing and validation phase for 96% of our high and medium
priority IT systems and 92% of all our IT systems.
We estimate that, at December 31, 1998, our Year 2000 project was
approximately 94% completed for our high and medium priority IT systems and 91%
completed with respect to all our IT systems. Our Year 2000 project remains on
schedule to be completed by the end of the first quarter of 1999.
A majority of the software used in our IT systems is provided by outside
vendors. As of December 31, 1998, approximately 97% of our vendor provided
software or software upgrades have been designated by the software vendors as
Year 2000 compliant. We implemented a Year 2000 contingency plan which now
addresses the 3% of our vendor provided software which has not yet met our Year
2000 compliance deadlines.
27
<PAGE>
In addition, we continue to formulate a contingency plan for business
continuation in the event of Year 2000 systems failures. This contingency plan
formulation is based upon our existing disaster recovery and business continuity
plans with modifications for Year 2000 risks. We expect to complete our IT
systems Year 2000 contingency plan by June 30, 1999, and to test this
contingency plan thereafter.
Our non-IT systems used to conduct business at our facilities consist
primarily of office equipment (other than computer and communications equipment)
and other equipment at our leased office facilities. We have inventoried our
non-IT systems and have sent Year 2000 questionnaires to our office equipment
vendors and landlords to determine the status of their Year 2000 readiness.
Since 1997, we have been actively communicating with third parties
concerning the status of their Year 2000 readiness by, among other things,
sending written Year 2000 inquiries. These third parties include our borrowers,
obligors, banks, investment banks, investors, vendors, manufacturers, landlords
and suppliers of telecommunication services and other utilities. As part of the
process of evaluating our options and attempting to mitigate third party risks,
we continue to collect and analyze information from third parties. It is
difficult to predict the effect of such third party non-readiness on our
business.
Significant Year 2000 failures in our systems or in the systems of third
parties (or third parties upon whom they depend) could have a material adverse
effect on our financial condition and results of operations. We believe that our
reasonably likely worst case Year 2000 scenario is (i) a material increase in
our credit losses due to Year 2000 problems for our borrowers and obligors and
(ii) disruption in financial markets causing liquidity stress to us. The amount
of these potential credit losses or the degree of disruption cannot be
determined at this time.
During the first quarter of 1999, we will continue with the remediation
and testing of our IT systems, further evaluate third party Year 2000 risks,
continue to develop contingency plans and take further steps designed to reduce
our exposure to these risks.
The total cost of our Year 2000 project is expected to be approximately $8
million, of which approximately $5.5 million has been incurred through December
31, 1998. This amount includes the costs of additional hardware, software and
technology consultants, as well as the cost of our systems professionals
dedicated to achieving Year 2000 compliance for IT systems. We have included the
cost of the Year 2000 project in our annual budgets for information technology.
We have postponed some non-Year 2000 IT expenditures and initiatives until after
2000 in order to concentrate resources on the Year 2000 issue. We do not expect
that this will have a material adverse effect on our financial condition and
results of operations.
All Year 2000 information provided herein is a "Year 2000 Readiness
Disclosure" as defined in the Year 2000 Information and Readiness Disclosure Act
and is subject to the terms thereof. This Year 2000 information is provided
pursuant to securities law requirements and it may not be taken as a form of
covenant, warranty, representation or guarantee of any kind.
28
<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, 1998 and 1997, 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, 1998.
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, 1998 and 1997, and the results of
their operations and cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
KPMG LLP
Short Hills, New Jersey
January 28, 1999
29
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Assets
December 31,
--------------------
1998 1997
---- ----
Dollars in Millions
Financing and leasing assets
Loans
Commercial ......................................... $11,415.5 $10,342.5
Consumer ........................................... 4,266.9 3,664.8
Lease receivables ...................................... 4,173.6 3,712.4
--------- ---------
Finance receivables (Note 3) ....................... 19,856.0 17,719.7
Reserve for credit losses (Note 4) ..................... (263.7) (235.6)
--------- ---------
Net finance receivables ............................ 19,592.3 17,484.1
Operating lease equipment, net (Note 5) ................ 2,774.1 1,905.6
Consumer finance receivables held for sale ............. 987.4 268.2
Cash and cash equivalents .............................. 73.6 140.4
Other assets (Notes 14 and 19) ......................... 875.7 665.8
--------- ---------
Total assets ................................... $24,303.1 $20,464.1
========= =========
Liabilities and Stockholders' Equity
Debt (Notes 6 and 7)
Commercial paper ....................................... $ 6,144.1 $ 5,559.6
Variable rate senior notes ............................. 4,275.0 2,861.5
Fixed rate senior notes ................................ 8,032.3 6,593.8
Subordinated fixed rate notes .......................... 200.0 300.0
--------- ---------
Total debt ..................................... 18,651.4 15,314.9
Credit balances of factoring clients ................... 1,302.1 1,202.6
Accrued liabilities and payables
(Notes 12 and 14) .................................. 694.3 660.1
Deferred federal income taxes (Note 12) ................ 703.7 603.6
--------- ---------
Total liabilities .............................. 21,351.5 17,781.2
Company-obligated mandatorily redeemable
preferred securities of subsidiary
trust holding solely debentures of
the Company (Note 8) ............................... 250.0 250.0
Stockholders' equity (Notes 1 and 9)
Class A common stock, par value
$0.01 per share;
Authorized: 700,000,000 shares
Issued: 163,144,879 shares in
1998 and 37,173,527 shares
in 1997
Outstanding: 162,176,949 shares
in 1998 and 37,173,527
shares in 1997 ................................. 1.7 0.4
Class B common stock, par value $0.01
per share, 510,000,000 shares
authorized and in 1997 126,000,000
issued and outstanding ............................. -- 1.3
Paid-in capital ........................................ 952.5 948.3
Retained earnings ...................................... 1,772.8 1,482.9
Treasury stock at cost (967,930
shares; Class A) ................................... (25.4) --
--------- ---------
Total stockholders' equity ..................... 2,701.6 2,432.9
--------- ---------
Total liabilities and
stockholders' equity ........................ $24,303.1 $20,464.1
========= =========
See accompanying notes to consolidated financial statements
30
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
-----------------------------------
1998 1997 1996
-------- -------- --------
Dollars in Millions
(except per share amounts)
Finance income ............................ $2,015.1 $1,824.7 $1,646.2
Interest expense .......................... 1,040.8 937.2 848.3
-------- -------- --------
Net finance income .................... 974.3 887.5 797.9
Fees and other income (Note 10) ........... 255.4 247.8 244.1
Gain on sale of equity interest
acquired in loan workout .............. -- 58.0 --
-------- -------- --------
Operating revenue ..................... 1,229.7 1,193.3 1,042.0
-------- -------- --------
Salaries and general operating
expenses (Notes 11, 14 and 15) ........ 417.8 428.4 393.1
Provision for credit losses (Note 4) ...... 99.4 113.7 111.4
Depreciation on operating lease
equipment (Note 5) .................... 169.5 146.8 121.7
Minority interest in subsidiary
trust holding solely
debentures of the Company (Note 8) .... 19.2 16.3 --
-------- -------- --------
Operating expenses .................... 705.9 705.2 626.2
-------- -------- --------
Income before provision for
income taxes ....................... 523.8 488.1 415.8
Provision for income taxes (Note 12) ...... 185.0 178.0 155.7
-------- -------- --------
Net income ............................ $ 338.8 $ 310.1 $ 260.1
======== ======== ========
Net income per basic share (Note 13) ...... $ 2.09 $ 1.96 $ 1.65
Net income per diluted share (Note 13) .... $ 2.08 $ 1.95 $ 1.64
See accompanying notes to consolidated financial statements.
31
<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, 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 underwriter's
overallotment of Class
A common stock shares,
net (Note 1) .................... 0.1 117.6 117.7
Restricted Class A common
stock grants (Note 14) .......... 9.0 9.0
------ ---- ---- ------ ------ -------- --------
Balance, December 31, 1997 ........ 0.0 0.4 1.3 948.3 0.0 1,482.9 2,432.9
Net income ........................ 338.8 338.8
Cash dividends .................... (48.9) (48.9)
Conversion of Class B
common stock to Class A
common stock shares
(Note 1) ........................ 1.3 (1.3) 0.0
Repurchase of 967,930
shares of Class A common
stock (Note 9) .................. (25.4) (25.4)
Costs relating to Class A
Common Stock
offering (Note 1) ............... (1.0) (1.0)
Restricted Class A common
stock grants (Note 14) .......... 5.2 5.2
------ ---- ---- ------ ------ -------- --------
Balance, December 31, 1998 ........ $ 0.0 $1.7 $0.0 $952.5 $(25.4) $1,772.8 $2,701.6
====== ==== ==== ====== ====== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------------------
1998 1997 1996
---- ---- ----
Dollars in Millions
Cash flows from operations
Net income .............................. $ 338.8 $ 310.1 $ 260.1
Adjustments to reconcile net
income to net cash flows
from operations:
Provision for credit losses ........ 99.4 113.7 111.4
Depreciation and amortization ...... 195.9 168.6 140.3
Provision for deferred federal
income taxes .................... 100.2 80.3 54.1
Gains on asset and receivable sales (75.1) (137.7) (78.9)
Increase in accrued liabilities
and payables .................... 34.2 66.1 108.1
Increase in other assets ........... (89.2) (54.0) (65.9)
Other .............................. 11.0 8.0 (3.7)
---------- ---------- ----------
Net cash flows provided by
operations .................... 615.2 555.1 525.5
---------- ---------- ----------
Cash flows from investing activities
Loans extended .......................... (35,818.9) (33,332.9) (32,647.2)
Collections on loans .................... 32,463.4 31,419.7 31,132.2
Proceeds from asset and
receivable sales ...................... 1,381.3 1,747.5 1,144.9
Purchases of assets to be leased ........ (1,101.7) (802.8) (431.2)
Net increase in short-term
factoring receivables ................. (255.4) (238.8) (0.3)
Purchases of finance receivables
portfolios ............................ (600.0) (176.6) (661.3)
Proceeds from sales of assets
received in satisfaction of loans ..... 49.2 37.7 76.7
Purchases of investment securities ...... (36.9) (27.5) (20.8)
Other ................................... (31.8) (23.1) (25.5)
---------- ---------- ----------
Net cash flows used for
investing activities ............... (3,950.8) (1,396.8) (1,432.5)
---------- ---------- ----------
Cash flows from financing activities
Proceeds from the issuance of
variable and fixed rate notes ......... 6,863.5 4,532.7 4,776.0
Repayments of variable and fixed
rate notes ............................ (4,111.5) (3,556.1) (3,461.8)
Net increase (decrease) in
commercial paper ...................... 584.5 (267.4) (278.6)
Proceeds from nonrecourse
leveraged lease debt .................. 155.3 43.7 58.1
Repayments of nonrecourse
leveraged lease debt .................. (148.7) (162.3) (146.2)
Cash dividends paid ..................... (48.9) (79.3) (263.9)
Purchase of treasury stock .............. (25.4) -- --
Proceeds from issuance of
common stock, net ..................... -- 926.0 --
Purchase of Class B common
stock pursuant to
option agreement ...................... -- (808.3) --
Proceeds from the issuance
of Company-obligated
manditorily redeemable preferred
securities of subsidiary
trust holding solely debentures
of the Company ........................ -- 250.0 --
Capital contribution from stockholders .. -- -- 165.0
---------- ---------- ----------
Net cash flows provided by
financing activities ............... 3,268.8 879.0 848.6
---------- ---------- ----------
Net (decrease) increase in cash
and cash equivalents .................. (66.8) 37.3 (58.4)
Cash and cash equivalents,
beginning of year ..................... 140.4 103.1 161.5
---------- ---------- ----------
Cash and cash equivalents,
end of year ........................... $ 73.6 $ 140.4 $ 103.1
========== ========== ==========
Supplemental disclosures
Interest paid ........................... $ 1,021.3 $ 917.5 $ 842.6
Federal and state and local
income taxes paid ..................... $ 81.4 $ 102.1 $ 102.5
See accompanying notes to consolidated financial statements.
33
<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 secured commercial and consumer financing and leasing
activities through a nationwide distribution network.
In November 1998, The Dai-Ichi Kangyo Bank, Limited ("DKB") sold
55,000,000 shares of Class A Common Stock in a secondary public offering (the
"Secondary Offering") for which it received all the proceeds. Prior to the sale,
DKB converted all of its Class B Common Stock into an identical number of shares
of Class A Common Stock, which is now the only class of common stock
outstanding. DKB held 94.4% of the combined voting power and 77.2% of the
economic interest of all of the Company's outstanding common stock prior to the
sale. At December 31, 1998, DKB held 43.8% of the voting power and economic
interest of the Company's outstanding common stock.
In November 1997, the Company issued 36,225,000 shares of Class A Common
Stock in an initial public offering (the "IPO"). Prior to the IPO, DKB owned 80%
of the Company's issued and outstanding stock, and The Chase Manhattan
Corporation ("Chase") owned the remaining 20% of the issued and outstanding
stock. 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 outstanding
common stock to 157,500,000 shares of Class B Common Stock. Twenty percent of
the Class B Common Stock shares (which had 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 IPO. 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.
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 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 when payment of
principal or interest is contractually delinquent for 90 days or more, or
earlier when, 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
34
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 significant amounts of accrued interest. To the extent
the estimated fair value of collateral does not satisfy both the principal and
accrued income outstanding, accrued but uncollected income at the date an
account is placed on nonaccrual status is reversed and charged against income,
though such amounts are generally 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 leasing equipment, venture capital
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 nonrecourse third party debt 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 considering economic conditions, collateral values and credit quality
indicators, including charge-off experience and levels of past due loans and
nonperforming assets. It is management's judgment that the consolidated reserve
for credit losses is adequate to provide for potential credit losses. The
Company reviews finance receivables periodically to determine the probability of
loss, and takes charge-offs after considering such factors as the obligor's
financial condition and the value of underlying collateral and guarantees. The
consolidated reserve for credit losses is intended to provide for future events,
which by their nature are uncertain. Therefore, changes in economic conditions
or other events affecting specific obligors or industries may necessitate
additions or deductions 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) 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
35
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
("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-off procedures, and 3) short-term factoring customer
receivables, generally having terms of no more than 30 days. In general, the
impaired loans are collateral dependent. Any shortfall between the value and the
recorded investment in the loan is recognized by recording a provision for
credit losses.
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
exceeds 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 any 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, market trends and
anticipated trends relative to the particular products securitized. Subsequent
to the recording 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, 1998 and 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 25 years.
36
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Fixed assets such as computer equipment, furniture, and leasehold
improvements 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 uses 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 as interest expense to correspond with the hedged asset or
liability position, respectively. If 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 also uses derivative instruments to hedge the interest rate
associated with 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 are included in consumer finance receivables held for sale in
the accompanying balance sheets. The net interest differential on the derivative
instrument, including premium paid or received, if any, is recognized as an
adjustment to the basis of the corresponding assets at the time of sale. If the
anticipated securitization does not occur, the related hedge position 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 is recognized in income at the time of enactment of a
change in tax rates.
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.
Segment Reporting
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131") in 1998. SFAS 131 supersedes SFAS 14, "Financial Reporting for Segments of
a Business Enterprise," replacing the "industry segment" approach with the
"management" approach. The management approach is based on the way management
organizes the segments for making operating decisions and assessing performance.
SFAS 131 also requires disclosure about products and services, significant
account balances, and geographic areas. The adoption of SFAS 131 did not affect
results of operations or financial position but did affect the disclosure of
segment information. See Note 21 -- Business Segment Information.
37
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Comprehensive Income
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" in 1998. 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. There were no significant comprehensive income
items at December 31, 1998, 1997 or 1996.
Consolidated Statements of Cash Flows
Cash and cash equivalents includes cash and interest-bearing deposits,
which generally represent overnight money market investments of excess cash
borrowed in the commercial paper market and maintained for liquidity purposes.
Cash inflows and outflows from commercial paper borrowings and most factoring
receivables are presented on a net basis in the Statements of Cash Flows, as
their term is generally less than 90 days.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
Note 3--Finance Receivables
Included in lease receivables at December 31, 1998 and 1997 are leveraged
lease receivables of $792.2 million and $716.5 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 at both December
31, 1998 and 1997, including amounts owed to affiliates of DKB that totaled
$431.0 million in 1998 and $459.0 million in 1997. Finance receivables exclude
$2.5 billion of consumer finance receivables at December 31, 1998 ($2.4 billion
in 1997) previously securitized and currently managed by the Company.
Commercial and consumer loans are presented net of unearned income of
$557.0 million and $584.3 million at December 31, 1998 and 1997, respectively.
Lease receivables are presented net of unearned income of $1.1 billion at both
December 31, 1998 and 1997.
The following table sets forth the contractual maturities of finance
receivables.
At December 31,
---------------------------------------------
1998 1997
------------------ -------------------
Amount Percent Amount Percent
-------- ------- -------- -------
Dollars in Millions
Due within one year ............. $ 7,948.8 40.0% $ 6,540.9 36.9%
Due within one to two years ..... 3,146.0 15.9 2,797.1 15.8
Due within two to four years .... 3,458.3 17.4 3,288.0 18.6
Due after four years ............ 5,302.9 26.7 5,093.7 28.7
--------- ----- --------- -----
Total .......................... $19,856.0 100.0% $17,719.7 100.0%
========= ===== ========= =====
Information about concentrations of credit risk is set forth in
"Geographic Composition", "Industry Composition" and "Concentrations" in Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
38
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table sets forth the information regarding total
nonperforming assets.
At December 31,
--------------------
1998 1997
---- ----
Dollars in Millions
Nonaccrual finance receivables ................. $211.4 $164.4
Assets received in satisfaction of loans ....... 67.3 43.0
------ ------
Total nonperforming assets ................... $278.7 $207.4
====== ======
Percent to finance receivables ................. 1.40% 1.17%
====== ======
At December 31, 1998 and 1997, the recorded investment in impaired loans,
which are generally collateral dependent, totaled $74.1 million and $53.2
million, respectively. No SFAS 114 reserve for credit losses was required
because the fair value of the collateral or the present value of expected future
cash flows equaled or exceeded the recorded investment for such impaired loans.
The average monthly recorded investment in the impaired loans was $73.2 million,
$71.6 million and $89.4 million for the years ended December 31, 1998, 1997 and
1996, respectively. Cash collected on impaired loans is applied to the carrying
amount. There was no finance income recorded on these loans during 1998, 1997 or
1996 after being classified as impaired. The amount of finance income that would
have been recorded under contractual terms for year-end impaired loans would
have been $16.1 million, $19.9 million, and $24.7 million in 1998, 1997, and
1996, respectively.
Note 4--Reserve for Credit Losses
The following table presents changes in the reserve for credit losses.
At December 31,
-----------------------------
1998 1997 1996
---- ---- ----
Dollars in Millions
Balance, January 1 ........................... $ 235.6 $ 220.8 $ 206.0
------- ------- -------
Provision for credit losses .................. 99.4 113.7 111.4
Portfolio acquisitions, net .................. 7.5 2.1 4.9
------- ------- -------
Net addition to the reserve
for credit losses ........................ 106.9 115.8 116.3
------- ------- -------
Finance receivables charged-off .............. (103.7) (123.5) (122.2)
Recoveries on finance receivables
previously charged-off ..................... 24.9 22.5 20.7
------- ------- -------
Net credit losses .......................... (78.8) (101.0) (101.5)
------- ------- -------
Balance, December 31 ......................... $ 263.7 $ 235.6 $ 220.8
======= ======= =======
Reserve for credit losses as a
percentage of finance receivables .......... 1.33% 1.33% 1.30%
======= ======= =======
39
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5--Operating Lease Equipment
The following table provides an analysis of operating lease equipment by
equipment type, net of accumulated depreciation of $457.2 million in 1998 and
$375.6 million in 1997.
At December 31,
----------------------
1998 1997
---- ----
Dollars in Millions
Commercial aircraft ................................... $1,094.7 $ 822.7
Railroad equipment .................................... 806.0 429.0
Business aircraft ..................................... 318.7 295.6
Trucks, trailers and buses ............................ 187.0 172.2
Manufacturing ......................................... 147.2 101.3
Other ................................................. 220.5 84.8
-------- --------
Total ............................................... $2,774.1 $1,905.6
======== ========
Included in the preceding table is equipment not currently subject to
lease agreements of $27.2 million and $2.4 million at December 31, 1998 and
1997, respectively.
Commitments to purchase equipment from manufacturers to be placed on
operating lease totaled $449.9 million at December 31, 1998. Agreements to lease
this equipment to third parties have been entered into for $157.0 million at
December 31, 1998. There were no commitments to purchase equipment from
manufacturers to be placed on operating lease at December 31, 1997.
Rental income on operating leases, which is included in finance income,
totaled $314.1 million in 1998, $231.8 million in 1997, and $182.4 million in
1996. The following table presents future minimum lease rentals on
non-cancelable operating leases as of December 31, 1998. Excluded from this
table are variable rentals calculated on the level of asset usage, re-leasing
rentals, and expected sales proceeds from remarketing operating lease equipment
at lease expiration, all of which are important components of operating lease
profitability.
Years Ended December 31,
------------------------
Dollars in Millions
1999 ...................................................... $ 353.2
2000 ...................................................... 288.6
2001 ...................................................... 237.0
2002 ...................................................... 170.4
2003 ...................................................... 120.3
Thereafter ................................................ 208.1
--------
Total .................................................. $1,377.6
========
40
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6--Debt
The following table presents data on commercial paper borrowings.
At December 31,
--------------------------------
1998 1997 1996
---- ---- ----
Dollars in Millions
Borrowings outstanding ..................... $6,144.1 $5,559.6 $5,827.0
Weighted average interest rate ............. 5.35% 5.86% 5.45%
Weighted average maturity .................. 38 days 43 days 32 days
For the Years ended December 31,
---------------------------------
1998 1997 1996
---- ---- ----
Dollars in Millions
Daily average borrowings ................... $6,572.1 $6,320.7 $5,892.7
Maximum amount outstanding ................. $7,655.9 $7,039.4 $6,666.3
Weighted average interest rate ............. 5.51% 5.56% 5.44%
(excluding amounts related to
interest bearing deposits)
The following tables present the contractual maturities of total debt at
December 31, 1998.
<TABLE>
<CAPTION>
At December 31,
---------------------
Commercial Variable rate 1998 1997
paper senior notes Total Total
----- ------------ ----- -----
Dollars in Millions
<S> <C> <C> <C> <C>
Due in 1998 (rates ranging from
5.58% to 5.90%) ...................... $ -- $ -- $ -- $8,021.1
Due in 1999 (rates ranging from
4.40% to 5.88%) ...................... 6,144.1 3,705.0 9,849.1 380.0
Due in 2000 (rates ranging from
4.91% to 5.76%) ...................... -- 550.0 550.0 --
Due in 2003 (rates ranging from
5.81% to 5.96%) ...................... -- 20.0 20.0 20.0
-------- -------- --------- --------
Total .............................. $6,144.1 $4,275.0 $10,419.1 $8,421.1
======== ======== ========= ========
<CAPTION>
At December 31,
---------------------
Fixed rate notes 1998 1997
Senior Subordinated Total Total
------ ------------ ----- -----
<S> <C> <C> <C> <C>
Due in 1998 (rates ranging from
5.63% to 8.75%) ...................... $ -- $ -- $ -- $1,650.0
Due in 1999 (rates ranging from
5.38% to 6.63%) ...................... 1,881.0 -- 1,881.0 1,881.0
Due in 2000 (rates ranging from
5.00% to 6.80%) ...................... 2,222.0 -- 2,222.0 1,095.0
Due in 2001 (rates ranging from
5.50% to 9.25%) ...................... 1,475.0 200.0 1,675.0 700.0
Due in 2002 (rates ranging from
5.92% to 7.13%) ...................... 1,050.0 -- 1,050.0 950.0
Due in 2003 (rates ranging from
5.57% to 6.00%) ...................... 755.0 -- 755.0 --
Due after 2003 (rates ranging from
5.69% to 6.63%) ...................... 658.6 -- 658.6 628.6
-------- ------ -------- --------
Face amount of maturities .............. 8,041.6 200.0 8,241.6 6,904.6
Issue discount ......................... (9.3) -- (9.3) (10.8)
-------- ------ -------- --------
Total .............................. $8,032.3 $200.0 $8,232.3 $6,893.8
======== ====== ======== ========
</TABLE>
41
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fixed rate senior and subordinated debt outstanding at December 31, 1998
matures at various dates through 2008 at interest rates ranging from 5.00% to
9.25%. The consolidated weighted average interest rates on fixed rate senior and
subordinated debt at December 31, 1998 and 1997 were 6.11% and 6.39%,
respectively. Variable rate senior notes outstanding at December 31, 1998 with
interest rates ranging from 4.40% to 5.81% mature at various dates through 2003.
The consolidated weighted average interest rates on variable rate senior notes
at December 31, 1998 and 1997 were 4.93% and 5.66%, respectively.
The following table represents information on unsecured revolving lines of
credit with 53 banks that support commercial paper borrowings at December 31,
1998.
Maturity Amount
----------------
Dollars in Millions
April 1999 ..................................................... $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.
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. The Company uses
off-balance sheet derivatives for hedging purposes only, and 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, 1998.
<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>
1999 ............ $ 925.0 5.42% 6.15% $ -- -- -- $130.0 4.43% 5.71%
2000 ............ 760.0 5.48% 6.95% 20.0 6.15% 5.07% -- -- --
2001 ............ 1,021.7 5.48% 6.12% 200.0 5.82% 5.22% -- -- --
2002 ............ 560.0 5.35% 5.69% -- -- -- -- -- --
2003 ............ 269.7 5.57% 6.03% -- -- -- -- -- --
2004-2008 ....... 204.1 5.62% 5.98% 200.0 5.92% 5.09% -- -- --
-------- ---- ---- ------- ---- ---- ------ ---- ----
$3,740.5 $ 420.0 $130.0
======== ======= ======
Weighted
average rate .... 5.46% 6.22% 5.88% 5.15% 4.43% 5.71%
==== ==== ==== ==== ==== ====
</TABLE>
All rates were those in effect at December 31, 1998. Variable rates are
based on the contractually determined rate or other market rate indices and may
change significantly, affecting future cash flows.
42
<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 $2,940.5 Effectively converts the interest rate
on an equivalent amount of commercial
paper to a fixed rate.
Hedging variable
rate notes 800.0 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 3,740.5
--------
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 $4,290.5
========
The Company's hedging activity increased interest expense by $23.4
million, $24.2 million and $27.8 million in 1998, 1997 and 1996, 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.
The Company is party to cross-currency interest rate swaps with a notional
principal amount of $218.6 million paying interest at a weighted average rate of
5.15% at December 31, 1998, that effectively converted yen denominated fixed
rate debt into variable rate U.S. dollar obligations. These swaps have
maturities ranging from 1999 to 2006 that 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 $37.2 million at December 31, 1998, 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
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). Both the Capital Securities issued by the Trust and the
Debentures of the Company owned by the Trust are
43
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $200.0 million.
During 1998, the Company's Board of Directors authorized the purchase of
up to 2,000,000 shares of its common stock to provide shares for its employee
compensation programs. Stock repurchases are authorized to take place over a
twelve month period ending August 1999, and may be made from time to time in the
open market or in privately negotiated transactions. Through December 31, 1998,
the Company repurchased 967,930 shares.
Note 10--Fees and Other Income
The following table sets forth the components of fees and other income.
Years Ended December 31,
------------------------------
1998 1997 1996
------ ------ ------
Dollars in Millions
Factoring commissions ...................... $ 95.7 $ 95.2 $ 91.0
Fees and other income ...................... 90.7 73.8 83.6
Gains on sales of leasing equipment ........ 45.2 30.1 36.6
Gains on securitizations ................... 12.5 32.0 14.9
Gains on sales of venture capital
investments .............................. 11.3 16.7 18.0
------ ------ ------
Total .................................... $255.4 $247.8 $244.1
====== ====== ======
Note 11--Salaries and General Operating Expenses
The following table sets forth the components of salaries and general
operating expenses.
Years Ended December 31,
------------------------------
1998 1997 1996
------ ------ ------
Dollars in Millions
Salaries and employee benefits ............. $245.4 $253.5 $223.0
General operating expenses ................. 172.4 174.9 170.1
------ ------ ------
Total .................................... $417.8 $428.4 $393.1
====== ====== ======
44
<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,
----------------------------
1998 1997 1996
---- ---- ----
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 ........ 3.0 3.7 4.5
Investment tax credits ...................... (0.2) (0.2) (0.3)
Other ....................................... (2.5) (2.0) (1.8)
---- ---- ----
Effective tax rate ............................ 35.3% 36.5% 37.4%
==== ==== ====
The provision for income taxes is comprised of the following:
Years Ended December 31,
----------------------------
1998 1997 1996
---- ---- ----
Dollars in Millions
Current federal income tax provision ....... $ 60.4 $ 70.0 $ 72.9
Deferred federal income tax provision ...... 100.2 80.3 54.1
------ ------ ------
Total federal income taxes ................. 160.6 150.3 127.0
State and local income taxes ............... 24.4 27.7 28.7
------ ------ ------
Total provision for income taxes ......... $185.0 $178.0 $155.7
====== ====== ======
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,
----------------------
1998 1997
---- ----
Dollars in Millions
ASSETS
Provision for credit losses ................... $ (88.9) $ (93.3)
Loan origination fees ......................... (11.3) (9.2)
Other ......................................... (24.3) (47.1)
------- -------
Total deferred tax assets .................. (124.5) (149.6)
------- -------
LIABILITIES
Leasing transactions .......................... 778.3 679.0
Market discount income ........................ 33.7 55.8
Amortization of intangibles ................... 8.7 9.9
Depreciation of fixed assets .................. 0.7 1.5
Prepaid pension costs ......................... 0.6 1.0
Other ......................................... 3.1 1.8
------- -------
Total deferred tax liabilities ............. 825.1 749.0
------- -------
Net deferred tax liability ....................... $ 700.6 $ 599.4
======= =======
Also, included in deferred federal income taxes on the Consolidated
Balance Sheets are unamortized investment tax credits of $3.1 million and $4.2
million at December 31, 1998 and 1997, respectively. Included in the accrued
liabilities and payables caption in the Consolidated Balance Sheets are state
and local deferred tax liabilities of $124.7 million and $103.6 million at
December 31, 1998 and 1997, respectively, arising from the temporary differences
shown in the above tables.
45
<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. In accordance with SFAS 128, options which have an
anti-dilutive effect are not included in the denominator and were not
significant at December 31, 1998. The reconciliation of the numerator and
denominator of basic EPS with that of diluted EPS is presented for the years
ended December 31, 1998, 1997, and 1996.
For the Year Ended December 31, 1998
-------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Dollars in Millions
(except per share amounts)
Basic EPS:
Income available to common
shareholders ..................... $338.8 161,987,897 $ 2.09
Effect of Dilutive Securities:
Restricted shares .................. -- 936,250 (0.01)
Stock options ...................... -- 264,592 --
------ ----------- ------
Diluted EPS ........................... $338.8 163,188,739 $ 2.08
====== =========== ======
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
====== =========== ======
46
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 14 -- Postretirement and Other Benefit Plans
Retirement and Postretirement Medical and Life Insurance Benefit Plans
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.
The Company also 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.
During 1998, the Company adopted Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other Post
Retirement Benefits" ("SFAS 132"). SFAS 132 revises employers' disclosures about
pension and other post retirement benefit plans but does not change the
measurement or recognition of those plans. SFAS 132 also standardizes the
disclosure requirements to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan assets
that will facilitate financial analysis, and eliminates certain disclosures that
are no longer useful.
The following tables set forth the change in obligations, plan assets, and
funded status of the plans as well as the net periodic benefit cost.
<TABLE>
<CAPTION>
At or for the Years Ended December 31,
---------------------------------------------------------------
Retirement Benefits Postretirement Benefits
------------------------------- ---------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
Dollars in Millions
<S> <C> <C> <C> <C> <C> <C>
Change in Benefit Obligations
Benefit obligation at beginning
of year ................................ $100.4 $ 84.0 $79.9 $35.0 $34.9 $40.4
Service cost ............................. 6.3 5.2 5.3 1.5 1.3 1.1
Interest cost ............................ 6.9 6.2 5.7 2.3 2.3 2.4
Actuarial (gain)/loss .................... 7.0 7.8 (4.1) 1.2 (1.3) (7.3)
Benefits paid ............................ (2.5) (2.8) (2.8) (2.8) (2.2) (1.7)
------- ------- ----- ----- ----- -----
Benefit obligation at end of year ........ $ 118.1 $ 100.4 $84.0 $37.2 $35.0 $34.9
======= ======= ===== ===== ===== =====
<CAPTION>
At or for the Years Ended December 31,
-------------------------------------------------------
Retirement Benefits Postretirement Benefits
--------------------- -----------------------
1998 1997 1998 1997
---- ---- ---- ----
Dollars in Millions
<S> <C> <C> <C> <C>
Change in Plan Assets
Fair value of plan assets at
beginning of year ............................ $128.5 $109.9 $ 0.0 $ 0.0
Actual return on plan assets ................... 6.8 21.4 -- --
Employer contributions ......................... -- -- 2.8 2.2
Benefits paid .................................. (2.5) (2.8) (2.8) (2.2)
------ ------ ------ ------
Fair value of plan assets at
end of year .................................. $132.8 $128.5 $ 0.0 $ 0.0
====== ====== ====== ======
Reconciliation of Funded Status
at End of Year
Funded status .................................. $ 14.7 $ 28.1 $(37.2) $(35.0)
Unrecognized prior service cost ................ (1.5) (1.6) -- --
Unrecognized net (gain)/loss ................... (4.7) (18.2) (6.2) (8.3)
Unrecognized net transition obligation ......... -- -- 22.9 24.6
------ ------ ------ ------
Prepaid/(accrued) benefit cost ................. $ 8.5 $ 8.3 $(20.5) $(18.7)
====== ====== ====== ======
</TABLE>
47
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------------------------
Retirement Benefits Postretirement Benefits
------------------------------ ----------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Weighted Average Assumptions
Discount rate ............................... 6.50% 7.00% 7.50% 6.50% 7.00% 7.50%
Rate of compensation increase ............... 4.25% 4.50% 4.50% 4.25% 4.50% 4.50%
Expected return on plan assets .............. 10.00% 10.00% 10.00% -- -- --
</TABLE>
For 1998, the assumed health care cost trend rates decline to an ultimate
level of 4.50% in 2005 for all retirees; for 1997, 4.50% in 2004 for all
retirees; and for 1996, 4.75% in 2001 for employees prior to reaching age 65 and
4.75% in 1998 for retirees older than 65.
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------------------
Retirement Benefits Postretirement Benefits
------------------------------ ------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
Dollars in Millions
<S> <C> <C> <C> <C> <C> <C>
Components of Net Periodic
Benefit Cost
Service cost ................................ $ 6.3 $ 5.2 $ 5.3 $ 1.5 $ 1.3 $ 1.1
Interest cost ............................... 6.9 6.2 5.7 2.3 2.3 2.4
Expected return on plan assets .............. (12.8) (10.8) (10.1) -- -- --
Amortization of prior service cost .......... (0.2) (0.2) (0.2) -- -- --
Amortization of transition
obligation ................................ -- -- -- 1.6 1.7 1.7
Amortization of gains ....................... (0.5) (0.4) -- (0.8) (0.8) (0.6)
------ ----- ----- ----- ----- -----
Total net periodic (benefit)/expense ........ $ (0.3) $ -- $ 0.7 $ 4.6 $ 4.5 $ 4.6
====== ===== ===== ===== ===== =====
</TABLE>
Assumed healthcare cost trend rates have a significant effect on the
amounts reported for the healthcare plans. A one-percentage point change in
assumed health care cost trend rates would have the following effects:
For the Years Ended
-------------------------
Postretirement Benefits
1998 1997
---- ----
Dollars in Millions
Effect of One-Percentage Point Increase on:
Year-end benefit obligation ....................... $ 2.6 $ 2.4
Total of service and interest cost components ..... 0.4 0.3
Effect of One-Percentage Point Decrease on:
Year-end benefit obligation ....................... $(2.4) $(2.2)
Total of service and interest cost components ..... (0.3) (0.3)
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 $9.6
million, $9.0 million and $9.1 million, for 1998, 1997, and 1996, 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, 1998, 1997, and 1996, expenses for
the Bonus Plan amounted to $18.6 million, $18.5 million, and $17.4 million,
respectively.
48
<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 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. All options granted have 10 year terms. Options granted in
1997 vest at various anniversary dates through 2002. Options granted in 1998
vest one-third on the first anniversary of the date of grant (1999), an
additional one-third on the second anniversary of the date of grant (2000), and
in full on the third anniversary of the date of grant (2001).
Common stock data for the stock option plans is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------- --------------------------
Average Option Average Option
Shares Price Per Share Shares Price Per Share
------ --------------- ------ ---------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of year ........................... 4,038,298 $27.00 -- --
Granted ............................. 892,120 $29.08 4,047,816 $27.00
Exercised ........................... (921) $27.00 -- --
Forfeited ........................... (163,388) $27.01 (9,518) $27.00
--------- ------ --------- ------
Outstanding at end of year .......... 4,766,109 $27.39 4,038,298 $27.00
--------- ------ --------- ------
Options exercisable at year end ..... 903,438 $27.00 1,062 $27.00
--------- ====== --------- ======
Weighted average fair value
of options granted during
the year .......................... $ 9.41 $ 8.32
====== ======
</TABLE>
Fair value was determined at the date of grant using the Black-Scholes
option pricing model which assumed the following:
<TABLE>
<CAPTION>
Option Expected Average Expected Risk Free
Issuance Option Life Range Dividend Yield Volatility Range Interest Rate Range
- -------- ----------------- -------------- ---------------- -------------------
<S> <C> <C> <C> <C>
1998 ................... 3-5 years 1.37% 29.39%-40.93% 4.54%-5.63%
1997 ................... 3-7 years 1.33% 29.48%-31.39% 5.76%-5.90%
</TABLE>
The following table summarizes information about stock options outstanding
and options exercisable at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- ----------------------------
Range of Remaining Weighted Weighted
Exercise Number Contractual Average Number Average
Price Outstanding Life Exercise Price Exercisable Exercise Price
- ----------------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$27.00 - $33.06 4,766,109 9.12 years $27.39 903,438 $27.00
</TABLE>
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. Restricted shares of 919,879 and 948,527 were outstanding at December 31,
1998 and 1997, respectively. 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. For the years ended December 31, 1998 and 1997, expenses
in connection with restricted stock amounted to $5.2 million and $9.0 million,
respectively.
49
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CIT Career Incentive Plan
Prior to the termination of the CIT Career Incentive Plan in conjunction
with the IPO, phantom shares granted under the 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. The Company terminated the CIT Career Incentive Plan as of November
13, 1997 and extinguished all phantom shares of stock, by making a cash payment
and granting 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 and 1996, amounts charged to expense for
the CIT Career Incentive Plan amounted to $20.1 million and $9.5 million,
respectively. All charges relating to the termination of the Career Incentive
Plan are included in 1997 expense.
Employee Stock Purchase Plan
In 1998, the Company adopted an Employee Stock Purchase Plan (the "ESPP").
Under the ESPP, the Company is authorized to issue up to 500,000 shares of
common stock to eligible employees. Under the terms of the ESPP, employees can
choose to have between 1% and 10% of their base salary withheld to purchase the
Company's stock at 85% of the fair market value. During 1998, the Company sold
21,214 shares to employees under the ESPP.
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 1998 and net income per diluted share would have been $333.4 million
and $2.04, compared to $338.8 million and $2.08, as reported. For 1997, net
income 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.
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, 1998.
Years Ended December 31,
------------------------
Dollars in Millions
1999 ............................................... $ 22.8
2000 ............................................... 19.7
2001 ............................................... 17.4
2002 ............................................... 15.9
2003 ............................................... 21.2
Thereafter ......................................... 28.0
------
Total ........................................... $125.0
======
50
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $13.9 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,
---------------------------
1998 1997 1996
---- ---- ----
Dollars in Millions
Premises ......................................... $ 17.1 $ 19.6 $ 18.0
Equipment ........................................ 6.5 6.0 6.3
Less sublease income ............................. (1.3) (1.2) (1.2)
------ ------ ------
Total ......................................... $ 22.3 $ 24.4 $ 23.1
====== ====== ======
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.
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 1998 1997
-------- -------- ----------- -----------
Dollars in Millions
<S> <C> <C> <C> <C>
Unused commitments to extend credit
Financing and leasing assets ................ $ 1,684.9 $ 192.0 $ 1,876.9 $ 1,608.2
Letters of credit and acceptances
Standby letters of credit ................... 152.2 4.2 156.4 209.6
Other letters of credit ..................... 189.5 10.6 200.1 181.1
Acceptances ................................. 12.2 -- 12.2 24.0
Guarantees ..................................... 169.9 68.9 238.8 200.9
Foreign exchange contracts ..................... 2.2 -- 2.2 1.1
</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
51
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Estimated fair values, recorded carrying values, and various assumptions
used in valuing the Company's financial instruments, excluding leasing
transactions accounted for under SFAS 13, at December 31, 1998 and 1997 are set
forth below.
<TABLE>
<CAPTION>
1998 1997
---------------------------- ------------------------------
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) ................ $15,474.0 $15,772.2 $13,821.1 $14,028.2
Consumer finance receivables held for sale ..... 987.4 987.4 268.2 268.2
Other assets (b) ............................... 469.3 480.9 383.9 420.9
Commercial paper (c) ........................... (6,144.1) (6,144.1) (5,559.6) (5,559.6)
Fixed rate senior notes and subordinated
fixed rate notes (d) ........................ (8,232.3) (8,365.5) (6,893.8) (6,924.1)
Variable rate notes (d) ........................ (4,275.0) (4,272.3) (2,861.5) (2,856.5)
Credit balances of factoring clients &
accrued liabilities and payables (e) ........ (1,833.6) (1,833.6) (1,714.0) (1,714.0)
Company--obligated mandatorily redeemable
preferred securities of subsidiary trust
holding solely debentures of the
Company (f) ................................. (250.0) (263.4) (250.0) (253.8)
Derivative financial instruments (g)
Interest rate swaps
Off--balance sheet assets ...................... -- 11.6 -- 1.2
Off--balance sheet liabilities -- (79.0) -- (46.6)
Cross currency assets .......................... -- 25.6 -- 5.2
Cross currency liabilities ..................... -- (2.7) -- (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 7.59% to 8.67% for 1998 and 8.21% to 9.20%
for 1997. 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 1998 and $3.7
billion in 1997.
52
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(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 $406.4 million in 1998 and $281.9 million in
1997.
(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 4.83% to
6.04% in 1998 and 5.23% to 6.60% in 1997. 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 $866.5 million in
1998 and $752.3 million in 1997.
(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 $4.3 billion at December 31, 1998 ($0.7
billion of which related to interest rate swaps whose fair market value
represented an asset and $3.6 billion related to interest rate swaps whose
fair market value represented a liability, after adjusting for master
netting agreements) and $3.6 billion at December 31, 1997 ($0.8 billion of
assets and $2.8 billion of liabilities). The notional principal amount of
cross currency interest rate swaps totaled $218.6 million at December 31,
1998 and 1997. The estimated fair values of derivative financial
instruments are obtained from dealer quotes and represent the net amount
receivable or payable to terminate the agreement, taking into account
current market interest rates and counterparty credit risk.
Note 19--Investments in Debt and Equity Securities
The Company has decided to adopt early the provisions of Statement of
Financial Accounting Standards No. 134, "Accounting for Mortgaged-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise" ("SFAS 134"). Among other provisions, SFAS 134
requires that after the securitization of mortgage loans held for sale, an
entity engaged in mortgage banking activities classify the resulting
mortgage-backed securities or other retained interests based on its ability and
intent to sell or hold those investments. At December 31, 1998 and 1997, 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," as amended by SFAS 134, totaled $238.6 million and $233.6 million,
respectively. Included in the 1997 balance is $38.2 million relating to
securitized home equity loans which were classified as trading. Unrealized gains
and losses, representing the difference between carrying value and current fair
market value, were not significant.
Included in the Company's investments in debt and equity securities are
retained interests in securitized assets of $222.8 million at December 31, 1998
and $214.5 million at December 31, 1997. Retained interests include
interest-only receivables, retained subordinated securities, and cash reserve
accounts related to fifteen securitizations from 1992 through 1998. The carrying
value of the retained interests in securitized assets is reviewed periodically
for valuation impairment.
Ranges of key economic assumptions used in calculating the fair value of
the retained interests in securitized assets by type of product at December 31,
1998 were as follows:
<TABLE>
<CAPTION>
Manufactured Recreation Home Recreational
Housing Vehicle Equity Boat
-------------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Prepayment speed ..................... 225%-290%(1) 21.5%-24.4%(2) 23.6%-29.9%(2)(3) 21.0%-21.5%(2)(3)
Expected credit losses (4) ........... 0.90%-1.75% 0.21%-1.15% 0.87%-0.95% 0.71%-0.92%
Weighted average discount rate ....... 8.00% 8.00% 12.00% 8.50%
</TABLE>
- --------------------------------------------------------------------------------
(1) Based upon MHP, prepayment ramp commonly used in the manufactured housing
sector. MHP assumes a CPR (constant prepayment rate) for a newly
originated loan equal to 3.7% in month one, increasing to 6% in month 24,
then remaining constant at 6%.
(2) Based upon CPR. CPR expresses prepayments as a function of the declining
amount of loans at a compound annual rate.
(3) Implied cumulative remaining CPR based upon prepayment ramps developed for
each individual collateral pool.
(4) Annualized rate based upon average outstanding loan balances.
53
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1998 and December 31, 1997, the Company's credit line
coverage with 53 banks totaled $5.0 billion of committed facilities. DKB was a
committed bank under a $1.2 billion revolving credit facility and a $3.7 billion
revolving credit facility with commitments of $67.5 million and $210.0 million,
respectively, at December 31, 1998, and with commitments of $71.2 million and
$213.8 million, respectively, at December 31, 1997. Additional information
regarding these credit lines can be found in Note 6--Debt.
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. The notional principal amount
outstanding on interest rate swap agreements with DKB totaled $220.0 million at
both December 31, 1998 and 1997. The notional principal amount outstanding on
foreign currency swaps with DKB totaled $168.6 million at year-end 1998 and
1997, respectively.
The Company has entered into leveraged leasing arrangements with third
party loan participants, including affiliates of DKB. Amounts owed to affiliates
of DKB are discussed in Note 3--Finance Receivables.
At December 31, 1998 and 1997, the Company had entered into credit-related
commitments with DKB in the form of letters of credit totaling $12.2 million and
$15.2 million, respectively, equal to the amount of the single lump sum premium
necessary to provide group life insurance coverage to certain eligible retired
employees and an amount to fund certain overseas finance receivables.
The Company has entered into cash collateral loan agreements with DKB
pursuant to which DKB made four loans to 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 recreation vehicle and recreational marine finance
receivables. During 1998, the Company replaced DKB's position in two cash
collateral loan agreements with a total payment made to DKB of $5.9 million. At
December 31, 1998 and 1997, the principal amount outstanding on the cash
collateral loans with DKB was $34.3 million and $45.8 million, respectively.
Prior to November 1997, Chase had owned 20% of the Company. At December
31, 1997, Chase was both the agent and a committed bank under the $1.2 billion
revolving credit facility and $3.7 billion revolving credit facility referred to
above, with commitments of $63.8 million and $191.2 million, respectively.
The Company has entered into interest rate and cross currency swap
agreements with Chase acting as principle counterparties. At December 31, 1997,
the notional principal outstanding on interest rate swap agreements with Chase
totaled $475.0 million.
At December 31, 1997, the Company held a $9.0 million letter of credit
from Chase as additional collateral on a $20.8 million business aircraft loan to
a third party. Chase was also indebted to the Company in the amount of $6.7
million for financing relating to the purchase of a business aircraft by Chase,
at December 31, 1997.
The Company has also entered into various noncancellable long-term
facility lease agreements with Chase. Rental expense paid to Chase totaled $0.5
million in 1997.
During 1997, the Company purchased finance receivables totaling $39.6
million from Chase, and 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.
54
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 21--Business Segment Information
In 1998, the Company adopted SFAS 131. The prior years' segment
information has been restated to conform to the current presentation.
Management's Policy in Identifying Reportable Segments
The Company's reportable segments are comprised of strategic business
units aggregated into segments based upon the commonality of their products,
customers, distribution methods, operations and servicing, and the nature of
their regulatory environment.
Types of Products and Services
CIT has three reportable segments, Equipment Financing and Leasing,
Commercial Finance and Consumer. Equipment Financing and Leasing offers secured
lending and leasing products to midsize and larger companies across a variety of
industries including aerospace, construction, rail, machine tool, business
aircraft, technology, manufacturing, and transportation. The Commercial Finance
segment offers secured lending and receivables collection/management products to
small and midsize companies. These include secured revolving lines of credit and
term loans, credit protection, accounts receivable collection, import and export
financing and factoring, and debtor-in-possession and turnaround financing. The
Company's Consumer segment offers retail installment sale products to consumers
focused primarily on home equity and retail sales financing secured by
recreation vehicles, manufactured housing and recreational boats.
Segment Profit and Assets
The accounting policies of the segments are the same as those described in
the Summary of Significant Accounting Policies. Since the Company generates a
majority of its revenue from interest, fees, and asset gains, management relies
primarily on net revenues to assess the performance of the segment. The Company
evaluates segment performance based on profit after income taxes, as well as
asset growth, credit risk management, and other factors. The Company considers
significant long lived assets as equipment on operating lease.
55
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents reportable segment information and the
reconciliation of segment balances to the consolidated financial statement total
as of December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Equipment
Financing Commercial Total Corporate Consolidated
and Leasing Finance Consumer Segments and Other Total
----------- ---------- -------- -------- --------- ------------
Dollars in Millions
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998
Operating revenue .................. $ 616.8 $ 348.7 $ 222.4 $ 1,187.9 $ 41.8 $ 1,229.7
Depreciation on operating leases ... 169.5 -- -- 169.5 -- 169.5
Income taxes ....................... 93.3 84.7 27.2 205.2 (20.2) 185.0
Net income ......................... 193.9 119.1 44.3 357.3 (18.5) 338.8
Total managed assets. .............. 13,367.0 4,996.2 7,771.2 26,134.4 81.9 26,216.3
Expenditures for operating leases .. 1,101.7 -- -- 1,101.7 -- 1,101.7
December 31, 1997
Operating revenue .................. 561.6 343.5 210.9 1,116.0 77.3 1,193.3
Depreciation on operating leases ... 146.8 -- -- 146.8 -- 146.8
Income taxes ....................... 82.9 83.4 31.6 197.9 (19.9) 178.0
Net income ......................... 163.4 112.7 49.6 325.7 (15.6) 310.1
Total managed assets. .............. 11,709.7 4,250.8 6,318.6 22,279.1 65.8 22,344.9
Expenditures for operating leases .. 802.8 -- -- 802.8 -- 802.8
December 31, 1996
Operating revenue .................. 510.5 346.0 169.0 1,025.5 16.5 1,042.0
Depreciation on operating leases ... 121.7 -- -- 121.7 -- 121.7
Income taxes ....................... 69.1 84.5 26.4 180.0 (24.3) 155.7
Net income ......................... 145.4 109.6 40.1 295.1 (35.0) 260.1
Total managed assets. .............. 11,321.6 3,838.1 4,792.7 19,952.4 53.0 20,005.4
Expenditures for operating leases .. 431.2 -- -- 431.2 -- 431.2
</TABLE>
Revenues derived from United States based financing and leasing assets
were $2,129.9 million, $2,001.6 million, and $1,788.6 million for the years
ending December 31, 1998, 1997 and 1996, respectively. Revenues derived from
foreign based financing and leasing assets were $140.6 million, $128.9 million,
and $101.7 million for the years ending December 31, 1998, 1997, and 1996,
respectively.
United States based operating lease equipment, net, was $1,960.7 million,
$1,397.5 million, and $1,107.9 million at December 31, 1998, 1997, and 1996,
respectively. Foreign based operating lease equipment, net, was $813.4 million,
$508.1 million, and $294.2 million at December 31, 1998, 1997, and 1996,
respectively.
56
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 22--Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
1998
----------------------------------------------------------
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 ............................ $228.0 $240.4 $246.8 $259.1 $974.3
Fees and other income ......................... 66.4 60.7 69.0 59.3 255.4
Salaries and general operating expenses ....... 101.7 104.0 105.3 106.8 417.8
Provision for credit losses ................... 22.5 21.9 30.6 24.4 99.4
Depreciation on operating lease equipment ..... 38.3 40.4 42.7 48.1 169.5
Minority interest in subsidiary trust
holding solely debentures of the Company ... 4.8 4.8 4.8 4.8 19.2
Provision for income taxes .................... 45.4 46.3 46.3 47.0 185.0
Net income .................................... $ 81.7 $ 83.7 $ 86.1 $ 87.3 $338.8
Net income per diluted share .................. $ 0.50 $ 0.51 $ 0.53 $ 0.54 $ 2.08
<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
</TABLE>
Note 23--Subsequent Event (Unaudited)
On March 8, 1999, the Company announced that it would acquire Newcourt
Credit Group, Inc. ("Newcourt") in an exchange of common stock. Under the terms
of the transaction, which will be accounted for on a purchase basis, 0.92 shares
of the Company's common stock will be exchanged for each outstanding share of
Newcourt common stock. The transaction is expected to close during the third
quarter of 1999, and is conditioned upon, among other things, regulatory and
shareholder approval.
Newcourt is headquartered in Toronto, Canada and its stock is traded on
the New York, Toronto, and Montreal Stock Exchanges.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
57
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
Board of Directors
We list below the names and ages, followed by a biographical summary, of
all members of our Board of Directors as of March 15, 1999. This information was
given to us by each Director. No family relationship exists among these persons.
Certain Directors are also directors or trustees of privately held businesses or
not-for-profit entities that are not referred to below.
Name Age Current Position/Offices
- ---- --- ------------------------
Hisao Kobayashi ............ 63 Senior Advisor, DKB
Chairman of the Board of Directors of CIT
Albert R. Gamper, Jr. (1) .. 57 President & Chief Executive Officer of CIT
Daniel P. Amos ............. 47 President and Chief Executive Officer of
AFLAC Incorporated and American Family Life
Assurance Company of Columbus
Yoshiro Aoki ............... 53 Managing Director and General Manager,
New York Branch, DKB
Anthea Disney .............. 52 Chairman and Chief Executive Officer of News
America Publishing Group
Takasuke Kaneko ............ 56 Deputy President, DKB
Joseph A. Pollicino (1) .... 59 Vice Chairman of CIT
Paul N. Roth ............... 59 Partner, Schulte Roth & Zabel LLP
Peter J. Tobin ............. 55 Dean, College of Business Administration,
St. John's University
Tohru Tonoike (1) .......... 48 Senior Executive Vice President of CIT
Alan F. White .............. 61 Senior Associate Dean, Massachusetts
Institute of Technology, Alfred P. Sloan
School of Management
- --------------------------------------------------------------------------------
(1) Messrs. Gamper, Pollicino, and Tonoike, who are listed above as Directors,
are also Executive Officers of CIT.
Hisao Kobayashi has served as a Director of CIT since December 1989 and as
Chairman of the Board of Directors since July 1992. Since May 1995, Mr.
Kobayashi has served as a Senior Advisor of DKB, where he had been an employee
since 1959. Prior to his appointment as a Senior Advisor, Mr. Kobayashi served
in a number of executive positions at DKB, including most recently as Senior
Managing Director from May 1993 and Managing Director from June 1991. Mr.
Kobayashi is a director of AFLAC Incorporated, a life insurance company, and
Nippon Light Metal Co., Limited, a Japanese corporation.
Albert R. Gamper, Jr. has served as President and Chief Executive Officer
since December 1989 and as a Director since May 1984. From May 1987 to December
1989, Mr. Gamper served as Chairman and Chief Executive Officer. Prior to
December 1989, Mr. Gamper also held a number of executive positions at
Manufacturers Hanover Corporation, where he had been employed since 1962.
Daniel P. Amos has served as a Director of CIT since January 1998. Mr.
Amos has served as President and Chief Executive Officer of AFLAC Incorporated,
a life insurance company, and of its principal subsidiary, American Family Life
Assurance Company of Columbus, since August 1990. Mr. Amos is a director of
AFLAC Incorporated and Georgia Power Company.
Yoshiro Aoki has served as a Director of CIT since July 1997. Mr. Aoki has
been Managing Director and General Manager of the New York Branch of DKB since
May 1998, Director and General Manager of the New York Branch since June 1997,
and General Manager of the New York Branch since May 1997. Prior to such time,
Mr. Aoki served as General Manager of the Kabutocho Branch of DKB since May 1995
and as Assistant General Manager of the Personnel Division of DKB since February
1991.
Anthea Disney has served as Director of CIT since December 1998. Ms.
Disney has served as Chairman and Chief Executive Officer of News America
Publishing Group, a division of News Corporation Ltd., since October 1997. Ms.
Disney has held a number of other positions with News Corporation Ltd. since
1973, including President and Chief Executive Officer of Harper Collins
Publishers and Editor-in-Chief of I-Guide.
58
<PAGE>
Takasuke Kaneko has served as a Director of CIT since June 1995. He also
was a Director and Senior Executive Vice President of CIT from December 1989 to
May 1993. Mr. Kaneko is Deputy President of DKB, a position he has held since
June 1997. Previously, Mr. Kaneko served as Senior Managing Director of DKB from
May 1997 and as Managing Director since May 1995. Prior to such time, Mr. Kaneko
served in a number of other positions at DKB, including Director and General
Manager of the International Planning and Coordination Division since August
1994, Director and General Manager of the International Planning Division since
June 1994 and General Manager of the International Finance Division since May
1993.
Joseph A. Pollicino has served as a Director of CIT since August 1986 and
as Vice Chairman of its Board of Directors since December 1989. Prior to
December 1989, Mr. Pollicino held a number of executive positions at CIT and at
Manufacturers Hanover Corporation, where he had been employed since 1957.
Paul N. Roth has served as a Director of CIT since December 1989. Mr. Roth
has been a partner in the New York law firm of Schulte Roth & Zabel LLP since it
was founded in 1969.
Peter J. Tobin has served as a Director of CIT since May 1984. Mr. Tobin
has been Dean of the College of Business Administration at St. John's University
since August 1998. From April 1996 to December 1997, Mr. Tobin was the Chief
Financial Officer of The Chase Manhattan Corporation. From January 1992 to April
1996, Mr. Tobin served as Chief Financial Officer of both Chemical Bank and
Chemical Banking Corporation, and prior to that he served in a number of
executive positions at Manufacturers Hanover Corporation.
Tohru Tonoike has served as Senior Executive Vice President and as a
Director of CIT since April 1997. Prior to April 1997, Mr. Tonoike was employed
by DKB since April 1973, where he served in a number of executive positions
including, most recently, Head of the Americas Office in the International
Planning and Coordination Division since September 1996, Assistant General
Manager of Corporate Finance Division I since September 1993 and Head of the CIT
Office in the Americas Division since October 1992.
Alan F. White has served as a Director of CIT since March 1998. Mr. White
has served as Senior Associate Dean of the Alfred P. Sloan School of Management,
Massachusetts Institute of Technology, since 1991. Mr. White has held a number
of other positions with the Sloan School of Management since 1973, including
responsibility for MIT programs in Asia, Europe, and Latin America and Director
of Executive Education at MIT. He is a director of SBS Technologies, Inc. and
Celerity Solutions, Inc.
Executive Officers
We list the names and ages and provide a biographical summary below of all
of our executive officers, in addition to Messrs. Gamper, Pollicino and Tonoike,
who are listed above as Directors, as of March 15, 1999. No family relationship
exists among our executive officers or with any Director. The executive officers
were appointed by and hold office at the discretion of the Board of Directors.
Name Age Current Position/Offices (1)
- ---- --- ----------------------------
Joseph M. Leone ........ 45 Executive Vice President and Chief Financial
Officer
William M. O'Grady ..... 59 Executive Vice President - Administration
Ernest D. Stein ........ 59 Executive Vice President, General Counsel and
Secretary
- --------------------------------------------------------------------------------
(1) Certain Executive Officers are also directors or trustees of privately
held or not-for-profit organizations that are not discussed below.
Joseph M. Leone has served as our Executive Vice President and Chief
Financial Officer since July 1995. Previously, Mr. Leone served as Executive
Vice President of Sales Financing, a business unit of CIT, from June 1991, and
in a number of other executive positions with CIT and Manufacturers Hanover
Corporation since May 1982.
William M. O'Grady has served as our Executive Vice President of
Administration since January 1986 and previously served in a number of other
executive positions with CIT and with RCA Corporation, a prior owner of CIT,
from July 1965.
Ernest D. Stein has served as our Executive Vice President, General
Counsel and Secretary since February 1994. Previously, Mr. Stein served as
Senior Vice President and Deputy General Counsel since April 1993, as Senior
Vice President and Assistant General Counsel since March 1992, and in a number
of executive positions with Manufacturers Hanover Corporation, including
Executive Vice President and General Counsel since December 1985.
59
<PAGE>
Item 11. Executive Compensation.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Compensation of Directors
Directors who are not employees or officers of DKB or CIT or of any
subsidiary of either of them are paid an annual Board membership fee of $30,000,
an attendance fee of $1,000 for each meeting of the Board of Directors, and an
annual membership fee of $5,000 for service on any committee of the Board of
Directors. In addition, such Directors are eligible for grants under our
Long-Term Equity Compensation Plan.
Executive Compensation
The table below sets forth the annual and long-term compensation,
including bonuses and deferred compensation, of Messrs. Gamper, Pollicino,
Leone, O'Grady, and Stein (the "Named Executive Officers") for services rendered
in all capacities to CIT during the fiscal years ended December 31, 1998, 1997,
and 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term Compensation
----------------------------------------------
Annual Compensation Payouts
------------------------------------------ ----------------------------------
Other
Annual Restricted Securities All Other
Name and Compen- Stock Underlying LTIP Compen-
Principal Positions Year Salary Bonus(1) sation(2) Awards(3) Options(4) Payouts(5) sation (6)
------------------- ---- ------ -------- --------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Albert R. Gamper, Jr. .. 1998 $663,471 $467,500 $37,778 $584,394 0 0 $32,939
President and Chief 1997 $632,320 $845,000 $79,531 $3,400,000 619,200 $4,122,261 $79,697
Executive Officer 1996 $600,002 $785,000 $74,319 $0 0 $ 722,369 $30,000
Joseph A. Pollicino .... 1998 $482,127 $312,500 $23,333 $390,645 0 0 $25,685
Vice Chairman 1997 $461,560 $580,000 $47,720 $2,100,000 337,800 $2,533,400 $24,795
1996 $439,998 $550,000 $44,775 $0 0 $ 433,400 $23,600
Joseph M. Leone ........ 1998 $237,000 $120,000 $7,813 $150,023 0 0 $15,880
Executive Vice 1997 $212,962 $200,000 $18,579 $703,150 114,600 $ 829,486 $14,851
President and Chief 1996 $203,231 $170,000 $11,109 $0 0 $ 126,444 $14,129
Financial Officer
William M. O'Grady ..... 1998 $240,000 $100,000 $7,051 $125,014 0 0 $16,000
Executive Vice 1997 $220,769 $175,000 $16,826 $634,550 108,700 $ 742,900 $15,164
President 1996 $209,769 $150,000 $ 9,801 $0 0 $ 108,350 $14,391
Administration
Ernest D. Stein ........ 1998 $220,000 $75,000 $5,145 $93,777 0 0 $15,200
Executive Vice 1997 $200,769 $130,000 $12,461 $463,050 79,200 $ 538,895 $14,364
President, General 1996 $192,692 $115,000 $ 6,744 $0 0 $ 75,845 $13,708
Counsel and Secretary
</TABLE>
- --------------------------------------------------------------------------------
(1) The amounts shown in the Bonus column for 1998 represent the cash amounts
paid under CIT's annual bonus plan. All Named Executive Officers elected
to receive 50% (the maximum allowable amount) of their bonus for 1998 in
restricted stock rather than cash. Pursuant to the ECP, executive officers
may elect to receive some or all of their annual bonus plan awards in
common stock rather than cash. The restricted stock awarded included a 25%
premium in recognition of the election to forego cash compensation. The
shares awarded will vest annually in one-third increments commencing in
January 2000. For all Named Executive Officers, the amounts shown in the
Restricted Stock Awards column for 1998 represent the fair market value on
January 28, 1999 (the date of the grant) of the shares of Class A Common
Stock awarded at $32.4375 per share. CIT will pay dividends on the
restricted stock awarded to each Named Executive Officer to the extent and
on the same basis as paid to all other stockholders.
(2) The payments set forth in 1998 under Other Annual Compensation represents
the dividends paid on restricted stock awarded in 1997. The shares issued
in 1997 were as follows: Mr. Gamper - 125,926 shares; Mr. Pollicino -
77,778 shares; Mr. Leone - 26,043 shares; Mr. O'Grady - 23,502 shares; and
Mr. Stein - 17,150 shares. Compensation reported for 1997 and 1996
includes dividends paid under The CIT Group Holdings, Inc. Career
Incentive Plan (the "CIT Career Incentive Plan"). For the performance
period 1993-
60
<PAGE>
1995, Mr. Gamper was awarded 20,000 phantom shares, Mr. Pollicino was
awarded 12,000 phantom shares, Mr. Leone was awarded 3,500 phantom shares,
Mr. O'Grady was awarded 3,000 phantom shares and Mr. Stein was awarded
2,100 phantom shares. The shares awarded for the performance period 1993 -
1995 were vested in one-third increments commencing January 1996. For the
performance period 1996 - 1998 under the CIT Career Incentive Plan, Mr.
Gamper was awarded 20,000 phantom shares, Mr. Pollicino was awarded 12,000
phantom shares, Mr. Leone was awarded 4,100 phantom shares, Mr. O'Grady
was awarded 3,700 phantom shares and Mr. Stein was awarded 2,700 phantom
shares. We terminated the CIT Career Incentive Plan in conjunction with
our initial public offering in 1997.
(3) The number and value at December 31, 1998 of restricted stock awarded in
1997 based upon the closing market price of $31.8125 per share for CIT's
Class A Common Stock was as follows: Mr. Gamper - 125,926 shares
($4,006,021); Mr. Pollicino - 77,778 Shares ($2,474,313); Mr. Leone -
26,043 shares ($828,493); Mr. O'Grady - 23,502 ($747,657); and Mr. Stein -
17,150 ($545,584).
(4) Stock options to purchase Class A Common Stock awarded under the ECP.
(5) The payments set forth under LTIP Payouts represent the payout of shares
vested under the CIT Career Incentive Plan. The payouts in 1996 and 1997
were for shares awarded for the performance period 1993 - 1995. Also
included under LTIP Payouts for 1997 is the one-time cash payout related
to the termination of the CIT Career Incentive Plan for the 1996 - 1998
performance period.
(6) The payments set forth under "All Other Compensation" include the matching
employer contribution to each participant's account and the employer
flexible retirement contribution to each participant's flexible retirement
account under The CIT Group Holdings, Inc. Savings Incentive Plan (the
"CIT Savings Plan"). We made the matching employer contribution pursuant
to a compensation deferral feature of the CIT Savings Plan under Section
401(k) of the Internal Revenue Code of 1986. Each of the Named Executive
Officers received a contribution of $6,400 under the employer match and a
contribution of $6,400 under the employer flexible retirement account. The
payments set forth under "All Other Compensation" also included
contributions to each participant's account under The CIT Group Holdings,
Inc. Supplemental Savings Plan ("the "CIT Supplemental Savings Plan"),
which is an unfunded non-qualified plan. For 1998, they are as follows:
Mr. Gamper - $20,139, Mr. Pollicino - $12,885, Mr Leone - $3,080, Mr.
O'Grady - $3,200 and Mr. Stein - $2,400. In 1997, Mr. Gamper received
payments designed to cover the 1.45% Medicare tax liability created by
vesting in our deferred retirement benefits.
Stock Option Awards During 1998
Stock options and other rights related to Class A Common Stock may be
awarded to executives under the ECP. There were no stock options awarded to the
Named Executive Officers in 1998. The following table gives additional
information on options exercised in 1998 by the Named Executive Officers and on
the number and value of options held by the Named Executive Officers at December
31, 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of
Securities Value
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
12/31/98 12/31/98
Shares ------------- -------------
Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
---- ----------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Albert R. Gamper, Jr. ......... 0 $0 117,933/501,267 $567,553/$2,412,347
President and Chief
Executive Officer
Joseph A. Pollicino ........... 0 $0 64,333/273,467 $309,603/$1,316,060
Vice Chairman
Joseph M. Leone ............... 0 $0 19,333/95,267 $93,040/$458,472
Executive Vice President
and Chief Financial Officer
William M. O'Grady ............ 0 $0 18,033/90,667 $86,784/$436,335
Executive Vice President
Administration
Ernest D. Stein ............... 0 $0 13,133/66,067 $63,203/$317,947
Executive Vice President,
General Counsel and
Secretary
</TABLE>
61
<PAGE>
The options reported are non-qualified stock options to purchase shares of
Class A Common Stock awarded under the ECP. The exercise price of the options is
$27.00 per share and the closing trading price on the NYSE of Class A Common
Stock at December 31, 1998 was $31.8125.
Benefit Plans
Employee Stock Purchase Plan
Subject to approval by the stockholders, the Board of Directors has
adopted The CIT Group, Inc. Employee Stock Purchase Plan (the "ESPP"), which
offers our employees the opportunity to purchase Class A Common Stock at a
discount through payroll deductions. The ESPP is intended to meet the
requirements of Section 423 of the Code. All of our regular full-time and
part-time employees are eligible to participate in the ESPP beginning with the
first Offering Period that starts following their employment. Employees desiring
to purchase stock through the ESPP may elect to contribute 1% to 10% in any
payroll period. These payroll deductions accumulate during the three-month
"Offering Period". At the end of each Offering Period, the payroll deductions
are used to purchase Class A Common Stock at a price equal to 85% of the lower
of the fair market value of the Class A Common Stock at the beginning or end of
the Offering Period. (Prior to the amendment of the ESPP on January 28, 1999,
effective for the Offering Period commencing on October 1, 1998, the option
price per share equaled 85% of the fair market value of a share of Common Stock
on the last day of the Offering Period, and effective for the Offering Period
commencing on January 1, 1999, the option price per share equaled the lesser of
(i) 85% of the fair market value of a share of Common Stock on January 28, 1999
or (ii) 85% of the fair market value of a share of Common Stock on the last
business day of the Offering Period.) An employee will recognize no taxable
income or gain until he or she sells the Class A Common Stock and, if the
employee meets certain holding period requirements, he or she will also be
entitled to favorable tax treatment upon such sale.
We will use either treasury shares, authorized but unissued shares, or
publicly traded shares to satisfy purchases under the ESPP. The adoption of the
ESPP by the stockholders of CIT is the subject of Proposal 3.
Retirement Plans
Effective January 1, 1990, The CIT Group Holdings, Inc. Retirement Plan
(the "CIT Retirement Plan") was established. Assets necessary to fund the CIT
Retirement Plan were transferred from the MHC Retirement Plan, Inc. (the "MHC
Retirement Plan"), the predecessor plan in which our employees participated.
Accumulated years of benefit service under the MHC Retirement Plan are included
in the benefits formula of the CIT Retirement Plan, which covers officers and
salaried employees who have one year of service and have attained age 21.
Subject to certain exceptions, at the normal retirement age of 65, an
employee's pension is 1.25% of final average salary, as defined below, for each
of the first 20 years of benefit service as a participant and 0.75% of such
salary for each year of the next 20 years of benefit service. In general, an
employee who was a participant in the MHC Retirement Plan before 1985 will
receive a pension of not less than 2.0% of final average salary for each of the
first 20 years of benefit service as a participant and 1.0% of such salary for
each of the next 20 years of benefit service, reduced by 0.4% of the
participant's covered compensation for each year of such benefit service up to a
maximum of 35 years and further reduced by the value of certain benefits under
the CIT Savings Plan. An employee who was a participant in the former CIT
Retirement Plan on June 30, 1986 will not receive a pension of less than 1.1% of
final average salary up to certain Social Security limits plus 1.5% of final
average salary in excess of the Social Security limits, for each year of benefit
service to a maximum of 35 years, reduced by certain benefits under the CIT
Savings Plan. "Final average salary" is the highest average salary received in
any five consecutive years in the last ten years. "Salary" includes all wages
paid by CIT, including before-tax contributions made to the CIT Savings Plan and
salary reduction contributions pursuant to any Section 125 Plan, but excluding
commissions, bonuses, incentive compensation, overtime, reimbursement of
expenses, directors' fees, severance pay and deferred compensation. This salary
is comparable to the "Salary" shown in the Summary Compensation Table. After
completing five years of service, an employee whose employment with CIT has
terminated is entitled to a benefit, as of the employee's normal retirement
date, equal to the benefit earned to the date of termination of employment, or
an actuarially reduced benefit commencing at any time after age 55 if the
participant is eligible for early retirement under the CIT Retirement Plan.
Certain death benefits are available to eligible surviving spouses of
participants.
62
<PAGE>
Since various laws and regulations set limits on the amounts allocable to
a participant under the CIT Savings Plan and benefits under the CIT Retirement
Plan, we have established the CIT Supplemental Retirement Plan. The CIT
Supplemental Retirement Plan provides retirement benefits on an unfunded basis
to participants who retire from CIT (whose benefits under the CIT Retirement
Plan would be restricted by the limits) of an amount equal to the difference
between the annual retirement benefits permitted and the amount that would have
been paid but for the limitations imposed.
The amounts set forth in the table are the amounts which would be paid to
employees hired before 1985 pursuant to the CIT Retirement Plan and the CIT
Supplemental Retirement Plan at a participants' normal retirement age assuming
the indicated final average salary and the indicated years of benefit service
and assuming that the straight life annuity form of benefit will be elected and
that CIT Supplemental Retirement Plan benefits will be paid in the form of an
annuity. The amounts may be overstated to the extent that they do not reflect
the reduction for any benefits under the CIT Savings Plan.
PENSION PLAN TABLE
Annual Benefits Based on Years of Credited Service (1)
------------------------------------------------------
Final
Average
Salary of
Employee 15 20 25 30 35 40
- --------- -- -- -- -- -- --
150,000 43,016 57,355 64,194 71,033 77,872 85,372
200,000 58,016 77,355 86,694 96,033 105,372 115,372
250,000 73,016 97,355 109,194 121,033 132,872 145,372
300,000 88,016 117,355 131,694 146,033 160,372 175,372
350,000 103,016 137,355 154,194 171,033 187,872 205,372
400,000 118,016 157,355 176,694 196,033 215,372 235,372
450,000 133,016 177,355 199,194 221,033 242,872 265,372
500,000 148,016 197,355 221,694 246,033 270,372 295,372
550,000 163,016 217,355 244,194 271,033 297,872 325,372
600,000 178,016 237,355 266,694 296,033 325,372 355,372
650,000 193,016 257,355 289,194 321,033 352,872 385,372
700,000 208,016 277,355 311,694 346,033 380,372 415,372
750,000 223,016 297,355 334,194 371,033 407,872 445,372
800,000 238,016 317,355 356,694 396,033 435,372 475,372
- --------------------------------------------------------------------------------
(1) At December 31, 1998, Messrs. Gamper, Pollicino, Leone, O'Grady and Stein
had 31, 34, 14, 29 and 5 years of benefit service respectively.
Executive Retirement Plan
The Named Executive Officers are participants under the Executive
Retirement Plan. The benefit provided is life insurance equal to approximately
three times salary during such participant's employment, with a life annuity
option payable monthly by CIT upon retirement. The participant pays a portion of
the annual premium and we pay the balance on behalf of the participant. We are
entitled to recoup our payments from the proceeds of the policy in excess of the
death benefit. Upon the participant's retirement, a life annuity will be payable
out of our current income and we anticipate recovering the cost of the life
annuity out of the proceeds of the life insurance policy payable upon the death
of the participant.
In addition to the table of pension benefits shown above, we are
conditionally obligated to make annual payments under the Executive Retirement
Plan in the amounts indicated to the Named Executive Officers at retirement: Mr.
Gamper, $403,130, Mr. Pollicino, $255,642, Mr. Leone, $155,392, Mr. O'Grady,
$120,053, and Mr. Stein, $72,351.
Compensation Committee Interlocks and Insider Participation
There are no interlocking relationships between any member of the
Compensation Committee and any of our executive officers that would require
disclosure under the rules of the Securities and Exchange Commission. The
Compensation Committee consists entirely of independent, non-employee directors.
63
<PAGE>
Employment Agreements
Messrs. Gamper and Pollicino have employment agreements with CIT that
extend until December 31, 1999. Mr. Gamper's agreement provides that he will
serve as the Chief Executive Officer and President. Mr. Pollicino's agreement
provides that he will serve as the Vice Chairman. Each will serve as a member of
our Board of Directors. The agreements provide for the payment of an annual base
salary of not less than the amount that each received prior to the date of his
last extension on April 1, 1997. Pursuant to their employment agreements, each
individual's base salary and performance is reviewed by the Board of Directors
during the term of the agreement pursuant to our normal practices, subject to
increases but not to decreases. The employment agreements provide for
participation in all executive bonus and incentive compensation plans.
Mr. Leone, Mr. O'Grady, and Mr. Stein also have employment agreements with
CIT that extend until December 31, 2000. Mr. Leone's, Mr. O'Grady's, and Mr.
Stein's respective agreements provide for the payment of an annual base salary
of not less than the amount received prior to the date of their last extension
on November 1, 1998, to be reviewed by the Chief Executive Officer or his
designee pursuant to our normal practices, subject to increases but not to
decreases. The employment agreements also provide for participation in all
executive bonus and incentive compensation plans.
Termination And Change-In-Control Arrangements
Mr. Gamper's and Mr. Pollicino's employment agreements with CIT provide
that if their employment is terminated "without Cause" (as defined in the
agreement), or if they resign for "Good Reason" (as defined in the agreement)
they will be entitled to receive severance payments equal to their base salary
for thirty-six months provided that they do not violate the confidentiality or
non-competition provisions of the agreement (the latter of which, subject to
certain exceptions, extend for up to two years from the date of termination of
employment), in which case we would have no obligation to make any remaining
payments. Further, they will be entitled to receive, among other things, all
previously earned and accrued entitlements and benefits of CIT, full employee
welfare benefit coverage, outplacement services, any awards due under the ECP,
and all benefits payable under our Executive Benefits Program.
Each of the employment agreements of Mr. Leone, Mr. O'Grady, and Mr. Stein
provide that if his employment is terminated "without Cause" (as defined in the
agreement) or if he resigns for "Good Reason" (as defined in the agreement), he
will be entitled to receive severance payments equal to two times his total cash
compensation (as defined in the agreement) provided that he does not violate the
confidentiality or non-competition provisions of the agreement, in which case we
would have no obligation to make any remaining payments. The severance payments
are reduced by any "special payment" received. Further, upon such termination or
resignation, he will be entitled to all previously earned and accrued
entitlements and benefits, continued employee welfare benefit coverage for 24
months, two years benefit service and age credit for purposes of calculating
benefits under CIT's Retirement Plan and Executive Retirement Plan (as defined
in the agreement), outplacement services, any awards due under the ECP, and all
benefits payable under our Executive Benefits Program.
If CIT terminates Messrs. Gamper, Pollicino , Leone, O'Grady, or Stein for
Cause, or if they terminate their employment for any reason other than Good
Reason, they will be entitled to all previously earned and accrued entitlements
and benefits of CIT.
If, during the term of Mr. Gamper's and Mr. Pollicino's employment
agreements, a "Change of Control" (as defined in the agreement) occurs on or
prior to December 31, 1999, they each will be entitled to receive a "special
payment". With respect to Mr. Gamper, the amount of such a special payment shall
equal the sum of his prior four years annual bonuses under the CIT Bonus Plan,
and with respect to Mr. Pollicino, the amount of such special payment shall
equal the sum of his prior three years annual bonuses under the CIT Bonus Plan.
Notwithstanding the foregoing provision, the special payments shall be
forfeited if during the one-year period following the date of a Change of
Control: (i) their employment is involuntarily terminated by CIT for cause; (ii)
they voluntarily terminate employment with CIT for any reason other than good
reason; or (iii) they breach any non-compete or confidentiality covenant
contained in their employment agreements.
64
<PAGE>
In the event of a Change of Control during the term of employment, Mr.
Gamper and Mr. Pollicino may elect, on 90 days' notice, to terminate their
employment and have such termination deemed "Good Reason" upon the anniversary
of the Change of Control. In the event the first anniversary of such a Change of
Control occurs after the end of the term, the term shall be extended to the
first anniversary of the Change of Control.
If a Change of Control occurs on or prior to December 31, 2000, Mr. Leone,
Mr. O'Grady, and Mr. Stein will be entitled to receive a "special payment". The
amount of such special payment shall equal the sum of their respective prior two
years annual bonuses under the CIT Bonus Plan. The special payment will be
payable over a two year period. Notwithstanding the above, the special payment
will be forfeited if during the two year period commencing on the date of such
Change of Control (a) their employment is involuntarily terminated by CIT for
cause, (b) they voluntarily terminate employment with CIT for any reason other
than "Good Reason" as defined in their respective employment agreements, or (c)
they breach the non-compete or confidentiality provisions in their agreements.
In addition, if during the term of their respective employment agreements, a
"Change of Control" (as defined in the agreement) occurs, the terms of their
employment agreements are extended until the second anniversary of the Change of
Control.
In the event Messrs. Gamper, Pollicino, Leone, O'Grady, or Stein become
subject to excise taxes under Section 4999 of the Internal Revenue Code, their
employment agreements provide a gross up payment equal to the amount of such
excise taxes.
Under the ECP, if a participant's employment is terminated by CIT, or a
successor to CIT, on or after a Change of Control and prior to the first
anniversary of such Change of Control: (i) all options and SARs, other than
options granted in consideration of the termination of the CIT Career Incentive
Plan or otherwise granted in connection with the initial public offering, held
by the participant, if any, shall become immediately exercisable; (ii) all
restrictions and limitations imposed on restricted stock, other than restricted
stock granted in consideration of the termination of the CIT Career Incentive
Plan or otherwise granted in connection with the initial public offering, held
by the participant, if any, shall lapse. The vesting of all Options and
restricted stock granted in consideration of the termination of the CIT Career
Incentive Plan or otherwise granted in connection with the initial public
offering would be accelerated in the event the participant is terminated on or
after the Change of Control and during the five-year period following the
initial public offering.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
PRINCIPAL SHAREHOLDERS
Security Ownership of Certain Beneficial Owners
The table below shows, as of February 16, 1999, the name and address of
each person known to us that beneficially owns in excess of 5% of any class of
Voting Stock.
<TABLE>
<CAPTION>
Amount and Nature of
Beneficial Ownership
---------------------------------------------
Title of Class Name and Address of Sole Voting and Shared Voting and Percent
of Stock Beneficial Owner Investment Power Investment Power of Class
-------- ---------------- ---------------- ---------------- --------
<S> <C> <C> <C>
Class A Common Stock The Dai-Ichi Kangyo Bank, 71,000,000 0 43.8%
Limited
1-5, Uchisaiwaicho, 1-chome
Chiyoda-ku, Tokyo 100
Japan
Class A Common Stock Wellington Management
Company, LLP 0 10,767,381 6.65%
75 State Street
Boston, MA 02109
</TABLE>
65
<PAGE>
Security Ownership Of Directors And Executive Officers
The table below shows, as of February 16, 1999, the number of shares of
Class A Common Stock owned by each Director, by the Named Executive Officers,
and by the Directors and Named Executive Officers as a group.
Amount and Nature
of Beneficial Ownership Percentage
Name of Individual (Class A Common Stock)(1)(2)(3) of Class
------------------ ------------------------------- --------
Hisao Kobayashi .................... 4,100 *
Albert R. Gamper, Jr. (4) .......... 279,247 *
Daniel P. Amos (5) ................. 107,030 *
Yoshiro Aoki ....................... 0 *
Anthea Disney ...................... 0 *
Takasuke Kaneko .................... 0 *
Joseph A. Pollicino ................ 155,279 *
Paul N. Roth ....................... 9,000 *
Peter J. Tobin ..................... 10,000 *
Tohru Tonoike ...................... 0 *
Alan F. White ...................... 2,366 *
Joseph M. Leone .................... 55,203 *
William M. O'Grady ................. 50,593 *
Ernest D. Stein .................... 43,361 *
All Directors and executive
officers as a group (14 persons) .. 716,179 *
- --------------------------------------------------------------------------------
* Represents less than 1% of the total outstanding Class A Common Stock.
(1) Includes shares of Restricted Stock issued in lieu of cash in connection
with the 1998 CIT Bonus Plan, for which the holders have voting rights,
but for which ownership has not vested, in the following amounts: Mr.
Gamper - 18,016 shares, Mr. Pollicino - 12,043 shares, Mr. Leone - 4,625
shares, Mr. O'Grady - 3,854 shares, and Mr. Stein - 2,891 shares.
(2) Includes shares of Restricted Stock awarded under the Long-Term Equity
Compensation Plan in connection with the termination of The CIT Career
Incentive Plan, for which the holders have voting rights, but for which
ownership has not vested, in the following amounts: Mr. Gamper - 125,926
shares, Mr. Pollicino - 77,778 shares, Mr. Roth - 5,000 shares, Mr. Tobin
- 5,000 shares, Mr. Leone - 26,043 shares, Mr. O'Grady - 23,502 shares,
and Mr. Stein - 17,150 shares.
(3) Includes shares of stock issuable pursuant to stock options awarded under
the Long-Term Equity Compensation Plan that have vested or will vest
within 60 days after March 30, 1999, in the following amounts: Mr. Gamper
- 117,933 shares, Mr. Pollicino - 64,333 shares, Mr. Amos - 1,666 shares,
Mr. White - 1,666 shares, Mr. Leone - 19,333 shares, Mr. O'Grady - 18,033
shares, and Mr. Stein - 13,133 shares.
(4) Includes 1,100 shares owned by Mr. Gamper's daughter and 1,100 shares
owned by Mr. Gamper's son, as to which Mr. Gamper disclaims beneficial
ownership.
(5) Includes 56,464 shares owned by the Daniel P. Amos and Shannon Amos
Foundation, Inc., a Georgia nonprofit corporation, as to which Mr. Amos
disclaims beneficial ownership, and 7,000 shares owned by Lapaul, Inc., a
Georgia corporation, each of which is controlled by Mr. Amos.
Section 16(a) Beneficial Ownership Reporting Compliance
Based on our records and other information, we believe that our Directors
and officers complied with all applicable SEC filing requirements for reporting
beneficial ownership of our equity securities for 1998, except as noted below.
Hisao Kobayashi inadvertently failed to file Form 4 for November 1998 to report
that he purchased 2,000 shares of Class A Common Stock in our Secondary
Offering. Mr. Kobayashi filed a Form 4 to report the purchase in March 1999.
66
<PAGE>
Item 13. Certain Relationships and Related Transactions.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CIT has in the past and may in the future enter into certain transactions
with our affiliates. Such transactions have been, and it is anticipated that
such transactions will continue to be, entered into at a fair market value for
the transaction.
Paul N. Roth, a director of CIT, is a partner of Schulte Roth & Zabel LLP,
which provides legal services to CIT. Schulte Roth & Zabel LLP has been retained
in the past and will continue in the future to serve as outside counsel for DKB.
Relationship with DKB
DKB beneficially owns 71,000,000 shares of Class A Common Stock of CIT,
which represents approximately 43.8% of the outstanding Class A Common Stock.
DKB is our largest stockholder and may be able to exercise significant influence
over the election of the members of our Board of Directors and over our business
and affairs, including any determinations with respect to (i) mergers or other
business combinations involving us, (ii) the acquisition or disposition of
assets by us, (iii) the incurrence of indebtedness by us, (iv) the issuance of
any additional Common Stock or other equity securities, and (v) the payment of
dividends with respect to the Common Stock.
Set forth below are descriptions of certain agreements, relationships and
transactions between CIT and DKB.
Regulatory Compliance Agreement
DKB is subject to U.S. and Japanese banking laws, regulations, guidelines,
and orders that affect permissible activities of CIT. DKB and CIT have entered
into a regulatory compliance agreement (the "Regulatory Compliance Agreement")
in order to facilitate DKB's compliance with applicable U.S. and Japanese
banking laws, or the regulations, interpretations, policies, guidelines,
requests, directives, and orders of the applicable regulatory authorities or the
staffs thereof or a court (collectively, the "Banking Laws"). That Agreement
prohibits us 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. We are
also prohibited from engaging in any activity that would cause DKB, CIT or any
affiliate of DKB or CIT to violate any Banking Laws. If, at any time, it is
determined by DKB that any activity then conducted by us is prohibited by any
Banking Law, we are required to take all reasonable steps to cease such
activity.
Under the terms of the Regulatory Compliance Agreement, DKB is responsible
for making all determinations as to compliance with applicable Banking Laws.
The Regulatory Compliance Agreement expires upon the earlier of the date
on which DKB owns no shares of Common Stock or DKB, in its sole discretion,
requests and obtains an opinion of counsel that (i) DKB will not be required to
receive prior approval from or give notice to or make filings with applicable
regulatory authorities under the Banking Laws as a result of CIT or any of its
subsidiaries engaging in any activity and (ii) DKB and CIT are no longer subject
to the jurisdiction of the Banking Laws with respect to the activities or
transactions in which CIT may engage.
Registration Rights Agreement
DKB and CIT entered into a registration rights agreement (the
"Registration Rights Agreement"), which provides that, upon the request of DKB,
its subsidiaries or certain transferees of Common Stock from DKB or its
subsidiaries (each, a "Qualified Transferee"), we will use our best efforts to
effect the registration under the applicable federal and state securities laws
of any of the shares of Class A Common Stock that DKB may hold or that are
issued or issuable upon conversion of any other security that DKB may hold and
of any other securities issued or issuable in respect of the Class A Common
Stock, in each case for sale in accordance with
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the intended method of disposition of the holder or holders making such demand
for registration, and we will take such other actions as may be necessary to
permit the sale thereof in other jurisdictions, subject to certain specified
limitations. DKB, any of its subsidiaries, or any Qualified Transferee also has
the right, which it may exercise at any time and from time to time, subject to
certain limitations, to include any such shares and other securities in other
registrations of equity securities of CIT initiated by us on our own behalf or
on behalf of our other stockholders. The Company will pay all costs and expenses
in connection with each such registration which DKB, any subsidiary thereof or
any Qualified Transferee initiates or in which any of them participates. CIT
paid such costs and expenses in connection with the Secondary Offering. The
Registration Rights Agreement contains indemnification and contribution
provisions: (i) by DKB and its permitted assigns for our benefit; and (ii) by us
for the benefit of DKB and other persons entitled to effect registrations of
Class A Common Stock (and other securities) pursuant to its terms, and related
persons.
Tax Allocation Agreement
DKB does not include us in its consolidated group for federal income tax
purposes. DKB includes us in its consolidated group for state income tax
purposes only in the State of California. Pursuant to a Tax Allocation
Agreement, dated as of October 23, 1991 (the "Tax Allocation Agreement"), CIT
and certain other subsidiaries of DKB file a consolidated unitary California
franchise tax return and have elected to file that return on a "water's edge"
basis. Under the Tax Allocation Agreement, we are obligated to pay to DKB the
California franchise tax that we would have paid if we were filing on the same
basis we would have filed on had we not entered into the Tax Allocation
Agreement, and our liability cannot exceed the tax liability we would have
incurred had we not entered into the Tax Allocation Agreement. DKB absorbs any
residual cost or benefit of the filing of a consolidated unitary California
franchise tax return.
Other Transactions
At December 31, 1998, our credit line coverage with 53 banks totaled $5.0
billion of committed facilities. At December 31, 1998, DKB was a committed bank
under a $1.2 billion revolving credit facility and a $3.7 billion revolving
credit facility, with commitments of $67.5 million and $210.0 million,
respectively.
We have entered into interest rate swap and cross currency interest rate
swap agreements with financial institutions acting as principal counterparties,
including affiliates of DKB. At December 31, 1998, the notional principal amount
outstanding on interest rate swap agreements with DKB and its affiliates totaled
$220.0 million. The notional principal amount outstanding on foreign currency
swaps totaled $168.6 million with DKB at year-end 1998.
We have entered into leveraged leasing arrangements with third party loan
participants, including affiliates of DKB. Leveraged lease receivables, which
are included in lease receivables on our financial statements, exclude the
portion of lease receivables offset by related nonrecourse debt payable to third
party lenders, including amounts owed to affiliates of DKB that totaled $431.0
million at year-end 1998.
At December 31, 1998, we had entered into credit-related commitments with
DKB in the form of letters of credit totaling $12.2 million, 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.
We have 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. During
1998, we replaced DKB's position in two cash collateral loan agreements with a
total payment made to DKB of $5.9 million. At December 31, 1998, the principal
amount outstanding on the cash collateral loans was $34.3 million.
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PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.
(a) The following documents are filed with the Securities and Exchange
Commission as part of this report:
1. The financial statements of The CIT Group, Inc. and Subsidiaries as
set forth on pages 29-57.
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 Company.
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 November 2,
1998, comparable to the agreements for William M. O'Grady
and Ernest D. Stein.
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. 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).
10.7 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).
10.8 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).
10.9 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).
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10.10 The CIT Group, Inc. Employee Stock Purchase Plan, dated
November 1, 1998.
10.11 Agreement and Plan of Reorganization between The CIT Group,
Inc. and Newcourt Credit Group, Inc., dated as of March 7,
1999 (incorporated by reference to Exhibit 99 to Form 8-K
filed by the Company on March 16, 1999).
12 Computation of Ratios of Earnings to Fixed Charges.
21 Subsidiaries of the Registrant.
23 Consent of KPMG LLP.
24 Powers of Attorney
27 Financial Data Schedule (filed electronically)
(b) A Current Report on Form 8-K, dated October 5, 1998 was filed with the
Securities and Commission reporting the Company's announcement of results for
the quarter ended September 30, 1998, the declaration of a dividend for the
quarter ended September 30, 1998 and the filing of a registration statement with
the Securities and Exchange Commission for 49 million shares of Class A Common
Stock of the Company.
A Current Report on Form 8-K, dated December 2, 1998, was filed with the
Securities and Commission regarding the election of an additional director to
the Board of Directors of the Company.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE CIT GROUP, INC.
By: /S/ ERNEST D. STEIN
-----------------------------------------
Ernest D. Stein
Executive Vice President, General Counsel
and Secretary
March 18, 1999
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.*
- -----------------------------
Albert R. Gamper, Jr.
President, Chief Executive
Officer and Director
(principal executive officer)
HISAO KOBAYASHI*
- ------------------------------
Hisao Kobayashi
Director
DANIEL P. AMOS*
- ------------------------------
Daniel P. Amos
Director
YOSHIRO AOKI*
- ------------------------------
Yoshiro Aoki
Director
- ------------------------------
Anthea Disney
Director
TAKASUKE KANEKO* *By: /s/ ERNEST D. STEIN March 18, 1999
- ------------------------------ -------------------
Takasuke Kaneko Ernest D. Stein
Director Attorney-In-Fact
JOSEPH A. POLLICINO*
- ------------------------------
Joseph A. Pollicino
Director
- ------------------------------
Paul N. Roth
Director
PETER J. TOBIN*
- ------------------------------
Peter J. Tobin
Director
TOHRU TONOIKE*
- ------------------------------
Tohru Tonoike
Director
ALAN F. WHITE*
- ------------------------------
Alan F. White
Director
/s/ Joseph M. Leone March 18, 1999
- ------------------------------
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 James P. Shanahan 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.
71
EXHIBIT 10.4
THE CIT GROUP, INC.
November 2, 1998
Mr. Joseph M. Leone
650 CIT Drive
Livingston, NJ 07039
Dear Joe:
Reference is made to your employment agreement, dated December 29, 1989,
with The CIT Group, Inc. (the "Company"), as amended by letter agreements dated
November 16, 1992, December 20, 1994 and December 6, 1996 (the "Employment
Agreement"). The Board of Directors (the "Board") of the Company is pleased to
extend your Employment Agreement with the Company on the following terms and
conditions, all other terms and conditions being null and void:
1. Term. This Employment Agreement will be effective as of November 2,
1998. The term of this Employment Agreement (the "Term") will be for a period of
twenty-six (26) months beginning on November 2, 1998 and, except as otherwise
provided in paragraph 4 below, ending on December 31, 2000. This Employment
Agreement and the Term may be extended for one (1) or more additional periods by
written agreement signed by you and the Company at any time prior to the end of
the Term then in effect.
2. Duties. During the Term, you will serve in such capacities and devote
substantially all of your business time and energies to the business of the
Company and faithfully, diligently and competently perform such duties, as are
assigned to you by the Chief Executive Officer of the Company (the "CEO") or
pursuant to his delegation.
3. Compensation and Benefits. In full consideration for all services
rendered by you in all capacities during the Term, you will receive the
following compensation and benefits:
(a) Base Salary. An annual base salary ("Base Salary") of not less
than the amount you received immediately prior to the commencement of this
current Employment Agreement payable in accordance with the customary payroll
practices of the Company. Your Base Salary and performance will be reviewed by
the CEO or pursuant to his delegation during the Term pursuant to normal Company
practices. Your Base Salary may be increased (but not reduced) by the CEO from
time to time, based upon your performance and responsibilities, pursuant to the
Company's standard procedures for salary adjustments.
<PAGE>
(b) Bonuses. You will participate in all executive bonus and
incentive compensation plans (collectively, "Incentive Plans") now or hereafter
maintained by the Company for which your level of employment makes you eligible
in accordance with the Company's policies and the terms of such Incentive Plans.
(c) Expense Reimbursement. The Company will reimburse you, in
accordance with applicable policies and practices of the Company in effect from
time to time, for your ordinary and necessary business expenses.
(d) Other Benefits. You will be eligible to participate in all
employee retirement and welfare benefit plans now or hereafter maintained by or
on behalf of the Company, including the Company's Executive Retirement Plan and
receive all fringe benefits and vacations, for which your level of employment
makes you eligible in accordance with the Company's policies and the terms of
such plans. In addition, the Company will provide you with (1) a supplemental
pension benefit and (2) a supplemental savings benefit, in each case in an
amount equal to the value of the benefit you would be entitled to receive under
the Company's Retirement Plan or Savings Incentive Plan, as the case may be, but
for the limitations on the amount of such benefits imposed by Sections 415 and
401(a)(17) of the Internal Revenue Code of 1986, as amended (the "Code").
(e) Modifications. The Company may at any time or from time to time
amend, modify, suspend or terminate any bonus, incentive compensation or other
benefit plans or programs provided hereunder for any reason and without your
consent; provided that, without your consent, the Company may not reduce the
aggregate value of the benefits provided to you hereunder.
4. Termination of Your Employment.
(a) By the Company. The Company may terminate your employment in its
sole discretion at any time during the Term, with or without Cause, upon fifteen
(15) days prior notice by the Company to you. For purposes of this Employment
Agreement, "Cause" means any of the following: (1) action by you involving
willful malfeasance, (2) your unreasonable neglect or refusal to perform the
executive duties assigned to you under this Employment Agreement, (3) your being
convicted of a crime constituting a felony under federal or applicable state or
local law, (4) your engaging in any activity that is directly or indirectly in
competition with the Company or any affiliate or in any activity that is
inimical to the best interests of the Company or any affiliate, or (5) your
violation of Company policy covering standards of corporate conduct; provided
that the determination of Cause shall be made by the Company's CEO. If the
Company terminates your employment for Cause, all the Company's obligations
under this Employment Agreement shall thereupon cease and terminate, except for
those amounts specified in paragraph 5(a)(2).
(b) By You. You may terminate your employment with the Company at
any time during the Term, with or without Good Reason, upon fifteen
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(15) days prior notice by you to the Company. For purposes of this Employment
Agreement, "Good Reason" means (1) the assignment to you of duties and
responsibilities not commensurate with your status as a senior executive of the
Company, (2) the failure of the Company to provide compensation and benefits to
you at the levels required herein, (3) following a Change of Control as defined
in paragraph 7(d), the requirement by the Company, or, if applicable, a
Subsidiary, or a successor to the Company or a Subsidiary, without your consent,
that you relocate or perform a significant portion of your duties under this
Employment Agreement outside a fifty (50) mile radius from your present
principal place of employment or (4) the failure of the Company to adhere in any
substantial manner to any of its other covenants herein.
5. Severance Payment.
(a) Without Cause and Good Reason Termination. If during the Term,
the Company terminates your employment without Cause or you terminate your
employment for Good Reason, all compensation payable to you under paragraph 3
hereof will cease as of the effective date of such termination (the "Termination
Date") and the Company will pay to you, subject to paragraph 6, the following
sums:
(1) An amount equal to two (2) times your then current Base Salary plus
the sum of your annual bonuses, if any, for the two (2) immediately
preceding calendar years under The CIT Group, Inc. Bonus Plan plus a
pro-rata annual bonus amount for that portion of the bonus year up
to the Termination Date, based on the average annual bonus, if any,
paid in the prior two (2) full years. This payment shall be payable
fifty percent (50%) in twelve (12) equal installments at the end of
each of the twelve (12) months following the Termination Date, and
fifty percent (50%) in a lump sum on the anniversary of the
Termination Date. If, however, prior to the anniversary of the
Termination Date, you violate the noncompetition provisions of
paragraph 6(b)(i), then the Company will have no obligation to make
any of the payments that remain payable by the Company under this
paragraph 5(a)(1) on or after the date of such violation.
Notwithstanding the provisions of this paragraph 5(a)(1), if you
have received, are scheduled to receive or are otherwise eligible to
receive all or any portion of a "Special Payment" in accordance with
paragraph 7(b) below, the amount payable to you under this paragraph
5(a)(1) shall be reduced
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<PAGE>
by the amount of such "Special Payment" paid or payable to you under
paragraph 7(b).
(2) All previously earned and accrued entitlements and benefits from the
Company, including any such entitlements and benefits under the
Company's pension, disability, life insurance and medical plans,
policies and programs.
(3) Continued benefit coverage which permits you to continue to receive,
for two (2) years from the Termination Date, at the Company's
expense, life insurance and medical, dental and disability benefits
at least comparable to those provided by the Company to you on the
Termination Date provided that such benefits shall cease if you
obtain other employment with comparable benefits, as determined by
the Company, Two (2) years additional benefit service and age credit
under the Company's Retirement Plan and the Executive Retirement
Plan. (The amount of any benefit payable as a result of such two (2)
year additional service and age credit shall be paid from the
applicable benefit or retirement plan as permitted by the provisions
of such applicable benefit or retirement plan and the Code, or in
the event not paid from the applicable benefit or retirement plan,
such benefit shall be paid by the Company).
(4) The reasonable costs of outplacement services until such time as you
accept new employment.
(5) Any awards due to you under the terms of the Company's Long-Term
Equity Compensation Plan (the "ECP") or any successor plan as may
have been hereafter adopted by the Company. Upon such payment, all
of your rights under all such plans will then terminate.
(6) All benefits payable to you under the terms and conditions of the
Company's Executive Retirement Plan, if any.
All of the amounts and benefits to be provided pursuant to clauses (3),
(4), (5) and (6) above shall be provided without duplication for the amounts and
benefits to be provided pursuant to clause (2) above.
4
<PAGE>
(b) For Cause Termination or Termination By You Without Good Reason.
Subject to paragraph 7(c), if your employment is terminated by the Company for
Cause or if you terminate your employment for any reason other than Good Reason,
you will receive only the amounts specified in paragraph 5(a)(2).
(c) Death or Disability. In the event of your death or your
disability due to physical or mental illness or other disability which renders
you unable, on other than a temporary basis, to perform the duties of your
employment, the Term will terminate as of the date of your death or disability
and you or your beneficiary will receive the benefits specified in paragraphs
5(a)(2),(5),(6) plus an amount equal to your Base Salary on such date for one
(1) year. Disability will be determined in a manner consistent with the
Company's Long-Term Disability Plan.
6. Confidentiality and Competitive Activity.
(a) Confidential Information. You acknowledge that you have acquired
and will continue to acquire during the Term, confidential information regarding
the business of the Company, Dai-Ichi Kangyo Bank ("DKB") and their respective
subsidiaries and affiliates. Accordingly, you agree that, without the written
consent of the Board, you will not, at any time, disclose to any unauthorized
person or otherwise use any such confidential information. For this purpose,
confidential information means non-public information concerning the financial
data, business strategies, product development (and proprietary product data),
customer lists, marketing plans, and other proprietary information concerning
the Company or DKB and their respective subsidiaries and affiliates, except for
specific items which have become publicly available other than as a result of
your breach of this Employment Agreement.
(b) Competition and Solicitation. If (1) you resign with or without
Good Reason, (2) your employment is terminated by the Company with or without
Cause, (3) you retire under the terms of the Company's Retirement Plan, or (4)
solely for the purposes of (ii) below, you resign following the expiration of
this Employment Agreement, then for one (1) year after the Termination Date, in
the case of clause (i) below, and for (2) two years after the Termination Date,
in the case of clause (ii) below, you will not, without the written consent of
the Board, directly or indirectly, (i) knowingly engage or be interested in (as
owner, partner, stockhoIder, employee, director, officer, agent, consultant or
otherwise), with or without compensation, any business in the United States
which is in competition with any line of business actively being conducted on
the Termination Date by the Company or any of its subsidiaries; provided that if
your employment has been terminated by the Company without Cause or you have
terminated your employment with the Company for Good Reason, you may so compete
in which event you shall forfeit your right to receive future severance payments
pursuant to paragraph 5(a)(1) hereof and (ii) whether or not your termination of
employment occurred without Cause or for
5
<PAGE>
Good Reason, hire any person who was employed by the Company or any of its
subsidiaries or affiliates (other than persons employed in a clerical or other
nonprofessional position) within the six-(6)month period preceding the date of
such hiring, or solicit, entice, persuade or induce any person or entity doing
business with the Company or DKB and their respective subsidiaries and
affiliates, to terminate such relationship or to refrain from extending or
renewing the same. Nothing herein, however, will prohibit you from acquiring or
holding not more than one percent (1%) of any class of publicly traded
securities of any such business; provided that such securities entitle you to no
more than one percent (1%) of the total outstanding votes entitled to be cast by
securityholders of such business in matters on which such securityholders are
entitled to vote.
(c) Remedy for Breach. You hereby acknowledge that the provisions of
this paragraph 6 are reasonable and necessary for the protection of the Company,
DKB, and their respective subsidiaries and affiliates. In addition, you further
acknowledge that the Company, DKB, and their respective subsidiaries and
affiliates will be irrevocably damaged if such covenants are not specifically
enforced. Accordingly, you agree that, in addition to any other relief to which
the Company may be entitled, the Company will be entitled to seek and obtain
injunctive relief (without the requirement of any bond) from a court of
competent jurisdiction for the purposes of restraining you from any actual or
threatened breach of such covenants. In addition, and without limiting the
Company's other remedies, in the event of any breach by you of such covenants,
the Company will have no obligation to pay any of the amounts that remain
payable by the Company under paragraph 5(a)(1).
(d) Enforceability. If a court determines that any of the provisions
of this paragraph 6 are unenforceable because of the duration or geographical
scope of such provisions, the parties hereto agree that the duration or scope of
such provisions, as the case may be, shall be reduced so that such provision
becomes enforceable and, in its reduced form, such provision shall then be
enforceable and shall be enforced.
7. Change of Control.
(a) Contract Extension. If during the Term, a "Change of Control"
occurs as defined in paragraph 7(d), the Term of your employment shall
automatically be extended until the second anniversary date of such Change of
Control.
(b) Special Payment. In addition to the compensation and benefits
already required under the provisions of your Employment Agreement, if, while
you are an active employee of the Company, a Change of Control should occur on
or prior to December 31, 2000, you will receive a special payment (the "Special
Payment"). The amount of such Special Payment shall equal the sum of your annual
bonuses, if any, for the two (2) immediately preceding calendar years under The
CIT Group, Inc. Bonus Plan and will be payable over a two-(2)year period as
follows: one-third (1/3) of the payment shall be paid to you within thirty (30)
days after the
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<PAGE>
date of the Change of Control; one-third (1/3) shall be paid to you on or before
the first anniversary date of such Change of Control; and one-third (1/3) shall
be paid to you on or before the second anniversary date of such Change of
Control, provided, however, the Company, in its sole discretion, may accelerate
the payment of all or any part of the Special Payment determined in accordance
with this paragraph 7(b). Notwithstanding the foregoing provisions of this
paragraph, all or any part of such Special Payment shall not be payable to you
if during the two-(2)year period commencing on the date of a Change of Control,
and ending on the second anniversary of such date: (1) your employment is
involuntarily terminated by the Company for "Cause" as defined in the Employment
Agreement; (2) you voluntarily terminate employment with the Company for any
reason other than "Good Reason" as defined in the Employment Agreement; or (3)
you breach any confidentiality or competition covenant under paragraph 6 of the
Employment Agreement. For purposes of this paragraph 7(b), a termination of your
employment on account of your death, disability or retirement on or after age
fifty-five (55) under the terms of the Company's Retirement Plan shall
constitute a termination for "Good Reason." In the absence of a separate
beneficiary designation, your beneficiary under the Group Life Insurance Plan
will receive any Special Payment remaining to be paid upon your death.
(c) Termination of Employment After a Change of Control for Awards
Granted under the ECP. Notwithstanding the provisions of Article 14 of the ECP:
If an Executive's employment with the Company is terminated by the Company, or,
if applicable, a Subsidiary, or a successor to the Company or a Subsidiary, on
or after a Change of Control and prior to the first anniversary of such Change
of Control:
(1) If you terminate employment for Good Reason or your employment with
the Company is terminated by the Company, or if applicable, a
Subsidiary, or a successor to the Company or a Subsidiary, on or
after a Change of Control and prior to the first anniversary of such
Change of Control: (i) any and all Options other than Options
granted in consideration of the termination of The CIT Group, Inc.
Career Incentive Plan (the "CIT Career Incentive Plan") or granted
in consideration of The CIT Group, Inc. Initial Public Offering (the
"CIT Initial Public Offering"), shall become immediately
exercisable, and shall remain exercisable throughout their entire
term; and (ii) any Period of Restriction and restrictions imposed on
Restricted Stock, other than Restricted Stock granted in
consideration of the termination of the CIT Career Incentive Plan or
granted in consideration of the CIT Initial Public Offering, shall
lapse.
7
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(2) If you terminate employment for Good Reason or your employment with
the Company is terminated by the Company, or, if applicable, a
Subsidiary, or a successor to the Company or a Subsidiary, on or
after a Change of Control and prior to November 1, 2002, (i) All
Options granted in consideration of the termination of the CIT
Career Incentive Plan or granted in consideration of the CIT Initial
Public Offering held by the Participant, if any, shall become
immediately exercisable and shall remain exercisable throughout
their entire term; and (ii) any Period of Restriction and all
restrictions imposed on Restricted Stock granted in consideration of
the termination of the CIT Career Incentive Plan or granted in
consideration of the CIT Initial Public Offering, if any, shall
lapse.
(3) All terms with respect to the ECP that are not otherwise defined
herein, are defined in the ECP.
(d) Change of Control Defined. For purposes of this Employment
Agreement, a "Change of Control" shall be deemed to have occurred if: (1) any
Person or Group other than DKB or an Affiliate becomes the Beneficial Owner,
directly or indirectly, of securities representing a majority of the combined
voting power of the Company's then outstanding securities generally entitled to
vote for the election of directors (capitalized terms not otherwise defined
herein are used as defined under the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder); or (2) as a
result of a cash tender offer, merger or other business combination, sales of
assets or contested election, or any combination of the foregoing transactions
(a "Transaction"), the persons who were directors of the Company immediately
before the Transaction shall cease to constitute a majority of the Board of the
Company or of any successor to the Company. Notwithstanding the foregoing, a
Change of Control resulting from a Change of Control of DKB shall not require
the extension of the Term hereunder.
8. MiscelIaneous.
(a) Survival; Notices. The obligations of the Company in paragraph 5
and your obligations in paragraph 6 will survive the termination of this
Employment Agreement. Any notice, consent or other communication made or given
in connection with this Employment Agreement will be in writing and will be
deemed to have been duly given when delivered or five (5) days after mailed by
United States registered or certified mail, return receipt requested, to the
parties at the address set forth on the first page of this Employment Agreement
(attention: General Counsel, if to the Company).
8
<PAGE>
(b) Entire Agreement. This Employment Agreement supersedes any and
all existing agreements between you and the Company or any of its subsidiaries
or affiliates relating to the terms of your employment.
(c) Amendments and Waivers. No provisions of this Employment
Agreement may be amended, modified, waived or discharged except as agreed to in
writing by you and the Company. The failure of a party to insist upon strict
adherence to any term of this Employment Agreement on any occasion will not be
considered a waiver thereof or deprive that party of the right thereafter to
insist upon strict adherence to that term or any other term of this Employment
Agreement.
(d) Successors. This Employment Agreement shall be binding upon and
inure to the benefit of you and the Company and its successors and permitted
assigns. Neither this Employment Agreement nor any of the rights of the parties
hereunder may be assigned by either party hereto except that the Company may
assign its rights and obligations hereunder to a corporation or other entity
that acquires substantially all of its assets. Any assignment or transfer of
this Employment Agreement in violation of the foregoing provisions will be void.
(e) Governing Law. This Employment Agreement will be governed by and
construed in accordance with the laws of the State of New York applicable to
agreements made and to be performed in that State.
(f) Legal Counsel; Offsets and Reductions. In the event you obtain
legal counsel to enforce your rights under this Employment Agreement, the
Company will pay you reasonable legal fees if you recover any amount on such
claim. Except as provided in paragraph 6, if your employment is terminated by
the Company, your severance shall not be subject to any offsets or reductions
for your subsequently earned income or reduction by reason of any claim by the
Company.
(g) Severability. If any provision of this Employment Agreement is
invalid or unenforceable, the balance of this Employment Agreement will remain
in effect, and if such provision is inapplicable to any person or circumstance,
it will nevertheless remain applicable to all other persons and circumstances.
(h) Withholding. The Company is authorized to withhold from any
benefit provided or payment due hereunder the amount of withholding taxes due
any federal, state, or local authority in respect of such benefit or payment and
to take such other action as may be necessary in the opinion of the Company to
satisfy all obligations for the payment of such withholding taxes.
(i) Tax Gross-Up. In the event that any payment made to you pursuant
to this Employment Agreement with the Company becomes subject to excise taxes
under Section 4999 of the Code, the Company will pay to you the amount of such
excise taxes plus all federal, state and local taxes applicable to the Company's
payment of such excise taxes including any additional excise taxes due
9
<PAGE>
under Section 4999 of the Code with respect to payments made pursuant to this
Employment Agreement.
The determination of amounts required to be paid under this Employment
Agreement shall be made by an independent auditor selected and paid by the
Company. Such independent auditor shall be a nationally recognized United States
public accounting firm, which may be the independent accounting firm used by the
Company to audit its financial statements.
If you are in agreement with the terms of this letter, please so indicate
by signing and returning the enclosed copy of this letter, whereupon this letter
shall constitute a binding agreement between you and the Company.
Very truly yours,
THE CIT GROUP, INC.
By: /s/ Albert R. Gamper, Jr.
--------------------------------
Name: Albert R. Gamper, Jr.
Title: President & CEO
Agreed:
/s/ Joseph M. Leone
- ------------------------------
Joseph M. Leone
EXHIBIT 10.10
THE CIT GROUP, INC.
EMPLOYEE STOCK PURCHASE PLAN
As Amended and Restated
January 28, 1999
The following constitute the provisions of The CIT Group, Inc. Employee
Stock Purchase Plan (the "Plan") of The CIT Group, Inc. (the "Company").
1. Purpose. The purpose of the Plan is to provide employees of the Company
and its subsidiaries with an opportunity to purchase shares of Common Stock of
the Company through payroll deductions. It is the intention of the Company to
have the Plan qualify as an "employee stock purchase plan" under Section 423 of
the Internal Revenue Code of 1986, as amended (the "Code"). The provisions of
the Plan shall, accordingly, be construed so as to extend and limit
participation in a manner consistent with the requirements of that section of
the Code.
2. Definitions.
(a) "Account" shall mean the account established for each Participant
under the Plan.
(b) "Base Salary" shall mean an Employee's salary or wages for each pay
period during any Offering Period as determined from the payroll records of the
Company.
(c) "Board" shall mean the Board of Directors of the Company.
(d) "Broker" shall mean the brokerage firm designated in Section 9.
(e) "Closing Date" shall mean the last business day of each Offering
Period.
(f) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(g) "Committee" shall mean the Employee Benefit Plans Committee of the
Company.
(h) "Common Stock" shall mean the Class A common stock of the Company par
value $.01 per share.
(i) "Company" shall mean The CIT Group, Inc., a Delaware corporation.
(j) "Employee" shall mean any person who is customarily employed for at
least twenty (20) hours per week by the Company or a Subsidiary.
(k) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(l) "Fair Market Value" shall mean on any day, with respect to Common
Stock of the Company which is (a) listed on a United States securities exchange,
the last sales price of such stock on such day on the largest United States
securities exchange on which such stock shall have traded on such day, or if
such day is not a day on which a United States securities exchange is open for
trading, on the immediately preceding day on which such securities exchange was
open, (b) not listed on a United States securities exchange but is included in
The NASDAQ Stock Market System (including The NASDAQ National Market), the last
sales price on such system of such stock on such day, or if such day is not a
trading day, on the immediately preceding trading day, or (c) neither listed on
a United States securities exchange nor included in The NASDAQ Stock Market
System, the fair market value of such stock as determined from time to time by
the Board in good faith in its sole discretion.
(m) "Offering Date" shall mean the first business day of each Offering
Period.
(n) "Offering Period" shall mean each three (3) month period when Options
for shares of Common Stock are offered by the Company.
<PAGE>
(o) "Option" shall mean the right of a Participant to purchase shares of
Common Stock of the Company under the Plan.
(p) "Participant" shall mean an Employee of the Company or Subsidiary who
is enrolled in the Plan in accordance with Section 3 hereof.
(q) "Plan" shall mean The CIT Group, Inc. Employee Stock Purchase Plan.
(r) "Subsidiary" shall mean a corporation, domestic or foreign, of which
not less than fifty percent (50%) of the voting shares are held by the Company
or a Subsidiary, whether or not such corporation now exists or is hereafter
organized or acquired by the Company or a Subsidiary.
3. Eligibility.
(a) As soon as administratively possible, any Employee who shall be
employed by the Company or one of its Subsidiaries shall be eligible to
participate in the Plan as of the date of the first Offering Period following
the Employee's commencement of employment with the Company or a Subsidiary.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an Option under the Plan (i) if, immediately after the
grant, such Employee would own shares of Common Stock or hold outstanding
options to purchase shares of Common Stock possessing five percent (5%) or more
of the total combined voting power or value of all classes of shares of the
Company or of any Subsidiary of the Company, or (ii) which causes him or her to
purchase shares of Common Stock under all employee stock purchase plans of the
Company and its Subsidiaries which have a Fair Market Value which exceeds
Twenty-Five Thousand Dollars ($25,000) (determined at the time such Option is
granted) for each calendar year in which such Option is outstanding at any time.
4. Offering Dates. The Plan shall be implemented by one offering during
each three (3) month period (calendar quarter) of the Plan, commencing on
October 1, 1998, and continuing thereafter until terminated in accordance with
Section 21 hereof. The Offering Periods for each calendar quarter are as
follows:
October 1 - December 31
January 1 - March 31
April 1 - June 30
July 1 - September 30
The Committee shall have the power to change the duration of Offering
Periods with respect to future offerings without shareholder approval if such
change is announced at least fifteen (15) days prior to the scheduled beginning
of the first Offering Period to be affected.
5. Participation. An eligible Employee may become a Participant in the
Plan by authorizing payroll deductions in such form or manner as the Committee
may prescribe prior to the applicable Offering Date. Once authorized, such
authorization for payroll deductions shall commence on the first Offering Date
after authorization is effected and shall remain effective for all subsequent
Offering Periods until the Participant withdraws from the Plan as provided in
Section 11 hereof or, subject to Section 6 hereof, authorizes a change in the
amount of his or her payroll deductions.
6. Payroll Deductions.
(a) At the time a Participant authorizes payroll deductions, he or she
shall elect to have payroll deductions made on each payday during subsequent
Offering Periods at a rate between one percent (1%) and ten percent (10%) of
Base Salary (such percentage representing a whole number percentage).
(b) All payroll deductions made by a Participant shall be credited to his
or her Account under the Plan. A Participant may not make any additional
payments into such Account.
(c) A Participant may increase or decrease his or her rate of payroll
deductions (within the limitations set forth in Section 6(a) hereof) to be
effective for the next Offering Period by authorizing a new rate of payroll
2
<PAGE>
deductions at least fifteen (15) days before the beginning of such Offering
Period. A Participant may not increase or decrease the rate of payroll
deductions during an Offering Period to be effective for that Offering Period.
(d) A Participant must continue payroll deductions for the duration of the
Offering Period in order to exercise an Option in accordance with Section 8
hereof. In the event that a Participant does not continue payroll deductions for
the entire Offering Period, such Participant shall be treated as withdrawing
from such Offering Period in accordance with Section 11(a) hereof.
7. Grant of Option.
(a) On each Offering Date, each eligible Employee participating in the
Plan shall be granted an Option to purchase (at the per share Option price) up
to a number of shares of the Company's Common Stock determined by dividing the
Employee's to be accumulated payroll deductions (not to exceed an amount equal
to ten percent (10%) of his or her Base Salary during the applicable Offering
Period) by the option price, determined in accordance with this Section 7.
(b) Subject to Sections 7(c) and 7(d), the Option price per share of such
shares of Common Stock shall be the lesser of (i) eighty-five percent (85%) of
the Fair Market Value of a share of Common Stock of the Company on the Offering
Date or (ii) eighty-five percent (85%) of the Fair Market Value of a share of
Common Stock of the Company on the Closing Date.
(c) Effective for the Offering Period commencing January 1, 1999, the
option price per share of such shares of Common Stock shall be the lesser of (i)
the higher of (A) eighty-five percent (85%) of the Fair Market Value of a share
of Common Stock of the Company on the Offering Date or (B) eighty-five percent
(85%) of the Fair Market Value of a share of Common Stock of the Company on
January 28, 1999 or (ii) eighty-five percent (85%) of the Fair Market Value of a
share of Common Stock of the Company on the Closing Date.
(d) Effective for the Offering Period commencing on October 1, 1998, the
option price per share of such shares of Common Stock shall be eighty-five
percent (85%) of the Fair Market Value of a share of Common Stock of the Company
on the Closing Date.
8. Exercise of Option. Unless a Participant withdraws from the Plan as
provided in Section 11 hereof, his or her Option for the purchase of shares of
Common Stock will be exercised automatically on the Closing Date, and the
maximum number of whole and fractional shares (rounded to the nearest ten
thousandth) of Common Stock subject to the Option will be purchased for him or
her at the applicable Option price with the accumulated payroll deductions in
his or her Account. During his or her lifetime, a Participant's Option to
purchase shares of Common Stock hereunder is exercisable only by him or her.
9. Designation of Broker and Participant's Account with Broker. The
Company has designated Morgan Stanley Dean Witter & Co. and its affiliates to
open and maintain an Account for each Participant. The Company reserves the
right to change such designation at any time without prior notice to
Participants and the Broker has reserved the right to terminate its services as
Broker under the Plan at any time. The Broker shall deliver to each Participant
as promptly as practicable, by mail or otherwise, all notices of meetings, proxy
statements and other materials distributed by the Company to its shareholders.
The whole and fractional shares in each Participant's Account shall be voted in
accordance with the Participant's signed proxy instructions duly delivered to
the Broker by mail or otherwise, in accordance with the rules applicable to
stock listed on the New York Stock Exchange.
10. Delivery of Certificates. A Participant may request, in accordance
with Section 22 hereof, that the Company arrange for the delivery of a
certificate representing the number of whole shares of Common Stock of the
Company purchased upon exercise of the Participant's Option as promptly as
practicable after each Closing Date. A Participant may not require delivery for
a fractional share, but may instruct the Broker to sell the fractional share. In
connection with the delivery of certificates to a Participant, the Committee
may, in its sole discretion, impose a reasonable charge.
3
<PAGE>
11. Withdrawal; Termination of Employment.
(a) A Participant may withdraw all but not less than all the payroll
deductions credited to his or her Account under the Plan at any time prior to
the Closing Date by giving notice to the Committee in such form or manner as the
Committee may prescribe. All of the Participant's payroll deductions credited to
his or her Account will be paid to him or her as soon as administratively
possible after receipt of his or her notice of withdrawal and his or her Option
for the current Offering Period will be automatically terminated, and no further
payroll deductions for the purchase of shares of Common Stock will be made
during such Offering Period.
(b) Upon termination of the Participant's employment prior to the Closing
Date for any reason, including retirement or death, the payroll deductions
credited to his or her Account will be returned to him or her or, in the case of
his or her death, to the person or persons entitled thereto under Section 16
hereof, as soon as administratively possible, and his or her Option will be
automatically terminated.
(c) In the event an Employee fails to remain in the continuous employ of
the Company or one of its Subsidiaries for at least twenty (20) hours per week
during the Offering Period in which the employee is a Participant, he or she
will be deemed to have elected to withdraw from the Plan and the payroll
deductions credited to his or her Account will be returned to him or her as soon
as administratively possible and his or her Option will be terminated.
(d) A Participant's withdrawal from an Offering Period will not have any
effect upon his or her eligibility to participate in a succeeding offering or in
any similar plan which may hereafter be adopted by the Company. However, in such
a case, the Participant must authorize the resumption of payroll deductions and
the rate of such payroll deductions.
12. No Interest. No interest shall accrue on the payroll deductions held
in the Account of a Participant in the Plan.
13. Stock.
(a) The maximum number of shares of Common Stock which shall be made
available for sale under the Plan shall be five hundred thousand (500,000),
subject to adjustment upon changes in capitalization of the Company as provided
in Section 20 hereof. The shares of Common Stock to be sold to Participants
under the Plan may, at the election of the Company, be either treasury shares,
authorized but unissued shares or publicly traded shares. If at the termination
of any Offering Period the total number of shares of Common Stock which would
otherwise be subject to Options granted pursuant to Section 7(a) hereof exceeds
the number of shares of Common Stock then available under the Plan (after
deduction of all shares of Common Stock for which Options have been exercised or
are then outstanding), the Company shall promptly notify the Participants, and
shall, in its sole discretion (i) make a pro rata allocation of the shares of
Common Stock remaining available for Option grant in as uniform a manner as
shall be practicable and as it shall determine to be equitable, (ii) terminate
the Offering Period without issuance of any shares of Common Stock or (iii)
obtain shareholder approval for an increase in the number of shares of Common
Stock authorized under the Plan such that all Options could be exercised in
full. The Company may delay determining which of (i), (ii) or (iii) above it
shall decide to effect, and may accordingly delay issuances of any shares of
Common Stock under the Plan for such time as is necessary to attempt to obtain
shareholder approval for any increase in shares of Common Stock authorized under
the Plan. The Company shall promptly notify Participants of its determination to
effect (i), (ii) or (iii) above upon making such decision. A Participant may
withdraw all but not less than all the payroll deductions credited to his or her
Account under the Plan at any time prior to such notification from the Company.
In the event the Company determines to effect (i) or (ii) above, it shall
promptly upon such determination return to each Participant all payroll
deductions not applied towards the purchase of shares of Common Stock.
(b) The Participant will have no interest or voting right in shares of
Common Stock covered by his or her Option until such Option has been exercised.
(c) Shares of Common Stock to be delivered to a Participant under the Plan
shall be registered in the name of the Participant.
4
<PAGE>
14. Dividends. Cash dividends for shares of Common Stock in Participants'
Accounts under the Plan shall not be distributed to Participants directly, but
shall be automatically invested in shares of Common Stock at the full Fair
Market Value on the date of such investment as soon as administratively possible
after such dividends are paid by the Company. Such shares of Common Stock will
be held in Accounts under the Plan.
15. Administration. The Plan shall be administered by the Committee. The
administration, interpretation or application of the Plan by the Committee shall
be final, conclusive and binding upon all Participants.
16. Designation of Beneficiary. The beneficiary or beneficiaries of the
Participant to receive any shares of Common Stock and cash, if any, from the
Participant's Account under the Plan in the event of such Participant's death
prior to delivery to him or her of such shares of Common Stock and cash shall be
determined under the Company's Group Life Insurance Plan. A Participant under
the Plan may, from time to time, name any beneficiary or beneficiaries to
receive any shares of Common Stock and cash, if any, from the Participant's
Account under the Plan. Each such designation shall revoke all prior
designations by the same Participant, including the beneficiary designated under
the Company's Group Life Insurance Plan, and will be effective only when filed
by the Participant in writing (in such form or manner as may be prescribed by
the Committee) with the Company during the Participant's lifetime.
17. Transferability. Neither payroll deductions credited to a
Participant's Account nor any rights with regard to the exercise of an Option or
to receive shares of Common Stock under the Plan may be assigned, transferred,
pledged or otherwise disposed of in any way (other than by will, the laws of
descent and distribution or as provided in Section 16 hereof) by the
Participant. Any such attempt at assignment, transfer, pledge or other
disposition shall be without effect, except that the Company may treat such act
as an election to withdraw funds in accordance with Section 11 hereof.
18. No Segregation of Funds. The Company shall not be obligated to
segregate payroll deductions received or held by the Company under the Plan.
Such payroll deductions shall be used to purchase shares of Common Stock under
the Plan in accordance with Section 8 hereof.
19. Reports. Individual Accounts will be maintained for each Participant
in the Plan. Statements of Account will be given to Participants within a
reasonable period of time following each Closing Date.
20. Adjustments Upon Changes in Capitalization. Subject to any required
action by the shareholders of the Company, the number of shares of Common Stock
covered by each Option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but have not yet been placed under Option (collectively, the
"Reserves"), as well as the price per share of Common Stock covered by each
Option under the Plan which has not yet been exercised, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split or the payment of a stock dividend (but only
on the Common Stock) or any other increase or decrease in the number of shares
of Common Stock effected without receipt of consideration by the Company;
provided, however, that conversion of any convertible securities of the Company
shall not be deemed to have been "effected without receipt of consideration".
Such adjustment shall be made by the Board, whose determination in that respect
shall be final, binding and conclusive. Except as expressly provided herein, no
issue by the Company of shares of stock of any class, or securities convertible
into or exercisable for shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an Option.
The Board may, if it so determines in the exercise of its sole discretion,
also make provision for adjusting the Reserves, as well as the price per share
of Common Stock covered by each outstanding Option under the Plan, in the event
that the Company effects one or more reorganizations, recapitalizations, rights
offerings or other increases or reductions of shares of its outstanding Common
Stock, and in the event of the Company being consolidated with or merged into
any other corporation.
21. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Committee may at any time amend, alter,
suspend or discontinue the Plan, but no amendment, alteration, suspension or
discontinuation shall be made which would impair the rights of any Participant
under any Option theretofore granted without his or her consent.
5
<PAGE>
(b) Shareholder Approval of Amendments. The Company shall obtain
shareholder approval of any Plan amendment to the extent necessary and desirable
to comply with Rule 16b-3 promulgated under the Exchange Act or with Section 423
of the Code (or any successor statute or rule or other applicable law, rule or
regulation), such shareholder approval to be obtained in such a manner and to
such a degree as is required by the applicable law, rule or regulation.
(c) Effect of Amendment or Termination. Any such amendment or termination
of the Plan shall not affect Options already granted hereunder and such Options
shall remain in full force and effect as if this Plan had not been amended or
terminated.
22. Notices. All notices or other communications by a Participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof. All notices or
other communications to a Participant by the Company shall be deemed to have
been duly given when sent by the Company by regular mail to the address of the
Participant on the human resources records of the Company.
23. Conditions Upon Issuance of Shares of Common Stock. Shares of Common
Stock shall not be issued with respect to an Option unless the exercise of such
Option and the issuance and delivery of such shares of Common Stock pursuant
thereto shall comply with all applicable provisions of law, domestic or foreign,
including, without limitation, the Securities Act of 1933, as amended, the
Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any stock exchange or automated quotation system upon which the
shares of Common Stock may then be listed or quoted, and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the shares of Common Stock are being purchased only for investment
and without any present intention to sell or distribute such shares of Common
Stock if, in the opinion of counsel for the Company, such a representation is
required by any of the aforementioned applicable provisions of law.
24. No Contract of Employment. The Plan is not and shall not be deemed to
constitute a contract of employment between the Company and any Employee or
other individual, nor shall anything herein contained be deemed to give any
Employee or other individual any right to be retained in the Company's employ or
to in any way limit or restrict the Company's right or power to discharge any
Employee or other individual at any time and to treat him without any regard to
the effect which such treatment might have upon him as a Participant of the
Plan.
25. Governing Law. The Plan shall be construed in accordance with and
governed by the laws of the state of New York.
26. Effective Date and Approval of Plan by Shareholders. The Plan shall
become effective on October 1, 1998, subject however, to receipt of approval of
the Plan by shareholders of the Company in accordance with Section 423(b)(2) of
the Code.
6
EXHIBIT 12
THE CIT GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Years Ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
Dollars in millions
Net income ................................. $ 338.8 $ 310.1 $ 260.1
Provision for income taxes ................. 185.0 178.0 155.7
-------- -------- --------
Earnings before provision for
income taxes .............................. 523.8 488.1 415.8
-------- -------- --------
Fixed Charges:
Interest and debt expenses
on indebtedness ........................ 1,040.8 937.2 848.3
Minority interest in subsidiary
trust holding solely Debentures
of the Company ......................... 19.2 16.3 --
Interest factor - one-third of rentals
on real and personal properties ........... 7.9 8.5 8.1
-------- -------- --------
Total fixed charges ........................ 1,067.9 962.0 856.4
-------- -------- --------
Total earnings before provisions
for income taxes and fixed charges ........ $1,591.7 $1,450.1 $1,272.2
======== ======== ========
Ratios of Earnings to Fixed Charges ........ 1.49x 1.51x 1.49x
EXHIBIT 21
THE CIT GROUP, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
December 31, 1998
Jurisdiction of
Name of Subsidiary Incorporation
------------------ -------------
3553400 Canada Inc. ........................................... Canada
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 & Co., Inc. .................................... 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, 1998
Jurisdiction of
Name of Subsidiary Incorporation
------------------ -------------
CIT FSC Sixteen, Ltd. ........................................ Bermuda
CIT Leasing Two (Bermuda) 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
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. 333-64539, No. 333-43323, No. 333-64529 and No.
333-63793 on Form S-3 of The CIT Group, Inc. of our report dated January 28,
1999, relating to the consolidated balance sheets of The CIT Group, Inc. and
subsidiaries as of December 31, 1998 and 1997, 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, 1998, which report appears
in the December 31, 1998 Annual Report on Form 10-K of The CIT Group, Inc.
KPMG LLP
Short Hills, New Jersey
March 16, 1999
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