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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
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Form 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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
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Common Stock, par value $0.01 per share ......... New York Stock Exchange
Toronto Stock Exchange
5 7/8% Notes due October 15, 2008 ............ New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock including Exchangeable
Shares held by non-affiliates of the registrant, based on the most recent New
York Stock Exchange Composite Transaction closing price of the Common Stock
($14.06 per share), which occurred on February 29, 2000, was $2,281,167,773. 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 29, 2000, 263,827,792 shares of
the Company's Common Stock including Exchangeable Shares, par value $0.01 per
share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE*
Document Where Incorporated
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Proxy Statement for 2000 Part III (Items 10, 11, 12 and 13)
Annual Meeting of Stockholders
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* As stated under various Items of this Report, only certain specified
portions of such document are incorporated by reference herein.
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<PAGE>
<TABLE>
TABLE OF CONTENTS
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<CAPTION>
Form 10-K
Item No. Name of Item Page
-------- ------------ ----
Part I
<S> <C> <C>
Item 1. Business .................................................................................. 1
Overview ............................................................................... 1
Securitization Program ................................................................. 9
Industry Concentration ................................................................. 10
Competition ............................................................................ 10
Regulation ............................................................................. 11
Item 2. Properties ................................................................................ 12
Item 3. Legal Proceedings ......................................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders ....................................... 12
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ..................... 13
Item 6. Selected Financial Data ................................................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
and Operations .............................................................................. 16
Item 7A. Quantitative and Qualitative Disclosure about Market Risk ................................. 16
Item 8. Financial Statements and Supplementary Data ............................................... 31
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure .............................................................................. 63
Part III
Item 10. Directors and Executive Officers of the Registrant ........................................ 64
Item 11. Executive Compensation .................................................................... 64
Item 12. Security Ownership of Certain Beneficial Owners and Management ............................ 64
Item 13. Certain Relationships and Related Transactions ............................................ 64
Part IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K ............................ 65
</TABLE>
i
<PAGE>
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. Also, forward-looking statements are based upon management's estimates
of fair values and of future costs, using currently available information.
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 risks of economic slowdown or downturn,
o industry cycles and trends,
o risks inherent in changes in prevailing market interest rates,
o funding opportunities and borrowing costs,
o changes in funding markets (including the asset-based
securitization market),
o uncertainties associated with risk management, including credit risk
management, asset/liability management, interest rate risk
management and currency risk management,
o adequacy of reserves for credit losses,
o risks associated with the value and recoverability of leased
equipment,
o difficulties in combining the management, operations or cultures of
CIT and Newcourt,
o cost savings that are not realized or are not realizable within the
time anticipated and
o changes in regulations governing the combined companies' business
and operations, competitive factors, permissible activities.
ii
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PART I
Item 1. Business
OVERVIEW
THE CIT Group, Inc., ("we," "our," "us," or "CIT"), a Delaware
corporation, is a leading diversified commercial finance company with $50.4
billion of managed assets and $5.6 billion of stockholders' equity at December
31, 1999. 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.
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 size, scope and diversification was expanded significantly when we
acquired Newcourt Credit Group Inc. ("Newcourt") on November 15, 1999. As of the
transaction date, Newcourt had over $20.0 billion of managed assets. Newcourt,
headquartered in Toronto, Canada, is a non-bank financial services enterprise,
which originates, invests in and sells asset-based financing. Newcourt's
origination activities focus on the commercial and corporate finance segments of
the asset-based financing market through a global network of offices in 26
countries. This transaction combines the financial strength of CIT with
Newcourt's broad technology-based leasing business and international platform.
In conjunction with the Newcourt acquisition, we issued common stock and
exchangeable equivalents with a value of $2.6 billion. The acquisition was
accounted for using the purchase method, whereby the excess of the purchase
price over the estimated fair value of net assets acquired has been allocated to
goodwill in the Consolidated Balance Sheets. This goodwill amounted to $1.4
billion, and is being amortized over 25 years. In connection with the
acquisition, we also established an integration plan, which identified
activities that would not continue and the associated exit costs. Pursuant to
this plan, restructuring charges of $235.7 million were included in the purchase
accounting adjustments. The restructuring plan anticipates reducing annual
operating expenses by more than $150 million from the mid-1999 combined expense
level by the end of the year 2000. See Item 8. Financial Statements and
Supplementary Data, Note 3 -"Acquisitions" for more information regarding the
Newcourt acquisition.
During 1999 we also acquired Heller Financial Corporation's ("Heller")
domestic factoring business and factoring assets from Congress Financial
Corporation ("Congress"). These businesses added in excess of $1.5 billion in
finance assets and enhance our Commercial Services business unit's scale and
market share in the factoring industry. These acquisitions were also accounted
for using the purchase method.
Prior to the acquisition of Newcourt, CIT had three business segments --
Equipment Financing and Leasing, Commercial Finance and Consumer. Following the
completion of the acquisition, a fourth segment was created to reflect the
combined results of Newcourt. This presentation was necessitated by the timing
of the acquisition and was consistent with our internal fourth quarter
management reporting. Accordingly, the financial data in this section reflects
the four business segments as follows:
o Equipment Financing and Leasing
o Newcourt
o Commercial Finance
o Consumer
Certain segments conduct their operations through strategic business units
that market their products and services to satisfy the financing needs of
specific customers, industries, vendors/manufacturers, and markets. Our business
segments are described in greater detail.
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,
1
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construction, rail, trucking, machine tool, business aircraft, apparel,
textiles, electronics and technology, chemicals, manufacturing, and financial
institutions. 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 for each of the years in the five-year
period ended December 31, 1999. In total, our commercial segments represented
88.0% and 85.3% of consolidated financing and leasing assets and total managed
assets, respectively. The Newcourt segment was acquired in 1999. In addition to
on-balance sheet finance receivables, operating lease equipment, finance
receivables held for sale, and certain investments, managed assets include
finance receivables previously securitized and still managed by us.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Dollars in Millions
<S> <C> <C> <C> <C> <C>
Equipment Financing and Leasing ......... $17,016.7 $13,367.0 $11,709.7 $11,321.6 $10,591.6
Newcourt ................................ 11,531.6 -- -- -- --
Commercial Finance ...................... 7,002.1 4,996.2 4,250.8 3,838.1 3,973.0
--------- --------- --------- --------- ---------
Total financing and leasing assets .... 35,550.4 18,363.2 15,960.5 15,159.7 14,564.6
Finance receivables previously
securitized and currently managed
by us ................................. 7,471.5 -- -- -- --
--------- --------- --------- --------- ---------
Total managed assets .................... $43,021.9 $18,363.2 $15,960.5 $15,159.7 $14,564.6
========= ========= ========= ========= =========
</TABLE>
Commercial transactions are generated through direct calling efforts with
borrowers, lessees, equipment end-users, vendors, 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 our 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. Historically,
Newcourt had securitized pools of various financing and leasing assets which
comprise the entire $7.5 billion balance in the table above at December 31,
1999.
Equipment Financing and Leasing Segment
Our Equipment Financing and Leasing operations had total financing and
leasing assets of $17.0 billion at December 31, 1999, representing 42.1% 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.
2
<PAGE>
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 enables 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 1995 through
1999, Equipment Financing and Capital Finance have realized in excess of 100% of
the aggregate booked residual values in connection with their equipment sales.
The following table sets forth certain information concerning the
financing and leasing assets of our Equipment Financing and Leasing segment at
December 31 for each of the years in the five-year period ended December 31,
1999.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Dollars in Millions
<S> <C> <C> <C> <C> <C>
Finance receivables $12,999.6 $10,592.9 $ 9,804.1 $ 9,919.5 $ 9,478.6
Operating lease equipment, net .......... 4,017.1 2,774.1 1,905.6 1,402.1 1,113.0
--------- --------- --------- --------- ---------
Total financing and leasing assets .... 17,016.7 13,367.0 11,709.7 11,321.6 10,591.6
Finance receivables previously
securitized and currently
managed by us ......................... 2,189.4 -- -- -- --
--------- --------- --------- --------- ---------
Total managed assets .................... $19,206.1 $13,367.0 $11,709.7 $11,321.6 $10,591.6
========= ========= ========= ========= =========
</TABLE>
As part of our integration plan of the former Newcourt businesses, on
December 31, 1999, financing and leasing assets of $2,357.8 million were
transferred to Equipment Financing from Vendor Technology Finance and $233.8
million were transferred to Vendor Technology Finance from Equipment Financing.
Additionally, $231.3 million of financing and leasing assets were transferred to
Capital Finance from Structured Finance on December 31, 1999. Similarly, finance
receivables previously securitized by Newcourt of $2,189.4 million are now
managed by Equipment Financing. 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 financing and
leasing assets, operations and securitized assets that were transferred are
considered more complementary to the specified business units. The transfers
were undertaken to increase reach and scale in specific markets and to further
leverage existing systems and infrastructure.
Equipment Financing
On an owned asset basis, Equipment Financing is the largest of our
strategic business units with total financing and leasing assets of $12.0
billion at December 31, 1999, representing 29.6% of our total financing and
leasing assets. On a managed asset basis, Equipment Financing represents $14.2
billion or 28.1% of total managed 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, specialized wholesale and retail financing for
distributors and manufacturers, and loans guaranteed by the U.S. Small Business
Administration.
Equipment Financing is a leading nationwide asset-based equipment lender.
At December 31, 1999, its portfolio included significant financing and leasing
assets 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.
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.
3
<PAGE>
The following table sets forth certain information concerning the
financing and leasing assets of Equipment Financing at December 31 for each of
the years in the five-year period ended December 31, 1999.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Dollars in Millions
<S> <C> <C> <C> <C> <C>
Finance receivables .................... $10,899.3 $8,497.6 $7,403.4 $5,616.8 $4,929.9
Operating lease equipment, net ......... 1,066.2 765.1 623.8 426.6 363.0
--------- -------- -------- -------- --------
Total financing and leasing assets ... 11,965.5 9,262.7 8,027.2 6,043.4 5,292.9
Finance receivables previously
securitized and currently managed
by us ................................ 2,189.4 -- -- -- --
--------- -------- -------- -------- --------
Total managed assets ................... $14,154.9 $9,262.7 $8,027.2 $6,043.4 $5,292.9
========= ======== ======== ======== ========
</TABLE>
Capital Finance
Capital Finance had financing and leasing assets of $5.1 billion at
December 31, 1999, which represented 12.5% of our total financing and leasing
assets. Capital Finance specializes in customized leasing and secured financing,
relating primarily to end-users of commercial aircraft and railcars, including
operating leases, single investor leases, equity portions of leveraged leases,
sale and leaseback arrangements, as well as loans secured by equipment. 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. During 1999, we entered into agreements with both Airbus
Industries and the Boeing Company to purchase a total of 40 aircraft, with
options to acquire additional units. Deliveries of these new aircraft are
scheduled to take place over a five year period starting in the fourth quarter
of 2000.
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. Capital Finance has a dedicated rail
equipment group, 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
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.
4
<PAGE>
The following table sets forth certain information concerning the
financing and leasing assets of Capital Finance at December 31 for each of the
years in the five-year period ended December 31, 1999.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Dollars in Millions
<S> <C> <C> <C> <C> <C>
Finance receivables ..................... $2,100.3 $2,095.3 $2,400.7 $4,302.7 $4,548.7
Operating lease equipment, net .......... 2,950.9 2,009.0 1,281.8 975.5 750.0
-------- -------- -------- -------- --------
Total financing and leasing assets .... $5,051.2 $4,104.3 $3,682.5 $5,278.2 $5,298.7
======== ======== ======== ======== ========
</TABLE>
Newcourt Segment
At December 31, 1999, the financing and leasing assets of our Newcourt
segment totaled $11.5 billion, representing 28.5% of total financing and leasing
assets. Newcourt's origination activities focus on the commercial and corporate
finance segments of the asset-based financing market through a global network.
We conduct our Newcourt operations through two strategic business units.
o Vendor Technology Finance (formerly Newcourt Financial)
o Structured Finance (formerly Newcourt Capital)
The following table sets forth certain information concerning the
financing and leasing assets of the Newcourt segment at December 31, 1999.
December 31, 1999
----------------
Dollars in Millions
Finance receivables ............................... $ 9,422.8
Operating lease equipment, net .................... 2,108.8
---------
Total financing and leasing assets .............. 11,531.6
Finance receivables previously securitized
and currently managed by us ..................... 5,282.1
---------
Total managed assets .............................. $16,813.7
=========
Vendor Technology Finance
Financing and leasing assets of Vendor Technology Finance ("VTF") totaled
$9.6 billion at December 31, 1999, and comprised 23.8% of our total financing
and leasing assets. On a managed asset basis, VTF totaled $14.9 billion or 29.5%
of total managed assets. VTF is a newly acquired strategic business unit. VTF
operates globally through operations in the United States, Canada, Europe, Latin
America, Asia, and Australia, and serves many industries including a wide range
of manufacturers. Additionally, VTF customers range from small-market businesses
and consumers to large-sized companies.
VTF builds alliances with industry-leading equipment vendors, including
manufacturers, dealers and distributors, to deliver customized asset-based sales
and financing solutions in more than 300 vendor programs. VTF offers credit
financing to the manufacturer's customers for the purchase or lease of the
manufacturer's products, while also offering enhanced sales tools to
manufacturers and vendors, such as asset management services, efficient loan
processing, and real-time credit adjudication. By working in partnership with
its vendors, VTF is integrated with the vendor's business planning process and
product offering systems. VTF has significant vendor programs in information
technology and telecommunications.
These vendor alliances are also characterized by the use of joint
ventures, profit sharing and other transaction structures. In the case of joint
ventures, through a contractual arrangement, VTF and the vendor combine
activities into one business model in a distinct legal entity. Generally, these
arrangements are accounted for on an equity basis, with profits and losses
distributed according to the joint venture agreement. VTF also utilizes "virtual
joint ventures", whereby the assets are funded on balance sheet, while profits
and losses are shared with the vendor. These types of strategic alliances are a
key source of business for VTF. New business is also generated through
intermediaries and other referral sources, as well as through direct end-user
relationships.
5
<PAGE>
The following table sets forth certain information concerning the
financing and leasing assets of Vendor Technology Finance at December 31, 1999.
December 31, 1999
------------------
Dollars in Millions
Finance receivables ................................ $ 7,488.9
Operating lease equipment, net ..................... 2,108.8
---------
Total financing and leasing assets ............... 9,597.7
Finance receivables previously securitized
and currently managed by us ...................... 5,282.1
---------
Total managed assets ............................... $14,879.8
=========
Structured Finance
At December 31, 1999 Structured Finance had financing and leasing assets
of $1.9 billion, comprising 4.8% of our consolidated financing and leasing
assets.
Structured Finance provides specialized investment banking services to the
international corporate finance and institutional finance markets by providing
asset-based financing for large ticket asset acquisitions and project financing
and related advisory services to equipment manufacturers, corporate clients,
regional airlines, governments and public sector agencies. Communications,
transportation, and the power and utilities sectors are among the industries
that Structured Finance serves.
Structured Finance also serves as an origination conduit to its lending
partners by seeking out and creating investment opportunities. Structured
Finance has established relationships with insurance companies and institutional
investors and can arrange financing opportunities that meet asset class, yield,
duration and credit quality requirements. Accordingly, Structured Finance has
considerable syndication and fee generation capacity. Structured Finance also
holds equity positions in connection with its advisory activities.
Commercial Finance Segment
At December 31, 1999, the financing and leasing assets of our Commercial
Finance segment totaled $7.0 billion, representing 17.3% of total financing and
leasing assets. We conduct our Commercial Finance operations through two
strategic business units, both 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 to a full range of borrowers from small to
larger-sized companies.
The following table sets forth certain information concerning the
financing and leasing assets of Commercial Finance at December 31 for each of
the years in the five-year period ended December 31, 1999.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Dollars in Millions
<S> <C> <C> <C> <C> <C>
Commercial Services .................... $4,165.1 $2,481.8 $2,113.1 $1,804.7 $1,743.3
Business Credit ........................ 2,837.0 2,514.4 2,137.7 2,033.4 2,229.7
-------- -------- -------- -------- --------
Total financing and leasing assets ... $7,002.1 $4,996.2 $4,250.8 $3,838.1 $3,973.0
======== ======== ======== ======== ========
</TABLE>
In 1999, CIT combined the management and operations of two business units
with similar products and processes, Business Credit and Credit Finance, into
one business unit called Business Credit to improve efficiency and reduce costs.
Prior year balances reflect the current year presentation. In 1999, Commercial
6
<PAGE>
Services completed the acquisitions of certain domestic assets from Heller
and Congress. In total, these purchases added in excess of $1.5 billion in
financing and leasing assets.
Commercial Services
Commercial Services had total financing and leasing assets of $4.2 billion
at December 31, 1999, which represented 10.3% 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
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. Additionally, acquisitions play a large role in the growth of
Commercial Services.
Business Credit
Financing and leasing assets of Business Credit totaled $2.8 billion at
December 31, 1999 and represented 7.0% of our total financing and leasing
assets. Business Credit offers revolving and term loans secured by accounts
receivable, inventories and fixed assets to smaller through larger-sized
companies. Clients use such loans primarily for working capital growth,
expansion, acquisitions, refinancings and debtor-in-possession, reorganization
and restructurings, 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, as well as through sales and regional offices. 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. Business Credit has developed long-term relationships
with selected finance companies, banks and other lenders and with many
diversified referral sources.
Consumer Segment
At December 31, 1999, our Consumer segment financing and leasing assets
totaled $4.7 billion, representing 11.7% of total financing and leasing assets.
Total Consumer managed assets were $7.3 billion at December 31, 1999,
representing 14.4% of our total managed assets.
7
<PAGE>
Our consumer business is focused primarily on home equity lending and on
retail sales financing secured by recreational vehicles and manufactured
housing. During 1999, two changes were initiated in order to improve margins and
efficiencies. First, we decided to concentrate our efforts on core products. In
doing so, we de-emphasized recreational boat and wholesale financing. Second,
prior to 1999, home equity lending was performed by The CIT Group/Consumer
Finance ("Consumer Finance") business unit while sales financing for consumer
products sold through dealers was performed by The CIT Group/Sales Financing
("Sales Financing") business unit. During 1999, we combined these two business
units under one management team to improve efficiencies. Our streamlined
consumer unit will continue to provide contract servicing for securitization
trusts and other third parties through a centralized Asset Service Center.
Additionally, in the ordinary course of business, the consumer unit will
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
segment at December 31 for each of the years in the five-year period ended
December 31, 1999.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Dollars in Millions
<S> <C> <C> <C> <C> <C>
Financing and leasing assets
Home equity .......................... $2,215.4 $2,244.4 $1,992.3 $2,005.5 $1,039.0
Manufactured housing ................. 1,666.9 1,417.5 1,125.7 790.2 561.5
Recreational vehicles ................ 361.2 744.0 501.9 510.1 698.5
Liquidating portfolio* ............... 462.8 848.4 313.1 49.5 156.9
-------- -------- -------- -------- --------
Total financing and leasing assets ..... 4,706.3 5,254.3 3,933.0 3,355.3 2,455.9
Finance receivables previously
securitized and currently
managed by us ........................ 2,567.8 2,516.9 2,385.6 1,437.4 916.5
-------- -------- -------- -------- --------
Total managed assets ................... $7,274.1 $7,771.2 $6,318.6 $4,792.7 $3,372.4
======== ======== ======== ======== ========
</TABLE>
- ----------
* In 1999 we decided to exit the recreational boat and wholesale loan
product lines. Prior year balances have been conformed to current year
presentation.
Our home equity products include both fixed and variable rate closed-end
loans and variable rate lines of credit. We primarily originate, purchase and
sell 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 primarily originates loans through brokers, as well as on a direct
marketing basis and through correspondents. We believe that the network of
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
provides rapid turnaround time from application to loan funding, a
characteristic considered to be critical by its broker relationships.
Consumer also provides nationwide retail financing for the purchase of new
and used recreational vehicles and manufactured housing. These loans are
predominantly originated through recreational vehicle and manufactured housing
dealer, manufacturer and broker relationships.
Servicing
The Asset Service Center centrally services and collects substantially all
of our Consumer receivables, including loans originated or purchased by our
Consumer Group, 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 our Consumer Group for a fee on a
"contract" basis. At December 31, 1999, the Consumer servicing portfolio
included $1.0 billion of finance receivables serviced for third parties.
8
<PAGE>
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 has investments in
emerging growth opportunities in selected industries, including the information
technology, communications, life science and consumer products industries.
Equity Investments made its first investment in 1991 and had total investments
of $137.3 million at December 31, 1999.
Common Stock
On November 15, 1999, we issued 76,428,304 shares of CIT common stock and
27,577,082 exchangeable shares of CIT Exchangeco Inc. (exchangeable on a
one-for-one basis for shares of CIT common stock) under the terms of the
Newcourt acquisition. This issuance reflected an exchange ratio of .70 shares of
our common stock for the 148,536,081 outstanding common shares of Newcourt.
Canadian resident holders of Newcourt common shares could elect to receive
exchangeable shares issued by CIT Exchangeco in lieu of CIT common stock in
order to defer recognizing any gain or loss on the acquisition for income taxes.
Prior to the acquisition, we amended our Certificate of Incorporation to rename
and combine our Class A Common Stock and Class B Common Stock as Common Stock,
which is now the only class of common stock outstanding. Following the
transaction, the former CIT shareholders owned approximately 61% of the combined
company, and the former Newcourt shareholders owned approximately 39% of the
combined company. At December 31, 1999, The Dai-Ichi Kangyo Bank, Limited
("DKB"), our largest shareholder, owned approximately 26.8% of our outstanding
stock.
In November 1998, 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. 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.
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 share) were
converted to Class A Common Stock shares (which had 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.
SECURITIZATION PROGRAM
We fund most of our assets on balance sheet using our access to the
commercial paper, medium-term note and capital markets. In an effort to broaden
funding sources and to provide an additional source of liquidity, we have in
place a program to opportunistically access the public and private asset backed
securitization markets. Current products utilized in this program include
commercial receivables secured by equipment (a capability acquired with the
Newcourt acquisition) and consumer loans secured by recreational vehicles and
residential real estate. During 1999, we securitized $1.5 billion of financing
and leasing assets and the remaining pool balance at December 31, 1999 was $10.0
billion or 19.9% of our total managed assets. In addition to conventional on
balance sheet funding, Newcourt historically used securitizations to finance a
significant portion of asset growth. Newcourt has established securitization
vehicles and relationships with institutional investors in the U.S., Canada and
the U.K. to provide broad market access. It is our intention to continue these
commercial securitization capabilities, though at lower percentage levels of our
overall funding than Newcourt did prior to the acquisition.
9
<PAGE>
Under a typical asset backed securitization, we sell a "pool" of secured
loans or leases to a special purpose entity. The special purpose entity, in
turn, issues certificates and/or notes that are collateralized by the pool and
entitle the holders thereof to participate in certain pool cash flows. We retain
the servicing of the securitized contracts, for which we earn a servicing fee.
We also participate in certain "residual" cash flows (cash flows after payment
of principal and interest to certificate and/or note holders, servicing fees and
other credit related disbursements). 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 a retained interest in the
securitization (retained interests can include bonds issued by the trust, cash
reserve accounts on deposit in the trust or interest only receivables) and
recognize a gain. The retained interests are then amortized through earnings
over the estimated life of the related loan pool.
In estimating residual cash flows and the value of the retained interests,
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 products securitized. Subsequent to recording the retained
interests, we regularly review such assets for valuation impairment. These
reviews are performed on a disaggregated basis. Fair values of retained
interests are calculated utilizing current pool demographics, actual
note/certificate outstandings, current and anticipated credit losses, prepayment
speeds and discount rates. These revised fair values are then compared to our
carrying values. Our retained interests had a carrying value at December 31,
1999 of $1.1 billion, including interests in commercial securitized assets of
$914.5 million and consumer securitized assets of $194.8 million. Retained
interests are subject to credit and prepayment risk. These assets are subject to
the same credit granting and monitoring processes which are described in Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, "Credit Risk Management" section. Our interests relating to
commercial securitized assets are generally subject to lower prepayment risk
because of their contractual terms.
INDUSTRY CONCENTRATION
See the "Industry Composition" and "Commercial Airline Industry" sections
of "Concentrations" 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 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.
10
<PAGE>
REGULATION
DKB is a bank holding company within the meaning of the Bank Holding
Company Act of 1956 (the "Act"), and is registered as such with the 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 non-bank 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, 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 and various foreign 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, including establishing licensing
requirements, if any, in applicable jurisdictions, (ii) establish maximum
interest rates, finance charges and other charges, (iii) regulate customers'
insurance coverages, (iv) require disclosures to customers, (v) govern secured
transactions, (vi) set collection, foreclosure, repossession and claims handling
procedures and other trade practices, (vii) prohibit discrimination in the
extension of credit and administration of loans, and (viii) regulate the use and
reporting of information related to a borrower's credit experience.
Depending on the provisions of the applicable law and regulations 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 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 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 maximum levels permitted by law, 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.
11
<PAGE>
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 world.
Such leased office space is suitable and adequate for our needs. With the
exception of various locations in the United States and Canada, which are part
of our restructuring plan and are discussed in Note 3 of the Financial
Statements, 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 held a Special Meeting of Stockholders on October 26, 1999 at our
offices in Livingston, New Jersey. A total of 161,209,826 shares were eligible
to vote at the meeting. The stockholders approved each of the following
proposals:
<TABLE>
<CAPTION>
Proposal For Withheld/Against Exception/Abstain
-------- --- ---------------- -----------------
<S> <C> <C> <C>
Issue additional shares of common stock
to acquire Newcourt Credit Group Inc. .......... 141,420,487 1,934,463 24,308
Amend the Amended and Restated
Certificate of Incorporation to combine
Class A Common Stock and Class B
Common Stock into one class of
Common Stock ................................... 143,248,878 102,642 27,738
Approval of The CIT Group, Inc.
Long-Term Equity Compensation Plan ............. 134,893,586 8,419,320 66,352
Approval of The CIT Group, Inc.
Transition Option Plan ......................... 139,349,976 3,966,644 62,638
Approval of the Amendment to The CIT
Group, Inc. Employee Stock Purchase Plan ....... 142,961,387 351,508 66,363
</TABLE>
12
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The following table sets forth the high and low last reported sale prices
for the Common Stock for the periods indicated.
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- ------------------ --------------------
Common Stock Prices High Low High Low High Low
- ------------------- --------- --------- --------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
First Quarter ................................ $33 7/16 $27 5/8 $33 $29 7/16 -- --
Second Quarter ............................... $33 13/16 $27 9/16 $37 1/2 $31 1/4 -- --
Third Quarter ................................ $29 5/8 $20 1/16 $36 1/4 $25 3/8 -- --
Fourth Quarter ............................... $25 3/8 $17 13/16 $31 13/16 $19 1/8 $32 5/8 $29 3/4
</TABLE>
Our Common Stock was priced at $27.00 per share in our IPO and was listed
on the New York Stock Exchange on November 13, 1997.
Below are the dividends paid during the past two years:
1999 1998
---------- ----------
Dividends Paid (per share) (per share)
------------- ---------- ----------
First Quarter .............................. $0.10 $ *
Second Quarter ............................. 0.10 0.10
Third Quarter .............................. 0.10 0.10
Fourth Quarter ............................. 0.10 0.10
----- -----
Year ..................................... $0.40 $0.30
===== =====
- ----------
* No dividends were paid to holders of the Common Stock.
The declaration and payment of dividends by us is evaluated quarterly and
is subject to the discretion of the Board of Directors. As of March 2, 2000,
there were 31,378 stockholders of CIT, including both record holders and
individual participants holding through a registered clearing agency.
13
<PAGE>
Item 6. Selected Financial Data
The following tables set forth selected consolidated financial information
regarding our results of operations and balance sheet. The 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,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Dollars in Millions, except per share data
<S> <C> <C> <C> <C> <C>
Results of Operations
Net finance income ..................... $1,272.5 $ 974.3 $ 887.5 $797.9 $697.7
Net finance margin ..................... 917.4 804.8 740.7 676.2 618.0
Operating revenue ...................... 1,268.2 1,060.2 1,046.5(1) 920.3 802.7
Salaries and general operating
expenses ............................ 516.0 407.7 420.0 385.3 338.3
Provision for credit losses ............ 110.3 99.4 113.7 111.4 91.9
Goodwill amortization .................. 25.7 10.1 8.4 7.8 7.4
Net income ............................. 389.4 338.8 310.1 260.1 225.3
Net income per diluted share ........... 2.22 2.08 1.95 1.64 1.43
</TABLE>
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Dollars in Millions
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Finance receivables:
Commercial ........................... $27,119.2 $15,589.1 $14,054.9 $13,757.6 $13,451.5
Consumer ............................. 3,887.9 4,266.9 3,664.8 3,239.0 2,344.0
--------- --------- --------- --------- ---------
Total finance receivables .............. $31,007.1 $19,856.0 $17,719.7 $16,996.6 $15,795.5
Reserve for credit losses .............. 446.9 263.7 235.6 220.8 206.0
Operating lease equipment, net ......... 6,125.9 2,774.1 1,905.6 1,402.1 1,113.0
Goodwill ............................... 1,850.5 216.5 134.6 129.5 137.3
Total assets ........................... 45,081.1 24,303.1 20,464.1 18,932.5 17,420.3
Commercial paper ....................... 8,974.0 6,144.1 5,559.6 5,827.0 6,105.6
Variable rate senior notes ............. 7,147.2 4,275.0 2,861.5 3,717.5 3,827.5
Fixed rate senior notes ................ 19,052.3 8,032.3 6,593.8 4,761.2 3,337.0
Subordinated fixed rate notes .......... 200.0 200.0 300.0 300.0 300.0
Company-obligated mandatorily
redeemable preferred securities of
subsidiary trust holding solely
debentures of the Company ........... 250.0 250.0 250.0 -- --
Stockholders' equity ................... 5,554.4 2,701.6 2,432.9 2,075.4 1,914.2
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes a 1997 gain of $58.0 million on the sale of an equity interest
acquired in connection with a loan workout.
14
<PAGE>
<TABLE>
<CAPTION>
At or for the Years Ended December 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Selected Data and Ratios
Profitability
Net finance income as a percentage
of average earning
assets ("AEA")(1) ................... 4.97% 4.75% 4.87% 4.82% 4.54%
Net finance margin as
a percentage of AEA ................. 3.59% 3.93% 4.06% 4.09% 4.02%
Return on average
stockholders' equity ................ 12.0% 13.2% 14.0%(4) 13.0% 12.1%
Return on AEA (1) ...................... 1.52% 1.65% 1.70%(4) 1.57% 1.46%
Ratio of earnings to fixed charges ..... 1.45x 1.49x 1.51x 1.49x 1.44x
Salaries and general
operating expenses (excludes
goodwill amortization)
as a percentage of average
managed assets ("AMA")(2) ........... 1.75% 1.78% 2.11%(4) 2.18% 2.12%
Efficiency ratio (excluding
goodwill amortization)(3) ........... 41.3% 39.2% 40.8%(4) 41.9% 42.1%
Credit Quality
60+ days contractual delinquency
as a percentage of finance
receivables ......................... 2.71% 1.75% 1.67% 1.72% 1.67%
Net credit losses as a percentage
of average finance receivables ...... 0.42% 0.42% 0.59% 0.62% 0.50%
Reserve for credit losses as a percentage
of finance receivables .............. 1.44% 1.33% 1.33% 1.30% 1.30%
Leverage
Total debt (net of overnight deposits)
to stockholders' equity and
Company-obligated mandatorily
redeemable preferred securities
of subsidiary trust holding solely
debentures of the Company ........... 5.96x 6.32x 5.71x 7.04x 7.09x
Tangible stockholders' equity(5)
to managed assets ................... 7.8% 10.4% 11.4% 9.7% 9.9%
Other
Total managed assets
(dollars in millions)(6) ............ $50,433.3 $26,216.3 $22,344.9 $20,005.4 $17,978.6
Employees .............................. 8,255 3,230 3,025 2,950 2,750
</TABLE>
- --------------------------------------------------------------------------------
(1) "AEA" means the average of finance receivables, operating lease equipment,
finance receivables held for sale and certain investments, less credit
balances of factoring clients.
(2) "AMA" means average earning assets plus the average of finance receivables
previously securitized and currently managed by us.
(3) Efficiency ratio reflects the ratio of salaries and general operating
expenses to the sum of operating revenue less minority interest in
subsidiary trust holding solely debentures of the Company.
(4) Excluding a gain of $58.0 million on the sale of an equity interest
acquired in a loan workout and certain nonrecurring expenses, for the year
ended December 31, 1997, (i) the return on average stockholders' equity
would have been 13.1%, (ii) the return on AEA would have been 1.58%, (iii)
the efficiency ratio would have been 41.1% and (iv) salaries and general
operating expenses as a percentage of AMA would have been 2.01%.
(5) Tangible stockholders' equity excludes goodwill and Company-obligated
mandatorily redeemable preferred securities of subsidiary trust holding
solely debentures of the Company.
(6) "Managed assets" include (i) financing and leasing assets and (ii)
off-balance sheet finance receivables previously securitized and currently
managed by us.
15
<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, 1999, our net income totaled $389.4
million, increasing from $338.8 million in 1998 and $310.1 million in 1997. The
1999 earnings represented the twelfth consecutive increase in annual earnings,
and the ninth consecutive year of record earnings. The 1999 results reflect
continued growth in the commercial and equipment finance portfolios, solid fee
generation, improved consumer business profitability and continued strong credit
quality. Current year net income also includes earnings of $7.5 million for the
former Newcourt operations from the November 15, 1999 acquisition date through
December 31, 1999. The improvements in 1998 over 1997 resulted from stronger
revenues from a higher level of financing and leasing assets, lower commercial
credit losses and improvements in operating efficiency.
The following table summarizes our net income and related data, excluding
the 1997 special items.
Years Ended December 31,
--------------------------
1999 1998 1997
---- ---- ----
Net income (dollars in millions) .............. $389.4 $338.8 $287.5
Earnings per diluted share (EPS) .............. $ 2.22 $ 2.08 $ 1.81
Return on average stockholders' equity (ROE) .. 12.0% 13.2% 13.1%
Return on average earning assets (ROA) ........ 1.52% 1.65% 1.58%
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 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 ROA of 1.70%.
Managed assets totaled $50.4 billion in 1999, $26.2 billion in 1998, and
$22.3 billion in 1997. The 1999 increase of 92.4% over 1998 reflects primarily
the acquisition of over $20 billion in Newcourt managed assets in late 1999. The
remainder of the increase reflects strong new business volume and two strategic
factoring purchases in the Commercial Finance segment, offset by a drop in
consumer assets due to our decision to discontinue certain product lines and
liquidate our recreational boat and wholesale inventory finance portfolios. The
1998 increase of 17.3% over 1997 was principally due to record internally
generated new business, with strong performance across all 1998 CIT segments.
See "Financing and Leasing Assets" for additional information.
Net Finance Income and Margin
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 finance income." During 1999 our
net finance income as a percentage of AEA increased significantly, due to a
higher level of operating leases in 1999. Considering this growing proportion of
operating leases in the portfolio, we believe that a more meaningful measure of
profitability is finance income after depreciation on operating lease equipment
or "net finance margin."
16
<PAGE>
A comparison of the components of 1999, 1998 and 1997 net finance income
and net finance margin is set forth below.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1999 1998 1997
---- ---- ----
Dollars in Millions
<S> <C> <C> <C>
Finance income .......................... $ 2,565.9 $ 2,015.1 $ 1,824.7
Interest expense ........................ 1,293.4 1,040.8 937.2
--------- --------- ---------
Net finance income ...................... 1,272.5 974.3 887.5
Depreciation on operating lease equipment 355.1 169.5 146.8
--------- --------- ---------
Net finance margin ...................... $ 917.4 $ 804.8 $ 740.7
========= ========= =========
Average Earning Assets ("AEA") .......... $25,583.0 $20,495.8 $18,224.5
Net finance income as a % of AEA ........ 4.97% 4.75% 4.87%
Net finance margin as a % of AEA ........ 3.59% 3.93% 4.06%
</TABLE>
Net finance margin increased 14.0% in 1999 from 1998, and 8.6% in 1998
from 1997. The increases primarily reflect growth in our loans, leases and
operating leases. As a percentage of AEA, net finance margin was 3.59% versus
3.93% and 4.06% in 1998 and 1997, respectively. This downward three year trend
primarily reflects the growing operating leasing business which generally has
lower net finance margins than finance receivables, but which also generates
equipment gains, renewal fees and tax depreciation benefits.
Finance income totaled $2,565.9 million in 1999, $2,015.1 million in 1998
and $1,824.7 million in 1997. As a percentage of AEA (excluding interest income
related to short-term interest-bearing deposits), finance income was 9.88% in
1999, 9.69% in 1998 and 9.92% in 1997. The increase in yield in 1999 reflected
primarily changes in product mix, while the decline in yield in 1998 was
principally due to the 1998 decline in market interest rates and the highly
competitive marketplace.
Interest expense totaled $1,293.4 million in 1999, $1,040.8 million in
1998 and $937.2 million in 1997. As a percentage of AEA, interest expense
(excluding interest relating to short-term interest-bearing deposits and
dividends related to preferred capital securities) was 4.91% in 1999, 4.94% in
1998 and 5.05% in 1997, reflecting lower market interest rates. Although
interest expense as a percentage of AEA for the full year 1999 was below the
prior year, interest rates escalated during the latter part of 1999. See Note 7
- -- "Debt" for further information regarding interest rates during and as of the
years ended 1999, 1998 and 1997. 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 derivative financial instruments, principally
interest rate swaps. For further discussion, see "Market Risk Management."
The operating equipment lease portfolio was $6.1 billion at December 31,
1999 versus $2.8 billion and $1.9 billion at December 31, 1998 and December 31,
1997, respectively. As a result, depreciation on operating lease equipment was
$355.1 million in 1999, versus $169.5 million and $146.8 million in 1998 and
1997, respectively. As a percentage of average operating leases, depreciation
was 9.51%, 7.66%, and 10.04% in 1999, 1998 and 1997, respectively. The increase
in 1999 over 1998 reflects the impact of the former Newcourt portfolio, which
includes smaller ticket and shorter term assets than the existing CIT business.
This mitigates the impact of an increasing proportion of airline and rail assets
with longer depreciable lives from 1997 to 1999 in the Equipment Financing and
Leasing segment. See "Financing and Leasing Assets" for further discussion on
growth of our operating lease portfolio.
17
<PAGE>
Fees and Other Income
Fees and other income improved to $350.8 million during 1999, from $255.4
million during 1998 and $247.8 million during 1997 as set forth in the following
table.
Years Ended December 31,
-------------------------
1999 1998 1997
---- ---- ----
Dollars in Millions
Factoring commissions ............................. $118.7 $ 95.7 $ 95.2
Fees and other income ............................. 161.0 90.7 73.8
Gains on sales of leasing equipment ............... 56.4 45.2 30.1
Gains on securitizations .......................... 14.7 12.5 32.0
Gains on sales of venture capital investments ..... -- 11.3 16.7
----- ---- ------
$350.8 $255.4 $247.8
====== ====== ======
The 1999 increase reflects primarily an increase in factoring commissions,
due in part to the two acquisitions completed during the year, and syndication
fees (in fees and other income) from the Newcourt acquisition. The former
Newcourt operations contributed $49.3 million in total fees and other income for
the period from the acquisition date through December 31, 1999. Included in fees
and other income are gains recognized by increased sales of receivables ($38.2
million in 1999 and $6.1 million in 1998). Total fees and other income increased
in 1998 from 1997 primarily due to higher fees from servicing and commercial
businesses and improved gains on the sale of equipment coming off lease, offset
by lower gains on securitizations. We expect this trend of increasing fees and
other income to continue in the future given the higher proportion of fee-based
business within the former Newcourt and factoring businesses.
1997 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 $516.0 million in 1999,
$407.7 million in 1998, and $420.0 million in 1997. During 1999, core operating
expense growth was modest due to consumer business productivity improvements and
increased use of electronic data exchange in our factoring business. However,
expenses increased in 1999 due to the Newcourt and factoring acquisitions. The
largest portion of this increase was in employee costs and facilities expenses.
The 1997 expenses 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 $400.0 million.
Our personnel increased to approximately 8,255 at December 31, 1999 from
3,230 at December 31, 1998 and 3,025 at December 31, 1997, primarily reflecting
the late 1999 Newcourt acquisition.
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.
Management monitors productivity via the analysis of an efficiency ratio
and the ratio of salaries and general operating expenses to AMA. AMA is
comprised of average earning assets plus the average of finance receivables
previously securitized and currently managed by us. These ratios, excluding
goodwill amortization and the 1997 non-recurring pretax gain and expenses
previously described, are set forth in the following table.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Efficiency ratio ................................. 41.3% 39.2% 41.1%
Salaries and general operating expenses as a
percentage of AMA .............................. 1.75% 1.78% 2.01%
</TABLE>
18
<PAGE>
The 1999 efficiency ratio includes the results of Newcourt from the
November 15, 1999 acquisition date through year-end. Newcourt's efficiency ratio
has historically been significantly higher than CIT's. The deterioration in the
efficiency ratio in 1999 from 1998 reflects the impact of the Newcourt
acquisition, as integration cost savings are not expected to be fully realized
until the latter part of year 2000 and beyond. As the former Newcourt operations
results are only included for the period from November 15, 1999 to December 31,
1999, the expense ratio will likely increase in the near term before expense
savings and efficiency enhancements take effect.
In connection with the acquisition, we established an integration plan
which identified activities that would not continue and the associated costs of
exiting those activities. The plan identified areas for adjusting the amount of
real estate required including the closing of the Newcourt corporate location in
New Jersey, reducing corporate office space in Toronto, Canada and eliminating
various other operating locations throughout the United States and Canada. The
plan also outlined that approximately 850 employees would be involuntarily
terminated. Further, additional restructuring activities, which were
contemplated in our overall integration plan, may occur in the year 2000.
Goodwill Amortization
Goodwill amortization was $25.7 million in 1999 versus $10.1 million and
$8.4 million in 1998 and 1997, respectively. This trend reflects the partial
year impact of the 1999 acquisitions of Newcourt, Heller and Congress, each of
which were accounted for under the purchase method.
Reserve and Provision for Credit Losses/Credit Quality
Our consolidated reserve for credit losses increased to $446.9 million
(1.44% of finance receivables) at December 31, 1999, from $263.7 million (1.33%)
at December 31, 1998 and $235.6 million (1.33%) at December 31, 1997. The 1999
increases in amount and percentage primarily reflect the Newcourt acquisition.
The acquired Newcourt portfolio had a higher reserve percentage than CIT's,
commensurate with its higher past due loan and charge-off profile. The reserve
increases in 1998 and 1997 reflect growth in finance receivables in each year.
The ratio of the consolidated reserve for credit losses to non-accrual finance
receivables was 87.6% at year end 1999.
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
non-performing 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. 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 $110.3 million for 1999, $99.4 million
for 1998, and $113.7 million for 1997. Net charge-offs were $95.0 million for
1999, $78.8 million for 1998, and $101.0 million for 1997. Our net charge-off
experience is provided in the following table.
Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
Net credit losses as a percentage of average
finance receivables excluding
finance receivables held for sale:
Equipment Financing and Leasing ............... 0.16% 0.18% 0.50%
Commercial Finance ............................ 0.47% 0.31% 0.41%
Consumer ...................................... 1.19% 1.18% 1.09%
---- ---- ----
Total ....................................... 0.42% 0.42% 0.59%
==== ==== ====
19
<PAGE>
Charge-offs of the acquired Newcourt portfolio have been historically
higher as a percentage of average finance receivables than CIT's experience as
shown above. Accordingly, charge-offs as a percentage of average finance
receivables will increase in the short term.
The decrease in our Equipment Financing and Leasing segment's net credit
losses reflects continued improvement in credit quality in our portfolio and
sustained strength of the United States economy. The three year trend in
Commercial Finance net credit losses reflects unusually high recoveries in 1998.
As a percentage of average managed finance receivables, consumer net credit
losses were 1.03% for 1999, 0.92% for 1998, and 0.91% for 1997.
Past Due and Non-performing Assets
The following table sets forth certain information concerning our past due
and non-performing assets (and the related percentages of finance receivables)
at December 31, 1999, 1998 and 1997. The amounts and ratios below do not reflect
various portfolio transfers between the former Newcourt business units and the
Equipment Financing and Leasing segment.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------
1999 1998 1997
----------------- ---------------- ----------------
Dollars in Millions
<S> <C> <C> <C> <C> <C> <C>
Finance receivables, past due 60 days or more:
Equipment Financing and Leasing .............. $209.6 1.93% $149.9 1.41% $127.3 1.30%
Newcourt ..................................... 376.4 4.15% -- -- -- --
Commercial Finance ........................... 64.0 0.91% 32.1 0.64% 41.6 0.98%
Consumer ..................................... 189.1(1) 4.62%(1) 166.0 3.89% 127.7 3.48%
------ ----- ------ ---- ------ ----
Total ...................................... $839.1 2.71% $348.0 1.75% $296.6 1.67%
====== ==== ====== ==== ====== ====
Non-performing assets:
Equipment Financing and Leasing .............. $139.9 1.29% $135.2 1.27% $ 81.6 0.83%
Newcourt ..................................... 309.4 3.41% -- -- -- --
Commercial Finance ........................... 27.6 0.39% 14.5 0.29% 23.9 0.56%
Consumer ..................................... 158.5(1) 3.87%(1) 129.0 3.02% 101.9 2.78%
------ ----- ------ ---- ------ ----
Total ...................................... $635.4 2.05% $278.7 1.40% $207.4 1.17%
====== ==== ====== ==== ====== ====
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For these calculations, certain finance receivables held for sale and the
associated past due and non-performing balances are included.
Non-performing assets reflect both finance receivables on non-accrual
status and assets received in satisfaction of loans.
The increase in our overall delinquency and non-performing asset ratio was
in a large part due to the acquired Newcourt portfolios which carry a higher
level of delinquency and non-performing assets. In 1999, Equipment Financing and
Leasing past due loans increased, however non-performing assets remained
relatively stable at 1.29%. The increase in 1999 Equipment Financing and Leasing
past dues included three commercial aircraft that became past due in the fourth
quarter. We believe the carrying values are adequately supported by the
underlying aircraft collateral.
The 1999 increase in Consumer delinquencies and non-performing assets
reflects increases in the manufactured housing portfolio, whereas the increase
in Consumer delinquencies and non-performing 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 non-performing assets increased to a more normal level
from the particularly low 1997 year-end balance.
Income Taxes
The provision for federal, state and local and foreign income taxes
totaled $207.6 million in 1999, compared with $185.0 million in 1998, and $178.0
million in 1997. The effective income tax rate for 1999 declined to 34.8%,
compared with 35.3% in 1998, and 36.5% in 1997, primarily as a result of lower
state and local taxes.
20
<PAGE>
Results by Business Segment
Net income for 1999 improved $50.6 million or 14.9% from 1998, as all of
our original business segments improved from 1998. Both the Equipment Financing
and Leasing and Commercial Finance segments improved approximately 19% from
1998, due to the continuation of strong asset growth. The Commercial Finance
segment results also reflected the Heller and Congress acquisitions. The
Consumer segment earnings grew by 35% and benefited from improved efficiency and
gains on receivable sales. The increased corporate expense in 1999 over 1998
included higher goodwill amortization, higher corporate interest expense and the
absence of venture capital investment gains.
The 1998 net income improved $28.7 million, or 9.3% from 1997, as the
18.7% earnings improvement in the Equipment Financing and Leasing segment was
mitigated by the more modest earnings growth of 5.6% in the Commercial Finance
segment and a $5.3 million reduction in net income from the prior year in the
Consumer segment reflecting higher net credit losses. See Note 22 -- "Business
Segment Information" for summarized segment financial data.
Financing and Leasing Assets
Our managed assets grew $24.2 billion (92.4%), of which $21.4 billion was
acquired in the Newcourt acquisition, to $50.4 billion in 1999, and $3.9 billion
(17.3%) to $26.2 billion in 1998. Financing and leasing assets grew $16.7
billion (70.4%) to $40.4 billion in 1999, and grew $3.7 billion (18.7%) to $23.7
billion in 1998. Managed assets include finance receivables, operating lease
equipment, finance receivables held for sale, certain investments, and finance
receivables previously securitized and still managed by us. In connection with
the Newcourt acquisition and business integration, certain receivables were
transferred at December 31, 1999 between Vendor Technology Finance (formerly
Newcourt Financial) and Equipment Financing, and from Structured Finance
(formerly Newcourt Capital) to Capital Finance.
21
<PAGE>
The managed assets of our business segments and the corresponding
strategic business units are presented in the following table, including the
transfers between business units.
<TABLE>
<CAPTION>
At December 31, % Change
--------------------------------- -------------------------
1999 1998 1997 '99 vs. '98 '98 vs.'97
---- ---- ---- ----------- ----------
Dollars in Millions
<S> <C> <C> <C> <C> <C>
Equipment Financing:
Finance receivables (1) .......... $10,899.3 $ 8,497.6 $ 7,403.4 28.3% 14.8%
Operating lease equipment, net (2) 1,066.2 765.1 623.8 39.4% 22.7%
--------- --------- --------- ---- ----
Total .......................... 11,965.5 9,262.7 8,027.2 29.2% 15.4%
--------- --------- --------- ---- ----
Capital Finance:
Finance receivables (1) .......... 1,838.0 1,655.4 1,755.5 11.0% (5.7)%
Operating lease equipment, net ... 2,931.8 1,982.0 1,251.8 47.9% 58.3%
Liquidating portfolio (3) (4) .... 281.4 466.9 675.2 (39.7)% (30.9)%
--------- --------- --------- ---- ----
Total .......................... 5,051.2 4,104.3 3,682.5 23.1% 11.5%
--------- --------- --------- ---- ----
Total Equipment Financing
and Leasing Segment ............ 17,016.7 13,367.0 11,709.7 27.3% 14.2%
--------- --------- --------- ---- ----
Vendor Technology Finance:
Finance receivables (1) .......... 7,488.9 -- -- -- --
Operating lease equipment, net (2) 2,108.8 -- -- -- --
--------- --------- --------- ---- ----
Total .......................... 9,597.7 -- -- -- --
--------- --------- --------- ---- ----
Structured Finance
Finance receivables (1) .......... 1,933.9 -- -- -- --
--------- --------- --------- ---- ----
Total Newcourt Segment ........... 11,531.6 -- -- -- --
--------- --------- --------- ---- ----
Commercial Services ................ 4,165.1 2,481.8 2,113.1 67.8% 17.4%
Business Credit .................... 2,837.0 2,514.4 2,137.7 12.8% 17.6%
--------- --------- --------- ---- ----
Total Commercial
Finance Segment ............... 7,002.1 4,996.2 4,250.8 40.1% 17.5%
--------- --------- --------- ---- ----
Total Commercial Segments ........ 35,550.4 18,363.2 15,960.5 93.6% 15.1%
--------- --------- --------- ---- ----
Home equity ........................ 2,215.4 2,244.4 1,992.3 (1.3)% 12.7%
Manufactured housing ............... 1,666.9 1,417.5 1,125.7 17.6% 25.9%
Recreational vehicles .............. 361.2 744.0 501.9 (51.5)% 48.2%
Liquidating portfolio (5) .......... 462.8 848.4 313.1 (45.5)% 171.0%
--------- --------- --------- ---- ----
Total Consumer Segment .......... 4,706.3 5,254.3 3,933.0 (10.4)% 33.6%
--------- --------- --------- ---- ----
Other - Equity Investments ....... 137.3 81.9 65.8 67.6% 24.5%
--------- --------- --------- ---- ----
Total Financing and Leasing
Portfolio Assets .............. 40,394.0 23,699.4 19,959.3 70.4% 18.7%
--------- --------- --------- ---- ----
Finance receivables previously
securitized:
Commercial ....................... 7,471.5 -- -- -- --
Consumer ......................... 2,567.8 2,516.9 2,385.6 2.0% 5.5%
--------- --------- --------- ---- ----
Total ............................ 10,039.3 2,516.9 2,385.6 298.9% 5.5%
--------- --------- --------- ---- ----
Total Managed Assets ............. $50,433.3 $26,216.3 $22,344.9 92.4% 17.3%
========= ========= ========= ==== ====
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) At December 31, 1999, finance receivables of $2,149.4 million were
transferred to Equipment Financing from Vendor Technology Finance and
$229.4 million were transferred to Vendor Technology Finance from
Equipment Financing. Additionally, $231.3 million of finance receivables
were transferred to Capital Finance from Structured Finance.
(2) At December 31, 1999, net operating lease equipment of $208.4 million was
transferred to Equipment Financing from Vendor Technology Finance and $4.4
million was transferred to Vendor Technology Finance from Equipment
Financing.
(3) Consists primarily of ocean going maritime and project finance. We
discontinued marketing to these sectors in 1997.
(4) Operating lease equipment, net, of $19.1 million, $27.0 million and $30.0
million are included in the liquidating portfolio for 1999, 1998, and
1997, respectively.
(5) In 1999, we decided to exit the recreational boat and wholesale loan
product lines. Prior year balances have been conformed to current year
presentation.
22
<PAGE>
Based on strong new business volume plus the Newcourt acquisition, which
added $21.4 billion in managed assets, and the Heller and Congress purchases,
the Commercial segments' managed assets grew by $24.7 billion in 1999 to $43.0
billion in 1999. Including the Heller and Congress purchases, the Commercial
Finance segment grew 40.1% from 1998 to 1999. Excluding the liquidating
portfolio and the transfers between business units, the Equipment Financing and
Leasing segment grew 11.4% in 1999. Total commercial segments grew 15.1% from
1997 to 1998. Growth in finance receivables was principally due to increases in
transportation, construction and the purchase of a telecommunications leasing
portfolio.
Consumer managed assets decreased to $7.3 billion in 1999 from $7.8
billion in 1998. This decrease reflects the whole loan sales of certain
receivables and our decision to exit two product lines, recreational boat and
wholesale financing, to concentrate on our remaining core consumer product
lines. The Consumer segment managed assets grew 23.0% in 1998, reflecting strong
home equity originations and strong growth in new business volume, particularly
in recreational vehicle financing.
Concentrations
Financing and Leasing Assets Composition
Our ten largest financing and leasing asset accounts in the aggregate
represented 3.7% of our total financing and leasing assets at December 31, 1999,
and 4.5% at December 31, 1998. 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,
-----------------------------------------
1999 1998
------------------ ------------------
Amount Percent Amount Percent
------ ------- ------ -------
Dollars in Millions
United States
Northeast .................. $ 8,145.1 20.2% $ 5,143.9 21.7%
West ....................... 7,517.2 18.6 5,583.2 23.6
Midwest .................... 6,966.8 17.2 4,895.3 20.7
Southeast .................. 5,318.5 13.2 3,492.3 14.7
Southwest .................. 4,387.0 10.9 2,993.3 12.6
--------- ---- --------- ----
Total United States ........ 32,334.6 80.1 22,108.0 93.3
--------- ---- --------- ----
Foreign
Canada ..................... 3,163.4 7.8 100.5 0.4
All other .................. 4,896.0 12.1 1,490.9 6.3
--------- ---- --------- ----
Total ...................... $40,394.0 100.0% $23,699.4 100.0%
========= ===== ========= =====
Our managed asset geographic diversity does not differ significantly from
our owned asset geographic diversity.
Our financing and leasing asset portfolio in the United States is
diversified by state. At December 31, 1999, with the exception of California
(10.1%), Texas (7.7%), and New York (6.9%), no state represented more than 4.8%
of financing and leasing assets. Our 1997 managed and owned asset geographic
composition did not significantly differ from our 1998 managed and owned asset
geographic composition.
Financing and leasing assets to foreign obligors totaled $8.1 billion at
December 31, 1999. After Canada, $3.2 billion (7.83% of financing and leasing
assets), the largest foreign exposures were to England, $1.6 billion (4.00%),
and Australia, $397.6 million (0.98%). Our remaining foreign exposure was
geographically dispersed, with no other individual country exposure greater than
0.77% of financing and leasing assets.
At December 31, 1998, financing and leasing assets to foreign obligors
totaled $1.6 billion. The largest exposures at December 31, 1998 were to
obligors in Belgium, $142.4 million (0.60% of financing and leasing assets), and
France, $136.4 million (0.58%). Our remaining foreign exposure was
geographically dispersed, with no other individual country exposure greater than
0.44%.
23
<PAGE>
Industry Composition
The following table presents our financing and leasing assets by major
industry class.
At December 31,
----------------------------------------
1999 1998
------------------ ------------------
Amount Percent Amount Percent
------ ------- ------ -------
Dollars in Millions
Manufacturing(1)
(none greater than 4.2%) .......... $ 8,566.5 21.2% $ 5,117.0 21.6%
Retail (2) ........................... 5,194.1 12.9 1,882.1 7.9
Transportation (3) ................... 3,348.2 8.3 1,777.6 7.5
Commercial airlines (4) .............. 3,091.2 7.7 2,325.4 9.8
Construction equipment ............... 2,697.0 6.7 1,947.4 8.2
Home mortgage ........................ 2,215.4 5.5 2,244.4 9.5
Manufactured housing ................. 1,666.9 4.1 1,417.5 6.0
Wholesaling .......................... 1,303.6 3.2 976.5 4.1
Financial institutions ............... 1,205.3 3.0 316.5 1.4
Other (none greater than 3.0%) ....... 11,105.8 27.4 5,695.0 24.0
--------- ----- -------- -----
Total ................................ $40,394.0 100.0% $23,699.4 100.0%
========= ===== ======== =====
- --------------------------------------------------------------------------------
(1) Includes manufacturers of steel and metal products, textiles and apparel,
printing and paper products, and other industries.
(2) Includes retailers of apparel (4.0%) and trade and building materials
(3.5%), both increasing from 1998 due to 1999 acquisitions.
(3) Includes rail, bus, and over-the-road trucking industries, and business
aircraft.
(4) See "Commercial Airline Industry" for a discussion of the commercial
airline portfolio.
Our 1997 managed and owned asset industry composition did not differ
significantly from our 1998 managed and owned asset industry composition.
Commercial Airline Industry
Commercial airline financing and leasing assets totaled $3.1 billion (7.7%
of our total financing and leasing assets) and 264 aircraft at December 31, 1999
compared with $2.3 billion (9.8%) and 206 aircraft in 1998. The acquisition of
Newcourt increased our portfolio by approximately $0.4 billion, represented by
71 aircraft. Our portfolio is secured by commercial aircraft and related
equipment. From 1992 through mid-1997, we limited the growth of our 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 97.6% of our portfolio at December 31, 1999 consists
of Stage III aircraft versus 96.6% at December 31, 1998. All of our Stage II
aircraft are currently deployed outside the continental United States.
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 49.4% of the total commercial airline portfolio outstanding at
December 31, 1999, 47.1% at December 31, 1998, and 39.6% at December 31, 1997.
During 1999, we entered into agreements with both Airbus Industries and the
Boeing Company to purchase a total of 40 aircraft, for a total commitment of
approximately $2.0 billion, with options to acquire additional units. Deliveries
of these new aircraft are scheduled to take place over a five year period
starting in the fourth quarter of 2000.
Risk Management
Our business activities contain various elements of risk. We consider the
principal types of risk to be credit risk (including credit, collateral and
equipment risk) and market risk (including interest rate, foreign currency 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.
24
<PAGE>
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.
In response to our growing businesses, a corporate credit risk management
group, which reports to the Chief Risk Officer, was formed in the fourth quarter
of 1999 to oversee and manage credit risk throughout CIT. This group's structure
includes senior credit executive alignment with each of the business units, as
well as a senior executive with corporate-wide asset recovery and work-out
responsibilities. This group reviews non-traditional transactions and
transactions which are outside of established target market definitions and risk
acceptance criteria or which exceed the strategic business units' credit
authority. In addition, an executive credit committee ("ECC"), which includes
the Chairman and Chief Executive Officer, the Chief Risk Officer, and three
members of the corporate credit risk management group, approves credits that are
beyond the authority of the business units. The credit risk management group
also includes an independent credit audit function, which previously was part of
our internal audit group.
Each of our strategic business units has developed and implemented a
formal credit management process in accordance with formal uniform guidelines
established by the credit risk management group. These 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.
For small ticket business originated in our Vendor Technology Finance
business unit and the Consumer segment, we utilize automated credit scoring
capabilities. The Vendor Technology Finance capability, which was acquired in
the Newcourt purchase, dates back to the late 1980s. In these proprietary
models, we utilize statistical techniques in analyzing customer attributes,
including industry and corporate data, trade payment history, and other credit
bureau information. Model scores are measured against actual delinquency and
loss experience. Modifications are made to the models based upon this monitoring
effort as appropriate.
Compliance with established corporate policies and procedures and the
credit management processes at each strategic business unit are reviewed by the
credit audit group. 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 credit audit group reports to the Chief Risk Officer and to
the Audit Committee.
Commercial. We have developed systems specifically designed to effectively
manage credit risk in our 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. 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.
25
<PAGE>
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, and 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 Chief Risk Officer, the Executive Vice
President-Credit Administration and the Chief Financial Officer. Periodically,
this committee will meet with the Chairman and Chief Executive Officer 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 corporate credit risk management
group to review 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 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 include 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".
Market Risk Management
Market risk is the risk of loss arising from changes in values of
financial instruments including interest rate risk, foreign exchange risk,
derivative credit risk and liquidity risk. We engage in transactions, in the
normal course of business, that expose us to market risks and we maintain
management practices and policies designed to effectively mitigate such risks.
Our Capital Committee sets policies, oversees and guides the interest rate
and currency risk management process, including establishment and monitoring of
risk metrics, and ensures the implementation of those policies. Other risks
monitored by the Capital Committee include derivative credit risk and liquidity
risk. The Capital Committee is comprised of members of senior management
including the Chairman and Chief Executive Officer, the Chief Financial Officer,
the Treasurer, and the Controller. Business unit executives also serve on the
Capital Committee on a rotational basis.
We seek to preserve company value by hedging changes in future expected
net cash flows and/or by decreasing the cost of capital. Strategies for managing
market risks associated with changes in interest rates and foreign exchange
rates are an integral part of the process, since those strategies affect our
future expected cash flows as well as our cost of capital.
Interest Rate and Foreign Exchange Risk Management. We offer a variety of
financing products to our customers including fixed and floating rate loans of
various maturities and currency denominations, and a variety of leases,
including operating leases. 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., basic 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. We measure our
asset/liability position in both economic terms and by its periodic effect on
earnings using maturity gap analysis and duration analysis.
26
<PAGE>
A matched position is generally achieved through a combination of on- and
off-balance sheet financial instruments, including the issuance of commercial
paper and medium and long-term debt, interest rate and currency swaps, foreign
exchange contracts, syndication and securitization. We do not speculate on
interest rates and foreign exchange rates, but rather seek to mitigate the
possible impact of such rate fluctuations encountered in the normal course of
business. This is an ongoing process due to prepayments, refinancings, actual
payments varying from contractual terms, as well as other portfolio dynamics.
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.
Interest rate swaps with notional principal amounts of $8.8 billion at
December 31, 1999 and $4.3 billion at December 31, 1998 were designated as
hedges against outstanding debt and were principally used to 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
----------------------------------------------------------
1999 1998 1997
------------------ ------------------ ------------------
Dollars in Millions
<S> <C> <C> <C> <C> <C> <C>
Commercial paper and variable rate
senior notes .................. $11,896.2 5.26% $ 9,672.6 5.53% $ 9,574.2 5.61%
Fixed rate senior and subordinated
notes ......................... 10,115.1 6.47% 7,476.5 6.31% 5,497.6 6.52%
--------- ---- --------- ---- --------- ----
Composite ........................ $22,011.3 5.71% $17,149.1 5.87% $15,071.8 5.94%
========= ==== ========= ==== ========= ====
</TABLE>
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------
After Swaps
----------------------------------------------------------
1999 1998 1997
------------------ ------------------ ------------------
Dollars in Millions
<S> <C> <C> <C> <C> <C> <C>
Commercial paper and variable rate
senior notes .................. $ 8,977.7 5.32% $ 7,069.9 5.47% $ 6,443.2 5.54%
Fixed rate senior and subordinated
notes ......................... 13,033.6 6.25% 10,079.2 6.39% 8,628.6 6.52%
--------- ---- --------- ---- --------- ----
Composite ........................ $22,011.3 5.87% $17,149.1 6.01% $15,071.8 6.10%
========= ==== ========= ==== ========= ====
</TABLE>
The weighted average composite interest rate after swaps in each of the
years presented increased from the composite interest rate before swaps
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. Derivatives are discussed further in Note 8
"Derivative Financial Instruments" of Item 8. Financial Statements and
Supplementary Data.
The acquisition of Newcourt has expanded our global presence, with
operations in North America, South America, Europe, Asia and Australia. Our
foreign operations are funded through both local currency borrowings and U.S.
dollar borrowings which are converted to local currency through the use of
foreign exchange forward contracts or cross-currency swaps. At December 31,
1999, $2.9 billion in notional principal amount of foreign exchange forwards and
$1.5 billion in notional principal amount of cross-currency swaps were
designated as currency-related debt hedges.
We also utilize foreign exchange forward contracts to hedge our net
investments in foreign operations. Translation gains and losses of the
underlying foreign net investment, as well as offsetting hedge gains or losses
on designated hedges, are reflected in other comprehensive income as a separate
component of equity in the Consolidated Balance Sheets. As of December 31, 1999,
$0.9 billion in notional principal of foreign exchange forwards were designated
as hedges of net investments in foreign operations.
27
<PAGE>
We regularly 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 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, 1999, an immediate hypothetical 100 basis point
parallel rise in the yield curve on January 1, 2000 would increase net income by
an estimated $1.4 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 account 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.
Derivative Risk Management. 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. A list of
diversified, creditworthy counterparties used for derivative financial
instruments, each of whom has specific credit exposure limits, which are based
on market value, is maintained. The Capital 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 type of
contract, summarized by counterparty and reported to the Capital Committee.
We assess and manage the risks associated with derivative instruments,
which can be categorized as 1) external and 2) internal risks. External risk is
defined as those risks outside of our direct control, including counterparty
credit risk, liquidity risk, systemic risk and legal risk. Internal risk relates
to those operational risks within the management oversight structure, and
includes action taken in contravention of CIT policy.
The primary external risk of derivative instruments is counterparty credit
exposure, which is the market value of the derivative contract and the ability
of the counterparty to perform its payment obligation under the agreement. We
control the credit risk of our derivative agreements through credit approvals,
exposure limits, and monitoring procedures. All derivative agreements are with
major money center financial institutions rated investment grade by nationally
recognized rating agencies with the majority of our counterparties being rated
"AA" or better.
We maintain a variety of controls to address potential internal risks,
with such controls intended to effectively guard against policy violations.
Among the internal controls are approved authorization limits and segregation of
duties.
Liquidity Risk Management. Liquidity risk refers to the risk of CIT being
unable to meet potential cash outflows promptly and cost effectively. Factors
that could cause such a risk to arise might be a disruption of a securities
market or other
28
<PAGE>
source of funds. We actively manage and mitigate liquidity risk by maintaining
diversified sources of funding. The primary funding sources are commercial paper
(U.S., Canada and Australia), medium-term notes (U.S., Canada and Europe) and
asset-backed securities (U.S. and Canada). We also maintain committed bank lines
of credit aggregating $8.4 billion to provide back-stop support of commercial
paper borrowings and approximately $392 million of local bank lines to support
our international operations. Additional sources of liquidity are loan and lease
payments from customers and wholeloan asset sales and syndications. At December
31, 1999, $21.2 billion of registered, but unissued, debt securities remained
available under shelf registration statements, including $2.0 billion of
European Medium-Term Notes.
To ensure uninterrupted access to capital, we maintain strong investment
grade ratings as outlined below:
Short Term Long Term
---------- ---------
Moody's .................................. P-1 A1
Standard & Poor's ........................ A-1 A+
Duff & Phelps ............................ D-1+ AA-
Dominion Bond Rating Service ............. R-1 (mid) A (mid)
As part of our continuing program of accessing the public and private
asset-backed securitization markets as an additional liquidity source,
recreational vehicle and general equipment finance receivables of $1.5 billion
were securitized during 1999. We securitized recreational vehicle, home equity
and recreational boat finance receivables of $866.0 million in 1998. The
increase in securitization activity from 1998 to 1999 was primarily due to
additional activity from the former Newcourt operations, which have established
securitization vehicles and relationships with institutional investors in the
U.S. and Canada to insure broad market access. It is our intention to continue
this commercial securitization activity, though at a lower level of total
funding than done by Newcourt prior to the acquisition.
At December 31, 1999, we had $4.3 billion of registered, but unissued,
securities available under shelf registration statements relating to our
asset-backed securitization program.
We also target and monitor certain liquidity metrics to ensure both a
balanced liability profile and adequate alternate liquidity availability. Among
the target ratios are commercial paper as a percentage of total debt and
committed bank line coverage of outstanding commercial paper.
Capitalization
The following table presents information regarding our capital structure.
<TABLE>
<CAPTION>
At December 31,
-----------------------------
1999 1998
--------- ---------
Dollars in Millions
<S> <C> <C>
Commercial paper ......................................................... $ 8,974.0 $ 6,144.1
Term debt ................................................................ 26,399.5 12,507.3
Company-obligated mandatorily redeemable preferred securities
of subsidiary trust holding solely debentures of the Company ........... 250.0 250.0
Stockholders' equity ..................................................... 5,554.4 2,701.6
--------- ---------
Total capitalization ..................................................... $41,177.9 $21,603.0
========= =========
Total debt (excluding overnight deposits) to stockholders' equity and
Company-obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely debentures of the Company .............. 5.96x 6.32x
Total debt (excluding overnight deposits) to tangible stockholders'
equity and Company-obligated mandatorily redeemable
preferred securities of subsidiary trust holding solely
debentures of the Company .............................................. 8.75x 6.82x
Tangible stockholders' equity and Company-obligated
mandatorily redeemable preferred securities of subsidiary trust
holding solely debentures of the Company to managed assets ............ 7.8% 10.4%
</TABLE>
29
<PAGE>
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.
On November 15, 1999, we issued 76,428,304 shares of CIT common stock and
27,577,082 exchangeable shares of CIT Exchangeco Inc. (exchangeable on a
one-for-one basis for shares of CIT common stock) under the terms of the
Newcourt acquisition. This issuance reflected an exchange ratio of .70 shares of
our common stock for the 148,536,081 outstanding common shares of Newcourt.
Canadian resident holders of Newcourt common shares were permitted to elect to
receive exchangeable shares issued by CIT Exchangeco in lieu of CIT common stock
in order to defer recognizing any taxable gain or loss on the acquisition. Prior
to the acquisition, we amended our Certificate of Incorporation to rename and
combine our Class A Common Stock and Class B Common Stock as Common Stock, which
is now the only class of common stock outstanding. Following the transaction,
the former CIT shareholders owned approximately 61% of the combined company, and
the former Newcourt shareholders owned approximately 39% of the combined
company. At December 31, 1999, DKB, our largest shareholder, owned approximately
26.8% of our outstanding common stock (including the exchangeable shares). CIT
also acquired two factoring operations during 1999 for cash. All of these
acquisitions were accounted for using the purchase method of accounting. See
Note 3 -- "Acquisitions" for further discussion of 1999 acquisitions.
Recent Accounting Pronouncements
During 1999, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral
of the Effective Date of FASB Statement No. 133, an amendment of FASB Statement
No. 133". SFAS 137 delayed the implementation of SFAS 133, which is now
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. Due to the additional derivative instruments acquired in the Newcourt
purchase, we have not yet finalized the evaluation of the impact of SFAS 133.
Year 2000 Compliance
We successfully completed our Year 2000 transition and to date we have not
experienced any Year 2000 operational problems in our Information Technology
(IT) systems and our non-IT systems. We have not received indications from any
material third party or material borrower that they have experienced any Year
2000 problems. Although we do not anticipate that Year 2000 problems will arise
in our operations, we may continue to be exposed to Year 2000 risks from third
parties.
The total cost, excluding expenses incurred by Newcourt prior to the
acquisition, of our Year 2000 project was approximately $6.7 million. This
amount included 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.
30
<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, 1999 and 1998, 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, 1999.
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, 1999 and 1998, and the results of
their operations and cash flows for each of the years in the three-year period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
KPMG LLP
Short Hills, New Jersey
February 2, 2000
31
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
----- -----
Dollars in Millions
Assets
<S> <C> <C>
Financing and leasing assets
Loans and leases
Commercial ................................................. $27,119.2 $15,589.1
Consumer ................................................... 3,887.9 4,266.9
--------- ---------
Finance receivables ...................................... 31,007.1 19,856.0
Reserve for credit losses ...................................... (446.9) (263.7)
--------- ---------
Net finance receivables .................................... 30,560.2 19,592.3
Operating lease equipment, net ................................. 6,125.9 2,774.1
Finance receivables held for sale .............................. 3,123.7 987.4
Cash and cash equivalents ...................................... 1,073.4 73.6
Goodwill ....................................................... 1,850.5 216.5
Other assets ................................................... 2,347.4 659.2
--------- ---------
Total assets ............................................. $45,081.1 $24,303.1
========= =========
Liabilities and Stockholders' Equity
Debt
Commercial paper ............................................... $ 8,974.0 $ 6,144.1
Variable rate senior notes ..................................... 7,147.2 4,275.0
Fixed rate senior notes ........................................ 19,052.3 8,032.3
Subordinated fixed rate notes .................................. 200.0 200.0
--------- ---------
Total debt ............................................. 35,373.5 18,651.4
Credit balances of factoring clients ........................... 2,200.6 1,302.1
Accrued liabilities and payables ............................... 1,191.8 694.3
Deferred federal income taxes .................................. 510.8 703.7
--------- ---------
Total liabilities ...................................... 39,276.7 21,351.5
Company-obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely debentures of the Company .. 250.0 250.0
Stockholders' equity
Common stock ................................................... 2.7 1.7
Paid-in capital ................................................ 3,521.8 952.5
Retained earnings .............................................. 2,097.6 1,772.8
Accumulated other comprehensive income ......................... 2.8 --
Treasury stock at cost ......................................... (70.5) (25.4)
--------- ---------
Total stockholders' equity ............................. 5,554.4 2,701.6
--------- ---------
Total liabilities and stockholders' equity ............. $45,081.1 $24,303.1
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1999 1998 1997
-------- -------- --------
Dollars in Millions
(except per share amounts)
<S> <C> <C> <C>
Finance income .................................................... $2,565.9 $2,015.1 $1,824.7
Interest expense .................................................. 1,293.4 1,040.8 937.2
-------- -------- --------
Net finance income ............................................ 1,272.5 974.3 887.5
Depreciation on operating lease equipment ......................... 355.1 169.5 146.8
-------- -------- --------
Net finance margin ............................................ 917.4 804.8 740.7
Fees and other income ............................................. 350.8 255.4 247.8
Gain on sale of equity interest acquired in loan workout .......... -- -- 58.0
-------- -------- --------
Operating revenue ............................................. 1,268.2 1,060.2 1,046.5
-------- -------- --------
Salaries and general operating expenses ........................... 516.0 407.7 420.0
Provision for credit losses ....................................... 110.3 99.4 113.7
Goodwill amortization ............................................. 25.7 10.1 8.4
Minority interest in subsidiary trust holding solely
debentures of the Company ..................................... 19.2 19.2 16.3
-------- -------- --------
Operating expenses ............................................ 671.2 536.4 558.4
-------- -------- --------
Income before provision for income taxes ...................... 597.0 523.8 488.1
Provision for income taxes ........................................ 207.6 185.0 178.0
-------- -------- --------
Net income .................................................... $ 389.4 $ 338.8 $ 310.1
======== ======== ========
Net income per basic share ........................................ $ 2.24 $ 2.09 $ 1.96
Net income per diluted share ...................................... $ 2.22 $ 2.08 $ 1.95
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Class B Other Total
Common Common Paid-in Treasury Retained Comprehensive Stockholders'
Stock Stock Capital Stock Earnings Income Equity
-------- ------- ------- ------- -------- ------------- ------------
Dollars in Millions
<S> <C> <C> <C> <C> <C> <C> <C>
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 .............. (250.0) 1.6 248.4 --
Twenty percent of Class B
common shares bought
pursuant to option agreement ..... (0.3) (808.0) (808.3)
Conversion of Class B treasury
stock shares to common stock
shares and issuance of
common stock to the public ....... 0.3 808.0 808.3
Issuance of underwriter's
overallotment of common
stock shares, net ................ 0.1 117.6 117.7
Restricted common stock
grants ........................... 9.0 9.0
------ ---- -------- ------ -------- ----- --------
Balance, December 31, 1997 ......... 0.4 1.3 948.3 -- 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 common stock ............ 1.3 (1.3) --
Repurchase of common stock ......... (25.4) (25.4)
Costs relating to common
stock offering ................... (1.0) (1.0)
Restricted common stock grants ..... 5.2 5.2
------ ---- -------- ------ -------- ----- --------
Balance, December 31, 1998 ......... 1.7 -- 952.5 (25.4) 1,772.8 -- 2,701.6
Net income ......................... 389.4 389.4
Foreign currency translation
adjustments ..................... 0.3 0.3
Unrealized gain on equity and
securitization investments,
net ............................. 2.5 2.5
--------
Total comprehensive income ........ 392.2
--------
Cash dividends ..................... (64.6) (64.6)
Repurchase of common stock ......... (45.1) (45.1)
Issuance of common stock and
exchangeable shares in
connection with the
Newcourt acquisition ............. 1.0 2,562.7 2,563.7
Restricted common stock grants ..... 6.6 6.6
------ ---- ------ ------ -------- ----- --------
Balance, December 31, 1999 ......... $ 2.7 $ -- $3,521.8 $(70.5) $2,097.6 $ 2.8 $5,554.4
====== ==== ======== ====== ======== ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1999 1998 1997
----- ----- -----
Dollars in Millions
<S> <C> <C> <C>
Cash flows from operations
Net income ........................................................ $ 389.4 $ 338.8 $ 310.1
Adjustments to reconcile net income to net cash flows
from operations:
Provision for credit losses ................................... 110.3 99.4 113.7
Depreciation and amortization ................................. 402.8 195.9 168.6
Provision for deferred federal income taxes ................... 163.5 100.2 80.3
Gains on asset and receivable sales ........................... (109.3) (75.1) (137.7)
Increase in accrued liabilities and payables .................. 221.2 34.2 66.1
Increase in other assets ...................................... (125.6) (89.2) (54.0)
Other ......................................................... 33.9 11.0 8.0
--------- --------- ---------
Net cash flows provided by operations ....................... 1,086.2 615.2 555.1
--------- --------- ---------
Cash flows from investing activities
Loans extended .................................................... (39,657.9) (35,818.9) (33,332.9)
Collections on loans .............................................. 34,315.7 32,463.4 31,419.7
Proceeds from asset and receivable sales .......................... 3,733.2 1,381.3 1,747.5
Purchases of assets to be leased .................................. (1,633.2) (1,101.7) (802.8)
Acquisitions, net of cash acquired ................................ (538.0) -- --
Purchases of finance receivables portfolios ....................... (492.1) (600.0) (176.6)
Net increase in short-term factoring receivables .................. (242.9) (255.4) (238.8)
Other ............................................................. (36.0) (19.5) (12.9)
--------- --------- ---------
Net cash flows used for investing activities .................... (4,551.2) (3,950.8) (1,396.8)
--------- --------- ---------
Cash flows from financing activities
Proceeds from the issuance of variable and fixed rate notes ....... 7,700.0 6,863.5 4,532.7
Repayments of variable and fixed rate notes ....................... (5,538.3) (4,111.5) (3,556.1)
Net increase (decrease) in commercial paper ....................... 2,571.2 584.5 (267.4)
Repayments of nonrecourse leveraged lease debt .................... (160.4) (148.7) (162.3)
Proceeds from nonrecourse leveraged lease debt .................... 3.6 155.3 43.7
Cash dividends paid ............................................... (64.6) (48.9) (79.3)
Purchase of treasury stock ........................................ (45.1) (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 mandatorily
redeemable preferred securities of subsidiary trust holding
solely debentures of the Company ................................ -- -- 250.0
--------- --------- ---------
Net cash flows provided by financing activities ................. 4,466.4 3,268.8 879.0
--------- --------- ---------
Effect of exchange rate changes on cash ........................... (1.6) -- --
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents .............. 999.8 (66.8) 37.3
Cash and cash equivalents, beginning of year ...................... 73.6 140.4 103.1
--------- --------- ---------
Cash and cash equivalents, end of year ............................ $ 1,073.4 $ 73.6 $ 140.4
========= ========= =========
Supplemental cash disclosures
Interest paid ..................................................... $ 1,268.9 $ 1,021.3 $ 917.5
Federal and state and local income taxes paid ..................... $ 66.4 $ 81.4 $ 102.1
Supplemental non-cash disclosures
Stock issued for acquisition ...................................... $ 2,563.7 $ -- $ --
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--The Company
The CIT Group, Inc. (the "Company") is a diversified finance company
engaging in vendor, equipment, commercial, consumer and structured financing and
leasing activities. The Company operates extensively in the United States and
Canada, with strategic locations in Europe, Latin and South Americas and the
Pacific Rim.
On November 15, 1999, the Company issued 76,428,304 shares of CIT common
stock and 27,577,082 exchangeable shares of CIT Exchangeco Inc. (exchangeable on
a one-for-one basis for shares of CIT common stock) under the terms of the
acquisition of Newcourt Credit Group Inc. ("Newcourt"). In addition, prior to
the acquisition, the Company's Certificate of Incorporation was amended to
rename and combine the Class A Common Stock and Class B Common Stock as Common
Stock, which is now the only class of common stock outstanding. Following the
transaction, the former CIT shareholders owned approximately 61% of the combined
company, and the former Newcourt shareholders owned approximately 39% of the
combined company. At December 31, 1999, DKB owned approximately 26.8% of the
outstanding stock (including the exchangeable shares). The Company also acquired
two factoring operations during 1999 for cash. All of these acquisitions were
accounted for using the purchase method of accounting. See Note
3--"Acquisitions" for further discussion of 1999 acquisitions.
In November 1998, CIT's majority stockholder, 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 DKB 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. DKB owned approximately
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 owned approximately 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 had 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 Company and its subsidiaries. All significant intercompany
transactions have been eliminated. Prior period amounts have been reclassified
to conform to the current presentation. The 1999 acquisitions were accounted for
using the purchase method of accounting. The acquisitions affect the
comparability of the consolidated financial statements as the consolidated
statement of income reflects results for the acquired operations from the
acquisition dates through December 31, 1999.
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 finance receivables held for sale, net book value of operating
lease equipment, and certain investments, represent financing and leasing
assets.
36
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
generally suspended and an account is placed on non-accrual 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 placement of revolving credit facilities on non-accrual 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 non-accrual 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
non-performing 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.
37
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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 non-accrual status or any troubled debt
restructuring, subject to periodic review by the Company's Asset Quality Review
Committee ("AQR"). The AQR is comprised of members of senior management, which
reviews finance receivables of $500,000 or more meeting certain credit risk
grading parameters. Excluded from impaired loans are: 1) certain individual
small dollar commercial non-accrual 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.
Goodwill
Goodwill represents the excess of the purchase price over the estimated
fair value of identifiable assets acquired, less the estimated fair value of
liabilities assumed from business combinations and is amortized over periods not
exceeding 25 years on a straight line basis. Goodwill is reviewed for impairment
whenever events indicate the carrying amounts may not be recoverable. If the
estimated future cash flows of the Company are projected to be less than the
carrying amount of goodwill, an impairment write-down would be recorded as a
charge to operations.
Securitizations
Included in Other Assets are the Company's retained interest on
securitized assets. At the time management decides to proceed with a
securitization of loans, such loans are considered available for sale,
classified as finance receivables held for sale and carried at the lower of
aggregate cost or market value with losses recognized if applicable. Certain
loans are originated and sold to independent 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". 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
38
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Unrealized gains and losses, representing the difference between carrying value
and current fair market value, are recorded as other comprehensive income in a
separate component of equity. Declines in value considered to be other than
temporary are recognized directly in operations.
Other Assets
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.
Realized and unrealized gains (losses) on marketable equity securities
included in the Company's venture capital investment companies are included
directly in operations. Unrealized gains and losses, representing the difference
between carrying value and current fair market value for all other debt and
marketable equity securities, are recorded as other comprehensive income in a
separate component of equity.
Investments in joint ventures are accounted for using the equity method,
whereby the investment balance is carried at cost and adjusted for the
proportionate share of undistributed earnings or losses.
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 primarily uses interest rate swaps, as part of its worldwide
interest rate risk management. These transactions are entered into as hedges
against the effects of future interest and currency 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. In the event that early termination of a
derivative instrument occurs, the net proceeds paid or received are deferred and
amortized over the shorter of the remaining original contract life of the
interest rate swap or the maturity of the hedged asset or liability position.
The Company uses derivative instruments to hedge the interest rate
associated with the anticipated securitization, syndication, or wholeloan sale
of financing and leasing assets. Such derivative transactions are designated as
hedges against a sale 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 sold are considered held for sale
and are included in 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. In the event the
anticipated sale does not occur, the related hedge position would be liquidated
with any gain or loss recognized in operations at such time, and the related
assets would be reclassified to finance receivables.
The Company also uses foreign exchange forward contracts to hedge the net
investments in foreign operations. These instruments are designated as hedges
and resulting gains and losses are reflected in accumulated other comprehensive
income as a separate component of equity.
39
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation
Stock option plans are accounted for in accordance with Accounting
Principles Board Option 25, "Accounting for Stock Issued to Employees" ("APB
25"). In accordance with APB 25, no compensation expense is recognized for stock
options issued. Proforma disclosures, as if the Company applied the "Fair Value
Based Method" for stock issued to employees, have been provided in Note 15 to
the financial statements. Compensation expense associated with restricted stock
awards is recognized over the associated vesting periods.
Foreign Currency Translation
The Company has operations located in Canada and other countries outside
the United States. The functional currency for these foreign operations is the
local currency. The assets and liabilities of these operations are translated at
the rate of exchange in effect at the balance sheet date. Revenue and expense
items are translated at the average exchange rate prevailing during the year.
The resulting translation adjustments, as well as offsetting gains and losses on
hedges of net investments in foreign operations, are reflected in accumulated
other comprehensive income as a separate component of stockholders' equity.
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.
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.
Comprehensive Income
Components of comprehensive income prior to the year ending December 31,
1999 were not material.
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--Acquisitions
On November 15, 1999, the Company concluded its acquisition of Newcourt, a
publicly-traded non-bank financial services enterprise, which originated,
invested in and securitized, syndicated and sold asset-based loans and leases.
Newcourt's origination activities focus on the commercial and corporate finance
segments of the asset-based financing market. Newcourt, which was headquartered
in Toronto, Canada, operates extensively in the United States and Canada, and
has strategic locations in Europe, Latin and South America, and the Pacific Rim.
The Consolidated Statements of Income reflects Newcourt results from the date of
the acquisition through December 31, 1999.
40
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In connection with the acquisition, 76,428,304 shares of CIT common stock
and 27,577,082 exchangeable shares of CIT Exchangeco Inc. (exchangeable on a
one-for-one basis for shares of CIT common stock), were issued for all Newcourt
common stock outstanding. The value of CIT common stock issued in connection
with the acquisition (including exchangeable shares), was $2,563.7 million,
based upon 148,536,081 outstanding shares of Newcourt at a price of $17.26. The
price per share was determined by multiplying the average closing price of CIT
common stock for the two-day period both before and after the acquisition
announcement on August 5, 1999 by the exchange ratio of .70.
The acquisition of Newcourt has been accounted for using the purchase
method. The difference between the purchase price and the estimated fair value
of net assets acquired has been allocated to goodwill in the Consolidated
Balance Sheets. The goodwill created by the Newcourt acquisition was $1,383.1
million. This goodwill is being amortized on a straight-line basis over
twenty-five years.
The purchase accounting adjustments include estimated fair value
adjustments relating to certain receivable portfolios that are held for sale.
Goodwill may be further adjusted upon the sale of these portfolios to reflect
the allocation of goodwill to the cost basis of the assets sold. Further,
additional restructuring activities, which were contemplated in the Company's
overall integration plan, may occur in the year 2000. Any associated incremental
exit costs will also be reflected as goodwill adjustments in 2000 to the extent
applicable.
In connection with the acquisition, the Company established an integration
plan, which identified activities that would not continue and the associated
costs of exiting those activities. The plan identified areas for adjusting the
amount of real estate required, including the closing of the Newcourt corporate
location in New Jersey, the reduction of corporate office space in Toronto,
Canada, and the elimination of various other operating locations throughout the
United States and Canada. The plan also identified the number of employees who
would be involuntarily terminated, and established the severance levels that
employees would receive upon termination. The existence of this plan and the
severance levels were communicated to employees during December 1999.
Approximately 850 employees, whose functions were eliminated, were impacted by
this plan. Of this total, 1% were senior corporate executive officers, 21% were
in corporate staff groups, and the remaining 78% were in various operating
locations. As of December 31, 1999, approximately 230 employees were paid and
terminated under the plan, including former senior executive officers of
Newcourt. The facilities closings and employee terminations are expected to be
completed by the third quarter of 2000.
Pursuant to this integration plan, restructuring charges were included in
the purchase accounting adjustments as summarized in the table below.
December 31, 1999
-----------------
Dollars in Millions
Other Assets:
Leasehold abandonment .......................................... $ 21.8
Other .......................................................... 14.7
------
36.5
------
Accrued Liabilities and Payables:
Severance and other termination payments ....................... 102.1
Combined CIT and Newcourt transaction costs for legal, investment
banking and accounting ...................................... 57.9
Leasehold termination costs .................................... 24.5
Other .......................................................... 14.7
------
199.2
------
Total Restructuring Charge ...................................... $235.7
======
41
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes the activity in the restructuring liability
(dollars in millions).
Restructuring liability at November 15, 1999 ............ $199.2
Cash payments:
Transaction costs ..................................... (38.0)
Employee termination benefits ......................... (48.1) (86.1)
-----
Other adjustments:
Settlement of transaction fees in CIT common stock .... (14.3)
Other ................................................. ( 2.5) (16.8)
----- ------
Restructuring liability at December 31, 1999 ............ $ 96.3
======
On April 1, 1999, the Company purchased factoring assets of Congress
Financial Corporation ("Congress") from First Union Corporation, and on December
1, 1999, the Company purchased the domestic factoring business of Heller
Financial Inc. ("Heller"). Both of these acquisitions were cash purchases and
were accounted for using the purchase method of accounting, with the
Consolidated Statements of Income reflecting results from the dates of
acquisition through December 31, 1999. In total, these two acquisitions added in
excess of $1.5 billion in financing and leasing assets. The combined goodwill
created at the acquisition dates for Congress and Heller was $270.6 million.
This goodwill is being amortized on a straight-line basis over twenty years.
The unaudited pro forma condensed consolidated statements of income for
the years ended December 31, 1999, and December 31, 1998 follow. These
statements have been prepared assuming that the Newcourt, Congress, and Heller
acquisitions had occurred at the beginning of each respective period.
For the years ended
December 31,
------------------------
Dollars in Millions,
except per share amounts
1999 1998
---- ----
Operating revenue ................................. $ 3,256.9 $ 3,221.1
Net income ........................................ $ 448.1 $ 551.7
Basic earnings per share .......................... $ 1.69 $ 2.11
Diluted earning per share ......................... $ 1.68 $ 2.09
The pro forma results have been prepared for comparative purposes only,
and are based on the historical operating results of the acquired companies
prior to the acquisitions. The proforma results include certain adjustments,
primarily to recognize accretion and amortization based on the allocated
purchase price of assets and liabilities. Further, these results do not include
cost savings, reduced securitization activity and other initiatives introduced
by the Company that management believes will be reflected in the
post-acquisition results. Accordingly, management does not believe that these
pro forma results are indicative of the actual results that would have occurred
had the acquisition closed at the beginning of each period, nor indicative of
future results.
42
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4--Finance Receivables
The following table presents the breakdown of finance receivables by loans
and lease receivables:
December 31,
-----------------------
1999 1998
---- ----
Dollars in Millions
Loans:
Commercial ...................................... $16,997.9 $11,415.5
Consumer ........................................ 3,887.9 4,266.9
Lease receivables ................................. 10,121.3 4,173.6
--------- ---------
Finance receivables ............................. $31,007.1 $19,856.0
========= =========
Included in lease receivables at December 31, 1999 and 1998 are leveraged
lease receivables of $931.9 million and $792.2 million, respectively. Leveraged
lease receivables exclude the portion funded by nonrecourse debt payable to
third party lenders of $2.1 billion and $1.9 billion at December 31, 1999 and
1998, respectively.
Commercial and consumer loans are presented net of unearned income of
$899.8 million and $557.0 million at December 31, 1999 and 1998, respectively.
Lease receivables are presented net of unearned income of $1.8 billion and $1.1
billion at December 31, 1999 and 1998, respectively.
At December 31, 1999 and 1998, finance receivables exclude $10.0 billion
and $2.5 billion, respectively, of finance receivables previously securitized
and currently managed by the Company.
The following table sets forth the contractual maturities of finance
receivables.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------
1999 1998
-------------------- ----------------------
Amount Percent Amount Percent
------ ------- ------ -------
Dollars in Millions
<S> <C> <C> <C> <C>
Due within one year ....................... $11,761.2 37.9% $ 7,948.8 40.0%
Due within one to two years ............... 5,375.1 17.3 3,146.0 15.9
Due within two to four years .............. 5,789.3 18.7 3,458.3 17.4
Due after four years ...................... 8,081.5 26.1 5,302.9 26.7
--------- ----- --------- -----
Total ................................... $31,007.1 100.0% $19,856.0 100.0%
========= ===== ========= =====
</TABLE>
Information about concentrations of credit risk is set forth in
"Concentrations" in Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The following table sets forth the information regarding total
non-performing assets.
December 31,
-----------------------
1999 1998
---- ----
Dollars in Millions
Non-accrual finance receivables ....................... $510.3 $211.4
Assets received in satisfaction of loans .............. 125.1 67.3
------ ------
Total non-performing assets ......................... $635.4 $278.7
====== ======
Percent to finance receivables ........................ 2.05% 1.40%
====== ======
43
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1999 and 1998, the recorded investment in impaired loans,
which are generally collateral dependent, totaled $241.5 million and $74.1
million, respectively, with a related specific reserve allocation of $24.9
million and $0.0 million, respectively. The average monthly recorded investment
in the impaired loans was $116.9 million, $73.2 million and $71.6 million for
the years ended December 31, 1999, 1998 and 1997, respectively. There was no
finance income recorded on these loans during 1999, 1998 or 1997 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
$26.9 million, $16.1 million, and $19.9 million in 1999, 1998, and 1997,
respectively.
Note 5--Reserve for Credit Losses
The following table presents changes in the reserve for credit losses.
<TABLE>
<CAPTION>
At December 31,
----------------------------------
1999 1998 1997
---- ---- ----
Dollars in Millions
<S> <C> <C> <C>
Balance, January 1 ................................... $263.7 $235.6 $220.8
------ ------ ------
Provision for credit losses .......................... 110.3 99.4 113.7
Reserves relating to acquisitions .................... 167.9 7.5 2.1
------ ------ ------
Additions to the reserve for credit losses ......... 278.2 106.9 115.8
------ ------ ------
Finance receivables charged-off ...................... (111.1) (103.7) (123.5)
Recoveries on finance receivables
previously charged-off ............................. 16.1 24.9 22.5
------ ------ ------
Net credit losses .................................. (95.0) (78.8) (101.0)
------ ------ ------
Balance, December 31 ................................. $446.9 $263.7 $235.6
====== ====== ======
Reserve for credit losses as a percentage
of finance receivables ............................. 1.44% 1.33% 1.33%
====== ====== ======
</TABLE>
Note 6--Operating Lease Equipment
The following table provides an analysis of operating lease equipment by
equipment type, net of accumulated depreciation of $719.4 million in 1999 and
$457.2 million in 1998.
At December 31,
--------------------------
1999 1998
---- ----
Dollars in Millions
Commercial aircraft ............................ $1,528.4 $1,094.7
Railroad equipment ............................. 1,398.1 806.0
Information technology ......................... 925.1 12.0
Telecommunications ............................. 468.7 --
Transportation ................................. 428.4 187.0
Business aircraft .............................. 334.3 318.7
Manufacturing .................................. 258.6 122.0
Machinery and equipment ........................ 228.9 25.2
Construction ................................... 140.9 95.7
Other .......................................... 414.5 112.8
-------- --------
Total ....................................... $6,125.9 $2,774.1
======== ========
44
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Included in the preceding table is equipment not currently subject to
lease agreements of $235.9 million and $27.2 million at December 31, 1999 and
1998, respectively.
Rental income on operating leases, which is included in finance income,
totaled $617.8 million in 1999, $314.1 million in 1998, and $231.8 million in
1997. The following table presents future minimum lease rentals on
non-cancelable operating leases as of December 31, 1999. 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
2000 .......................................... $1,294.7
2001 .......................................... 866.7
2002 .......................................... 502.9
2003 .......................................... 258.3
2004 .......................................... 138.2
Thereafter .................................... 269.0
--------
Total ....................................... $3,329.8
========
Note 7--Debt
The following table presents data on commercial paper borrowings.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
Dollars in Millions
<S> <C> <C> <C>
Borrowings outstanding ....................... $ 8,974.0 $ 6,144.1 $ 5,559.6
Weighted average interest rate ............... 5.71% 5.35% 5.86%
Weighted average maturity .................... 27 days 38 days 43 days
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------
1999 1998 1997
------------ ------------ ------------
Dollars in Millions
<S> <C> <C> <C>
Daily average borrowings .................... $ 6,694.5 $ 6,572.1 $ 6,320.7
Maximum amount outstanding .................. $ 9,295.0 $ 7,655.9 $ 7,039.4
Weighted average interest rate .............. 5.17% 5.51% 5.56%
</TABLE>
45
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following tables present the contractual maturities of total debt at
December 31, 1999 and 1998.
<TABLE>
<CAPTION>
At December 31,
-------------------
Commercial Variable Rate Total Total
Paper Senior Notes 1999 1998
---------- ------------- ----- -----
Dollars in Millions
<S> <C> <C> <C> <C>
Due in 1999 (rates ranging from
4.40% to 5.47%) ................................... $ -- $ -- $ -- $ 9,849.1
Due in 2000 (rates ranging from
4.00% to 7.57%) ................................... 8,974.0 5,082.2 14,056.2 550.0
Due in 2001 (rates ranging from
6.14% to 6.35%) ................................... -- 1,225.0 1,225.0 --
Due in 2002 (rates ranging from
6.47% to 7.93%) ................................... -- 820.0 820.0 --
Due in 2003 (rates ranging from
5.81% to 6.04%) ................................... -- 20.0 20.0 20.0
-------- -------- --------- ---------
Total .............................................. $8,974.0 $7,147.2 $16,121.2 $10,419.1
======== ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
At December 31,
-------------------
Fixed Rate Notes Total Total
Senior Subordinated 1999 1998
------ ------------ ----- -----
<S> <C> <C> <C> <C>
Due in 1999 (rates ranging from
5.38% to 6.63%) .................................... $ -- $ -- $ -- $1,881.0
Due in 2000 (rates ranging from
5.00% to 9.34%) .................................... 4,827.2 -- 4,827.2 2,222.0
Due in 2001 (rates ranging from
5.50% to 9.25%) .................................... 4,478.7 200.0 4,678.7 1,675.0
Due in 2002 (rates ranging from
5.80% to 8.26%) .................................... 2,885.0 -- 2,885.0 1,050.0
Due in 2003 (rates ranging from
4.90% to 8.26%) .................................... 1,268.8 -- 1,268.8 755.0
Due in 2004 (rates ranging from
4.41% to 8.26%) .................................... 1,766.4 -- 1,766.4 80.2
Due after 2004 (rates ranging from
3.35% to 8.26%) .................................... 3,670.9 -- 3,670.9 578.4
--------- ------ --------- --------
Face amount of maturities ........................... 18,897.0 200.0 19,097.0 8,241.6
Purchase accounting adjustment and issue discount ... 155.3 -- 155.3 (9.3)
--------- ------ --------- --------
Total .............................................. $19,052.3 $200.0 $19,252.3 $8,232.3
========= ====== ========= ========
</TABLE>
Variable rate senior notes outstanding at December 31, 1999 with interest
rates ranging from 5.13% to 7.93% mature at various dates through 2003. The
consolidated weighted average interest rates on variable senior notes at
December 31, 1999 and 1998 were 6.03% and 4.93%, respectively. Fixed rate senior
and subordinated debt outstanding at December 31, 1999 matures at various dates
through 2028 at interest rates ranging from 3.35% to 9.34%. The consolidated
weighted average interest rates on fixed rate senior and subordinated debt at
December 31, 1999 and 1998 were 6.61% and 6.11%, respectively.
The following table represents information on unsecured revolving lines of
credit with 70 banks that support commercial paper borrowings at December 31,
1999.
Maturity Dollars in Millions
- -------- -------------------
April 2000 .............................................. $3,962.9
April 2002 .............................................. 3,720.0
April 2003 .............................................. 765.0
--------
Total credit lines ................................ $8,447.9
========
46
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The credit line agreements contain clauses that allow the Company to
extend the termination dates upon written consent from the participating banks.
Certain foreign operations utilize local financial institutions to fund
operations. At December 31, 1999, local credit facilities totaled $391.5
million, of which $130.3 million was available.
Note 8--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 or syndication. 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 Company utilizes foreign exchange forward contracts or cross-currency
swaps to convert U.S. dollar borrowings into local currency to the extent that
local borrowings are not cost effective or available. The Company also utilizes
foreign exchange forward contracts to hedge its net investment in foreign
operations.
The following table presents the notional principal amounts of interest
rate swaps by class and the corresponding hedged liability position.
Notional Amount
Interest Rate Swaps in Millions Comments
- ------------------- --------------- --------
Floating to fixed rate swaps $5,873.3 Effectively converts the
interest rate on an equivalent
amount of commercial paper and
variable rate notes to a fixed
rate.
Fixed to floating rate swaps 2,906.1 Effectively converts the
interest rate on an equivalent
amount of fixed rate notes to a
variable rate.
--------
Total interest rate swaps $8,779.4
========
The Company's hedging activity increased interest expense by $35.8
million, $23.4 million and $24.2 million in 1999, 1998 and 1997, respectively,
over the interest expense that would have been incurred with its debt structure
but without the Company's hedging activity. However, this calculation of
interest expense does not take into account any actions the Company would 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.
The Company is party to cross-currency interest rate swaps with a notional
principal amount of $1.5 billion. The swaps have maturities ranging from 2000 to
2019 that correspond with the terms of the debt. The Company entered into
foreign currency exchange and bond forward contracts with notional amounts of
$3.8 billion and $0.3 billion, respectively, to hedge foreign currency and
interest rate risk.
The Company is exposed to credit risk to the extent a counterparty fails
to perform under the terms of a derivative instrument. This risk is measured as
the market value of interest rate swaps, bond forwards, or foreign exchange
forwards with a positive fair value, which totaled $191.0 million at December
31, 1999, reduced by the effects of master netting agreements as presented in
Note 19--"Fair Values of Financial
47
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
The following table presents the notional principal amounts, weighted
average interest rates expected to be received or paid and the maturities of
U.S. dollar interest rate swaps at December 31, 1999. The data reflects
contractual amounts, maturities and rates, and does not include the impact of
purchase accounting adjustments.
<TABLE>
<CAPTION>
Floating to Fixed to
Fixed Rate Floating Rate
--------------------------------- ---------------------------------
Notional Amounts in Millions
Years Ending Notional Receive Pay Notional Receive Pay
December 31, Amount Rate Rate Amount Rate Rate
- ------------ -------- ------- ---- -------- ------- ----
<S> <C> <C> <C> <C> <C> <C>
2000 .................... $1,328.3 6.34% 6.44% $ 413.5 7.15% 7.75%
2001 .................... 2,349.9 6.40% 6.34% 637.1 6.52% 6.58%
2002 .................... 421.4 6.41% 6.44% 198.0 6.88% 6.76%
2003 .................... 617.9 6.12% 6.02% 311.0 7.15% 7.99%
2004 .................... 112.9 6.51% 5.82% 11.0 7.84% 6.32%
2005-Thereafter ......... 541.0 6.18% 6.82% 1,107.8 7.45% 7.69%
-------- ---- ---- -------- ---- ----
$5,371.4 $2,678.4
======== ========
Weighted average rate ... 6.33% 6.37% 7.11% 7.40%
==== ==== ==== ====
</TABLE>
In addition, at December 31, 1999, the Company had outstanding interest
rate swaps denominated in Canadian dollars and Australian dollars. The Canadian
dollar derivatives included instruments with U.S. dollar equivalent notional
principal of $230.0 million that converted floating-rate debt to fixed-rate debt
at weighted average receive and pay rates of 5.07% and 5.77%, respectively, and
instruments with notional principal of U.S. dollar equivalent $227.7 million
that converted fixed-rate debt to floating-rate debt at weighted average receive
and pay rates of 7.11% and 5.53%, respectively. The Australian dollar
derivatives convert U.S. dollar equivalent $163.4 million in floating-rate debt
to fixed-rate debt at weighted average receive and pay rates of 5.62% and 5.85%,
respectively. The contractual maturities for both the Canadian and Australian
derivatives, are predominately between 2000 and 2004. All other foreign currency
derivatives had an outstanding notional balance of U.S. dollar equivalent $108.4
million maturing through 2002, at weighted average receive and pay rates of
6.24% and 5.53%, respectively.
All rates were those in effect at December 31, 1999. Variable rates are
based on the contractually determined rate or other market rate indices and may
change significantly, affecting future cash flows.
The following table presents the notional principal amounts of foreign
exchange forwards, cross currency swaps and bond forward at December 31, 1999.
The bond forwards are utilized to hedge certain assets held for syndication.
<TABLE>
<CAPTION>
Foreign Exchange Cross-Currency Bond
Forwards Swaps Forwards
------------------------------------------------- -------------- ---------
Notional Amounts in Millions
Hedges of Net
Investments in
Years ended Hedges of Debt Foreign Operations Total
December 31, Notional Amount Notional Amount Notional Amount Notional Amount Notional Amount
- ------------ -------------- ----------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
2000 ................... $1,919.6 $646.0 $2,565.6 $ 240.8 $307.4
2001 ................... 633.2 258.3 891.5 184.1 --
2002 ................... 314.5 26.7 341.2 24.1 --
2003 ................... 34.7 -- 34.7 122.8 --
2004 ................... 3.4 -- 3.4 134.6 --
2005-Thereafter ........ -- -- -- 835.8 --
-------- ------ -------- -------- ------
$2,905.4 $931.0 $3,836.4 $1,542.2 $307.4
======== ====== ======== ======== ======
</TABLE>
48
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 9--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 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 10--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.
On July 22, 1999, the Company's Board of Directors renewed and extended
the 1998 stock repurchase program by authorizing the purchase of up to 2,000,000
additional shares of its common stock to provide shares for, among other things,
its employee compensation programs. Stock repurchases are authorized to take
place over a twelve month period ending August 2000, and may be made from time
to time in the open market or in privately negotiated transactions.
In 1999, the Class A Common Stock, par value $.01 per share was renamed
Common Stock, par value $.01 per share with 1,210,000,000 shares authorized as
of December 31, 1999. The following table summarizes activity in the outstanding
common stock and exchangeable shares for 1999 and 1998 respectively.
<TABLE>
<CAPTION>
Common Stock
---------------------------------------
Less Exchangeable
Issued Treasury Outstanding Shares
------ -------- ----------- ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 ........ 37,173,527 -- 37,173,527 --
Shares issued:
Conversion of Class B Common Stock 126,000,000 -- 126,000,000 --
Restricted shares -- net change ..... (28,648) -- (28,648) --
Shares purchased -- net ............. -- (967,930) (967,930) --
----------- ---------- ----------- ----------
Balance at December 31, 1998 ........ 163,144,879 (967,930) 162,176,949 --
Shares issued:
Newcourt acquisition 76,428,304 -- 76,428,304 27,577,082
Restricted shares -- net change ..... 27,997 -- 27,997 --
Shares purchased -- net ............. -- (1,777,755) (1,777,755) --
Conversion of Exchangeco shares
to common shares ................... 2,684,772 -- 2,684,772 (2,684,772)
----------- ---------- ----------- ----------
Balance at December 31, 1999 ........ 242,285,952 (2,745,685) 239,540,267 24,892,310
=========== ========== =========== ==========
</TABLE>
On November 15, 1999, 27,577,082 exchangeable shares of CIT Exchangeco
Inc., par value of $.01 per share, were issued in connection with the
acquisition of Newcourt. The holders of Exchangeco shares have dividend, voting
and other rights equivalent to those of CIT common stock holders. These shares
may be exchanged at any time at the option of the holder on a one-for-one basis
for CIT common stock, and in any event must be exchanged no later than November
2004.
49
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 11--Fees and Other Income
The following table sets forth the components of fees and other income.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1999 1998 1997
---- ---- ----
Dollars in Millions
<S> <C> <C> <C>
Factoring commissions .............................. $118.7 $ 95.7 $ 95.2
Fees and other income .............................. 161.0 90.7 73.8
Gains on sales of leasing equipment ................ 56.4 45.2 30.1
Gains on securitizations ........................... 14.7 12.5 32.0
Gains on sales of venture capital investments ...... -- 11.3 16.7
------ ------ ------
Total .............................................. $350.8 $255.4 $247.8
====== ====== ======
</TABLE>
Note 12--Salaries and General Operating Expenses
The following table sets forth the components of salaries and general
operating expenses.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1999 1998 1997
---- ---- ----
Dollars in Millions
<S> <C> <C> <C>
Salaries and employee benefits ................... $309.4 $245.4 $253.5
General operating expenses ....................... 206.6 162.3 166.5
------ ------ ------
Total .......................................... $516.0 $407.7 $420.0
====== ====== ======
</TABLE>
Note 13--Income Taxes
The effective tax rate of the Company varied from the statutory federal
corporate income tax rate as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1999 1998 1997
---- ---- ----
Percentage of Pretax Income
<S> <C> <C> <C>
Federal income tax rate ............................................. 35.0% 35.0% 35.0%
Increase (decrease) due to:
State and local income taxes, net of federal income tax benefit ... 2.7 3.0 3.7
Other ............................................................. (2.9) (2.7) (2.2)
---- ---- ----
Effective tax rate .................................................. 34.8% 35.3% 36.5%
==== ==== ====
</TABLE>
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1999 1998 1997
---- ---- ----
Dollars in Millions
<S> <C> <C> <C>
Current federal income tax provision ............. $ 16.7 $ 60.4 $ 70.0
Deferred federal income tax provision ............ 163.5 100.2 80.3
------ ------ ------
Total federal income taxes ..................... 180.2 160.6 150.3
State and local income taxes ..................... 24.4 24.4 27.7
Foreign income taxes ............................. 3.0 -- --
------ ------ ------
Total provision for income taxes ............... $207.6 $185.0 $178.0
====== ====== ======
</TABLE>
50
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred federal and foreign income tax assets and liabilities
are presented below.
At December 31,
----------------------
1999 1998
---- ----
Dollars in Millions
ASSETS
Amortization of intangibles ......................... $ (282.1) $ --
Net operating loss carryforwards .................... (153.8) --
Provision for credit losses .......................... (90.1) (88.9)
Alternative minimum tax ............................. (50.7) --
Loan origination fees ............................... (22.6) (11.3)
Other ............................................... (81.1) (24.3)
-------- -------
Total deferred tax assets ........................ (680.4) (124.5)
-------- -------
LIABILITIES
Leasing transactions ................................ 932.7 778.3
Market discount income .............................. 226.6 33.7
Other ............................................... 29.7 13.1
-------- -------
Total deferred tax liabilities ................... 1,189.0 825.1
-------- -------
Net deferred tax liability ............................. $ 508.6 $ 700.6
======== =======
Also, included in deferred federal income taxes on the Consolidated
Balance Sheets are unamortized investment tax credits of $2.2 million and $3.1
million at December 31, 1999 and 1998, respectively. Included in the accrued
liabilities and payables caption in the Consolidated Balance Sheets are state
and local deferred tax liabilities of $66.8 million and $124.7 million at
December 31, 1999 and 1998, respectively, arising from the temporary differences
shown in the above tables.
The Company has $591.5 million of non-capital losses available for tax
purposes to offset future taxable income arising from the reversal of deferred
income tax liabilities. These non-capital tax losses arise principally from
temporary differences relating to depreciation and restructuring charges as well
as certain other permanent differences. Non-capital losses pertaining to the
Canadian operations of $295.3 million will expire at various dates by the year
2005. Net operating losses pertaining to the U.S. operations of $296.2 million
will expire at various dates by the year 2019.
The Company had an alternative minimum tax credit carryforward for income
tax purposes of $51.2 million at December 31, 1999.
Note 14--Earnings Per Share
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. Options that have an
anti-dilutive effect are not included in the denominator and averaged
approximately 2.4 million shares at the year ended December 31, 1999.
51
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The reconciliation of the numerator and denominator of basic EPS with that
of diluted EPS is presented for the years ended December 31, 1999 and 1998 and
1997.
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Dollars in Millions, except per share amounts
<S> <C> <C> <C>
For the Year Ended December 31, 1999
Basic EPS:
Income available to common shareholders ......... $389.4 174,013,063 $ 2.24
Effect of Dilutive Securities:
Restricted shares ............................... -- 1,001,269 (0.02)
Stock options ................................... -- 146,753 --
------ ----------- ------
Diluted EPS ....................................... $389.4 175,161,085 $ 2.22
====== =========== ======
For the Year Ended December 31, 1998
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
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
====== =========== ======
</TABLE>
Note 15 -- Postretirement and Other Benefit Plans
Retirement and Postretirement Medical and Life Insurance Benefit Plans
Certain employees of the Company who have completed one year of service
and are 21 years of age or older 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 funded on a pay as you go basis.
52
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
------------------------ -------------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
Dollars in Millions
<S> <C> <C> <C> <C> <C> <C>
Change in Benefit Obligations
Benefit obligation at beginning of year ........ $ 118.1 $ 100.4 $ 84.0 $ 37.2 $ 35.0 $ 34.9
Service cost ................................... 7.2 6.3 5.2 1.8 1.5 1.3
Interest cost .................................. 7.6 6.9 6.2 2.3 2.3 2.3
Plan amendments ................................ 1.3 -- -- -- -- --
Actuarial (gain)/loss .......................... (23.8) 7.0 7.8 (2.8) 1.2 (1.3)
Benefits paid .................................. (2.5) (2.5) (2.8) (1.8) (2.8) (2.2)
------- ------- ------- ------ ------ ------
Benefit obligation at end of year ............. $ 107.9 $ 118.1 $ 100.4 $ 36.7 $ 37.2 $ 35.0
======= ======= ======= ====== ====== ======
Change in Plan Assets
Fair value of plan assets at beginning
of year ..................................... $ 132.8 $ 128.5 $ -- $ --
Actual return on plan assets .................. 10.4 6.8 -- --
Benefits paid ................................. (2.5) (2.5) (1.8) (2.8)
Employer contributions ........................ -- -- 1.8 2.8
------- ------- ------ ------
Fair value of plan assets at end of year ...... $ 140.7 $ 132.8 $ -- $ --
======= ======= ====== ======
Reconciliation of Funded Status at End of Year
Funded status ................................. $ 32.8 $ 14.7 $(36.7) $(37.2)
Unrecognized prior service cost ............... (0.1) (1.5) -- --
Unrecognized net (gain)/loss .................. (25.8) (4.7) (8.4) (6.2)
Unrecognized net transition obligation ........ -- -- 21.2 22.9
------- ------- ------ ------
Prepaid/(accrued) benefit cost ................ $ 6.9 $ 8.5 $(23.9) $(20.5)
======= ======= ====== ======
Weighted-average Assumptions
Discount rate ................................. 7.75% 6.50% 7.00% 7.75% 6.50% 7.00%
Rate of compensation increase ................. 4.75% 4.25% 4.50% 4.75% 4.25% 4.50%
Expected return on plan assets ................ 10.00% 10.00% 10.00% -- -- --
Components of Net Periodic Benefit Cost
Service cost .................................. $ 7.2 $ 6.3 $ 5.2 $ 1.8 $ 1.5 $ 1.3
Interest cost ................................. 7.6 6.9 6.2 2.3 2.3 2.3
Expected return on plan assets ................ (13.2) (12.8) (10.8) -- -- --
Amortization of prior service cost ............ -- (0.2) (0.2) -- -- --
Amortization of transition obligation ......... -- -- -- 1.6 1.6 1.7
Amortization of gains ......................... -- (0.5) (0.4) (0.5) (0.8) (0.8)
------- ------- ------- ------ ------ ------
Total net periodic expense/(benefit) .......... $ 1.6 $ (0.3) $ -- $ 5.2 $ 4.6 $ 4.5
======= ======= ======= ====== ====== ======
</TABLE>
For 1999, the assumed health care cost trend rates decline to an ultimate
level of 5.50% in 2005 for all retirees; for 1998, 4.50% in 2005 for all
retirees; and for 1997, 4.50% in 2004 for employees prior to reaching age 65.
53
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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:
Postretirement Benefits
-----------------------
For the Years Ended
-----------------------
1999 1998
---- ----
Dollars in Millions
Effect of One-Percentage Point Increase on:
Year-end benefit obligation............................ $ 2.8 $ 2.6
Total of service and interest cost components.......... 0.4 0.4
Effect of One-Percentage Point Decrease on:
Year-end benefit obligation............................ $(2.6) $(2.4)
Total of service and interest cost components.......... (0.4) (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 $10.4
million, $9.6 million and $9.0 million for 1999, 1998 and 1997, respectively.
During 1999, former Newcourt employees participated in the Newcourt Savings and
Investment Plan, which also qualifies under section 401(k).
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 and is subject to approval by
the Compensation Committee of the Board of Directors. Certain senior executive
officers were permitted to defer up to fifty percent (50%) of their 1999 bonus
(in the form of CIT stock units). The deferred portion of the bonus is converted
into restricted shares at a 25% premium, based on the closing price of CIT
shares on the date of approval. Such restricted shares vest over a three year
period. The premium element is subject to forfeiture if the executive
voluntarily terminates employment with CIT prior to three years from the date of
the award. For the years ended December 31, 1999, 1998 and 1997, expenses for
the Bonus Plan amounted to $24.3 million, $18.6 million and $18.5 million,
respectively.
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 28,900,000 shares of common
stock through grants of annual incentive awards, incentive and non-qualified
stock options, stock appreciation rights, restricted stock, performance shares
and performance units. 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 and 1999 vest one-third
on the first anniversary of the date of grant (1999 and 2000), an additional
one-third on the second anniversary of the date of grant (2000 and 2001), and in
full on the third anniversary of the date of grant (2001 and 2002).
54
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Data for the stock option plans is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------- -------------------------
Average Option Average Option
Shares Price Per Share Shares Price Per Share
------ --------------- ------ ---------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year ............... 4,766,109 $27.39 4,038,298 $27.00
Granted ........................................ 7,556,714 $23.38 892,120 $29.08
Exercised ...................................... (27,698) $27.00 (921) $27.00
Forfeited ...................................... (397,099) $26.10 (163,388) $27.01
Converted Newcourt options
outstanding at year end ...................... 4,653,617 $32.02 -- --
---------- ------ --------- ------
Outstanding at end of year ..................... 16,551,643 $26.89 4,766,109 $27.39
========== ====== ========= ======
Options exercisable at year end ................ 3,060,247 $26.13 903,438 $27.00
========== ====== ========= ======
Weighted average fair value of options
granted (excludes converted Newcourt
options) during the year ..................... $6.87 $9.41
===== =====
</TABLE>
On November 18, 1999, 5,985,714 options were granted to certain employees,
including former Newcourt employees, as part of a broad-based program. According
to the terms of the purchase agreement, outstanding Newcourt options as of the
acquisition date were converted to CIT options by multiplying the number of
Newcourt options by the .70 exchange ratio. The converted option price is the
original Newcourt option price divided by the exchange ratio, and converted into
U.S. dollars from Canadian dollars. The converted CIT options become vested and
exercisable in accordance with the original grants.
Fair value of options granted 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>
1999 .................... 3-5 years 1.75% 28.93%-34.82% 4.61%-5.92%
1998 .................... 3-5 years 1.37% 29.39%-40.93% 4.54%-5.63%
</TABLE>
The following table summarizes information about stock options outstanding
and options exercisable at December 31, 1999:
<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>
$12.40 - $21.44 6,829,610 9.8 years $21.13 209,097 $12.57
$25.78 - $30.75 8,421,595 8.2 years $27.86 2,818,958 $26.81
$32.44 - $68.22 1,300,438 8.4 years $50.86 32,192 $54.65
---------- ---------
16,551,643 3,060,247
========== =========
</TABLE>
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 1,000,000 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 1999 and 1998, the
Company sold 132,084 and 21,214 shares, respectively, to participating employees
under the ESPP.
55
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Restricted Stock and CIT Career Incentive Plan
In January 1999, the Company issued 68,225 restricted shares in connection
with the Bonus Plan and in November 1997, the Company issued 948,527 restricted
shares in connection with the termination of the CIT Career Incentive Plan. Such
shares were issued at fair market value, which was $32.44 per share in 1999 and
$27.00 per share in 1997. The 1999 shares vest one-third on the first
anniversary of the grant (2000) and an additional one-third on the second
anniversary of the date of grant (2001) and in full on the third anniversary of
the date of the grant (2002) whereas the 1997 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. Restricted shares of 945,606 and 919,879 were
outstanding at December 31, 1999 and 1998. For the years ended December 31,
1999, 1998 and 1997, compensation expense recognized in connection with
restricted stock was $4.9 million, $5.2 million and $9.0 million, respectively.
In conjunction with the IPO, 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 common stock
and stock options. Phantom shares granted under the CIT Career Incentive Plan
entitled the participant to receive, at the end of the three year performance
period, a specified amount of cash. Following the end of the performance period,
one-third of the phantom shares vested immediately and one-third vested at the
end of each of the next two years. 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 year ended December 31,
1997, amounts charged to expense for the CIT Career Incentive Plan amounted to
$20.1 million. All charges relating to the termination of the Career Incentive
Plan were included in 1997 expense.
Accounting for Stock-Based Compensation Plans
The Company has elected to apply Accounting Principles Board Opinion 25
("APB 25") rather than the optional provisions of Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS
123") in accounting for its stock-based compensation plans. Under APB 25, the
Company does not recognize compensation expense on the issuance of its stock
options because the option terms are fixed and the exercise price equals the
market price of the underlying stock on the grant date. As required by SFAS 123,
the Company has determined the pro forma information as if the Company had
accounted for stock options granted under the fair value method of SFAS 123. Had
the compensation cost of the Company's stock-based compensation plans been
determined based on the operational provisions of SFAS 123, the Company's net
income for 1999 and net income per diluted share would have been $355.6 million
and $2.03, compared to $389.4 million and $2.22, as reported. For 1998, net
income 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 and $1.95 as reported.
Note 16--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, 1999.
Years Ended December 31, Dollars in Millions
- ------------------------ -------------------
2000 ............................................... $ 54.4
2001 ............................................... 43.9
2002 ............................................... 39.4
2003 ............................................... 40.6
2004 ............................................... 24.2
Thereafter ......................................... 60.2
------
Total ........................................... $262.7
======
56
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In addition to fixed lease rentals, leases generally 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 $65.7 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,
-------------------------------
1999 1998 1997
---- ---- ----
Dollars in Millions
Premises .................................. $24.8 $17.1 $19.6
Equipment ................................. 7.1 6.5 6.0
Less sublease income ...................... (1.3) (1.3) (1.2)
----- ----- -----
Total ................................... $30.6 $22.3 $24.4
===== ===== =====
Note 17--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 18--Credit-Related and Other 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 1999 1998
-------- -------- ----------- -----------
Dollars in Millions
<S> <C> <C> <C> <C>
Unused commitments to extend credit
Financing and leasing assets ............. $2,396.1 $732.0 $3,128.1 $1,876.9
Letters of credit and acceptances
Standby letters of credit .................. 157.3 11.2 168.5 156.4
Other letters of credit .................... 371.7 2.2 373.9 200.1
Acceptances ................................ 12.7 -- 12.7 12.2
Guarantees ................................. 350.3 0.9 351.2 238.8
</TABLE>
During 1999, we entered into agreements with both Airbus Industrie and the
Boeing Company to purchase a total of 40 aircraft (at a cost of approximately
$2.0 billion), with options to acquire additional units. Deliveries of these new
aircraft are scheduled to take place over a five year period starting in the
fourth quarter of 2000. Additional commitments to purchase equipment from other
manufacturers to be placed on operating lease totaled $224.5 million and $449.9
million at December 31, 1999 and 1998, respectively.
Note 19--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
57
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
instrument. Since no established trading market exists for a significant portion
of the Company's financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature, involving uncertainties and
matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions or estimation methods may significantly affect
the estimated fair values. Because of these limitations, management provides no
assurance that the estimated fair values presented would necessarily be realized
upon disposition or sale.
Actual fair values in the marketplace are affected by other significant
factors, such as supply and demand, investment trends and the motivations of
buyers and sellers, which are not considered in the methodology used to
determine the estimated fair values presented. In addition, fair value estimates
are based on existing on-and off-balance sheet financial instruments without
attempting to estimate the value of future business transactions and the value
of assets and liabilities that are part of the Company's overall value but are
not considered financial instruments. Significant assets and liabilities that
are not considered financial instruments include customer base, operating lease
equipment, premises and equipment, assets received in satisfaction of loans, and
deferred tax balances. In addition, tax effects relating to the unrealized gains
and losses (differences in estimated fair values and carrying values) have not
been considered in these estimates and can have a significant effect on fair
value estimates. The carrying amounts for cash and cash equivalents approximate
fair value because they have short maturities and do not present significant
credit risks. Credit-related commitments, as disclosed in Note 18, are primarily
short term floating rate contracts whose terms and conditions are individually
negotiated, taking into account the creditworthiness of the customer and the
nature, accessibility and quality of the collateral and guarantees. Therefore,
the fair value of credit-related commitments, if exercised, would approximate
their contractual amounts.
Estimated fair values, recorded carrying values and various assumptions
used in valuing the Company's financial instruments at December 31, 1999 and
1998 are set forth below.
<TABLE>
<CAPTION>
1999 1998
-------------------------- ---------------------------
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) .................. $20,638.1 $20,726.4 $15,474.0 $15,772.2
Finance receivables held for sale ............... 3,123.7 3,123.7 987.4 987.4
Other assets(b) ................................. 1,728.8 1,746.2 469.3 480.9
Commercial paper(c) ............................. (8,974.0) (8,974.0) (6,144.1) (6,144.1)
Fixed rate senior notes and subordinated
fixed rate notes(d) .......................... (19,149.0) (19,082.7) (8,232.3) (8,365.5)
Variable rate notes(d) .......................... (7,147.2) (7,146.7) (4,275.0) (4,272.3)
Credit balances of factoring clients and
other liabilities(e) ......................... (3,547.1) (3,547.1) (1,833.6) (1,833.6)
Company-obligated mandatorily
redeemable preferred securities of
subsidiary trust holding solely
debentures of the Company(f) ................. (250.0) (232.8) (250.0) (263.4)
Derivative Financial Instruments(g)
Interest rate swap assets ..................... 32.9 62.5 -- 11.6
Interest rate swap liabilities ................ (158.3) (196.5) -- (79.0)
Cross currency assets ......................... 14.8 53.2 -- 25.6
Cross currency liabilities .................... (31.3) (39.4) -- (2.7)
Foreign exchange assets ....................... 37.3 61.8 -- --
Foreign exchange liabilities .................. (11.9) (42.7) -- --
Bond forward assets ........................... 13.2 13.5 -- --
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The fair value of performing fixed-rate loans was estimated based upon a
present value discounted cash flow analysis, using interest rates that
were being offered at the end of the year for loans with similar terms to
borrowers of similar credit quality. Discount rates used in the present
value calculation range from 8.32% to 10.37% for 1999 and 7.59% to 8.67%
for 1998. 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
58
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
quality, fair value approximates carrying value. The net carrying value of
lease finance receivables not subject to fair value disclosure totaled
$10.0 billion in 1999 and $4.1 billion in 1998.
(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 $618.6 million in 1999 and $406.4 million in
1998.
(c) The estimated fair value of commercial paper approximates carrying value
due to the relatively short maturities.
(d) The carrying value of the fixed rate senior notes excludes the net
liability carrying value of $103.3 million of derivative financial
instruments. Fixed rate notes were valued using a present value discounted
cash flow analysis with a discount rate approximating current market rates
for issuances by the Company of similar term debt at the end of the year.
Discount rates used in the present value calculation ranged from 5.65% to
7.83% in 1999 and 4.83% to 6.04% in 1998. 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. Other
liabilities includes accrued liabilities and deferred federal income
taxes. 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 $356.1
million in 1999 and $866.5 million in 1998.
(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) The Company enters into derivative financial instruments for hedging
purposes only. The 1999 carrying values represent purchase accounting
adjustments associated with the instruments acquired from Newcourt and do
not necessarily correlate directly with the presented fair values as the
Company has other instruments that are carried only off-balance sheet. The
carrying value balances will amortize as the instruments acquired mature.
The estimate fair values 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 counter-party credit risk. See
Note 8 - "Derivative Financial Instruments" for notional principal amounts
associated with the instruments.
Note 20--Investments in Debt and Equity Securities
At December 31, 1999 and 1998, the Company's investments in debt and
equity securities designated as available for sale totaled $1,129.7 million and
$238.6 million, respectively.
Included in the Company's investments in debt and equity securities are
retained interests in commercial securitized assets of $914.5 million and
consumer securitized assets of $194.8 million at December 31, 1999 and consumer
securitized assets of $222.8 million at December 31, 1998. Retained interests
include interest-only strips, retained subordinated securities, and cash reserve
accounts related to securitizations. 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,
1999 were as follows:
<TABLE>
<CAPTION>
Consumer
-------------------------------------
Commercial Manufactured Housing Recreational
Equipment & Home Equity Vehicle & Boat
---------- -------------------- --------------
<S> <C> <C> <C>
Prepayment speed(1) .................... 6.0%-11.7% 15.6%-30.2% 21.5%-26.2%
Expected credit losses ................. 0.30%-1.70% 0.25%-1.38% 0.60%-1.52%
Weighted average discount rate ......... 5.3%-11.6% 8.8%-12.1% 8.7%- 9.6%
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) Based upon CPR. CPR expresses prepayments as a function of the declining
amount of loans at a compound annual rate.
Note 21--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.
At December 31, 1999 and December 31, 1998, the Company's total credit
line coverage totaled $8.4 billion and $5.0 billion, respectively, of committed
facilities. At December 31, 1999, DKB was committed under a $1.7 billion
revolving credit facility and a $3.7 billion revolving credit facility with
commitments of
59
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$93.0 million and $210.0 million, respectively. 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. Additional information regarding these credit lines can be found
in Note 7 -- "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, 1999 and 1998. The notional principal amount outstanding on
foreign currency swaps with DKB totaled $168.6 million at year-end 1999 and
1998. The Company has entered into leveraged leasing arrangements with third
party loan participants, including affiliates of DKB. Amounts owed to affiliates
of DKB are $398.3 million in 1999 and $431.0 million in 1998.
At December 31, 1999 and 1998, the Company had entered into credit-related
commitments with DKB in the form of letters of credit totaling $13.4 million and
$12.2 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 recreational 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, 1999 and 1998, the principal amount outstanding on the cash
collateral loans with DKB was $15.7 million and $34.3 million, respectively.
Note 22--Business Segment Information
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 four reportable segments, Equipment Financing and Leasing,
Newcourt, Commercial Finance, and Consumer. Equipment Financing and Leasing, and
the former Newcourt operations offer 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. Prospectively, the Company expects to report the operations
of Newcourt by its Vendor Technology Finance and Structured Finance segments.
However, for 1999 the Company's internal financial information was prepared for
the Newcourt segment only due to the short period and the business restructuring
which took place as of year-end. 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, 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 recreational
vehicles and manufactured housing.
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
60
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
evaluates segment performance based on profit after income taxes, as well as
asset growth, credit risk management and other factors.
The following table presents reportable segment information and the
reconciliation of segment balances to the consolidated financial statement total
and the consolidated managed asset total at or as of December 31, 1999, 1998 and
1997.
<TABLE>
<CAPTION>
Equipment
Financing Commercial Consumer Total Corporate Consolidated
and Leasing Newcourt Finance Finance Segments and Other Total
----------- -------- ---------- -------- -------- ---------- -----------
Dollars in Millions
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1999
- -----------------
Operating revenue ............. $ 504.6 $ 104.1 $ 429.3 $ 243.1 $ 1,281.1 $(12.9) $ 1,268.2
Income taxes .................. 108.2 5.5 100.6 37.5 251.8 (44.2) 207.6
Net income .................... 231.5 7.5 141.4 60.0 440.4 (51.0) 389.4
Total managed assets .......... 19,206.1 16,813.7 7,002.1 7,274.1 50,296.0 137.3 50,433.3
December 31, 1998
- -----------------
Operating revenue ............. 447.3 -- 348.7 222.4 1,018.4 41.8 1,060.2
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
December 31, 1997
- -----------------
Operating revenue ............. 414.8 -- 343.5 210.9 969.2 77.3 1,046.5
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
</TABLE>
Revenues derived from United States based financing and leasing assets
were $2,641.0 million, $2,129.9 million and $2,001.6 million for the years
ending December 31, 1999, 1998 and 1997, respectively. Revenues derived from
foreign based financing and leasing assets were $275.7 million, $140.6 million
and $128.9 million for the years ending December 31, 1999, 1998 and 1997,
respectively.
Note 23--Summarized Financial Information of Subsidiaries
The following table shows summarized consolidated financial information
for Newcourt Credit Group Inc. and for AT&T Capital. AT&T Capital was a
subsidiary of Newcourt Credit Group Inc. at December 31, 1999. The Company has
guaranteed on a full and unconditional basis the existing registered debt
securities and certain other indebtedness of these subsidiaries. The Company has
not disclosed related financial statements or other information for these
subsidiaries on a stand-alone basis because management does not believe that it
is material to debt holders due to the guarantee.
61
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following summarized consolidated financial information reflects
results from the November 15, 1999 acquisition date through December 31, 1999.
<TABLE>
<CAPTION>
Period Ended December 31, 1999
Newcourt Credit Group Inc. AT&T Capital
-------------------------- ------------
Dollars in Millions
<S> <C> <C>
Operating revenue ....................................... $ 219.4 $ 30.2
Operating expenses ...................................... 206.4 31.2
Operating income (loss) before taxes .................... 13.0 (1.0)
Net income (loss) ....................................... 7.5 (0.7)
At December 31, 1999
-------------------------------------------
ASSETS
Cash and cash equivalents ............................... $ 423.7 $ 179.0
Financing and leasing portfolio assets .................. 14,122.9 5,250.1
Receivables from affiliates and other assets ............ 2,543.5 5,992.2
--------- ---------
Total assets ............................................ $17,090.1 $11,421.3
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Debt .................................................... $11,822.6 $10,050.6
Other ................................................... 2,327.4 472.3
--------- ---------
Total liabilities ....................................... 14,150.0 10,522.9
Total shareholders' equity .............................. 2,940.1 898.4
--------- ---------
Total liabilities and shareholders' equity .............. $17,090.1 $11,421.3
========= =========
</TABLE>
Note 24--Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
1999
-----------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- -----
Dollars in Millions, except per share amounts
<S> <C> <C> <C> <C> <C>
Net finance margin ................................... $212.1 $214.4 $218.2 $272.7 $917.4
Fees and other income ................................ 64.7 74.8 81.9 129.4 350.8
Salaries and general operating expenses .............. 105.8 108.0 110.2 192.0 516.0
Provision for credit losses .......................... 21.9 23.8 32.2 32.4 110.3
Goodwill amortization ................................ 3.2 5.0 4.9 12.6 25.7
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 ........................... 49.2 51.3 51.1 56.0 207.6
Net income ........................................... $ 91.9 $ 96.3 $ 96.9 $104.3 $389.4
Net income per diluted share ......................... $ 0.57 $ 0.59 $ 0.60 $ 0.49 $ 2.22
</TABLE>
62
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
1998
----------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----
Dollars in Millions, except per share amounts
<S> <C> <C> <C> <C> <C>
Net finance margin ................................... $189.7 $200.0 $204.1 $211.0 $804.8
Fees and other income ................................ 66.4 60.7 69.0 59.3 255.4
Salaries and general operating expenses .............. 99.4 101.7 103.0 103.6 407.7
Provision for credit losses .......................... 22.5 21.9 30.6 24.4 99.4
Goodwill amortization ................................ 2.3 2.3 2.3 3.2 10.1
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
</TABLE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
63
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information called for by Item 10 is incorporated by reference from
the information under the caption "Election of Directors" and "Election of
Directors -- Executive Officers" in our Proxy Statement for our 2000 annual
meeting of stockholders.
Item 11. Executive Compensation.
The information called for by Item 11 is incorporated by reference from
the information under the caption "Compensation of Directors and Executive
Officers" in our Proxy Statement for our 2000 annual meeting of stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information called for by Item 12 is incorporated by reference from
the information under the caption "Principal Shareholders" in our Proxy
Statement for our 2000 annual meeting of stockholders.
Item 13. Certain Relationships and Related Transactions.
The information called for by Item 13 is incorporated by reference from
the information under the caption "Certain Relationships and Related
Transactions" in our Proxy Statement for our 2000 annual meeting of
stockholders.
64
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.
(a) The following documents are filed with the Securities and Exchange
Commission as part of this report:
1. The financial statements of The CIT Group, Inc. and Subsidiaries as
set forth on pages 31 - 63.
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 CIT 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 CIT 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 CIT 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 CIT.
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 CIT 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 CIT 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 CIT 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 CIT 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 CIT 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 CIT on November 12,
1997).
10.9 The CIT Group, Inc. Long-Term Equity Compensation Plan, as
amended and restated as of October 26, 1999 (incorporated by
reference to Annex P to the Joint Management Information
Circular and Proxy Statement filed by CIT and Newcourt Credit
Group Inc. on September 21, 1999).
10.10 The CIT Group, Inc. Employee Stock Purchase Plan, as amended
and restated January 28, 1999 and amended September 17, 1999
(incorporated by reference to Annex R to the Joint
Management Information Circular and Proxy Statement filed by
CIT and Newcourt Credit Group Inc. on September 21, 1999).
65
<PAGE>
10.11 The CIT Group, Inc. Transition Option Plan, dated as of
November 15, 1999 (incorporated by reference to Annex Q to
the Joint Management Information Circular and Proxy Statement
filed by CIT and Newcourt Credit Group Inc. on September 21,
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 4, 1999, was filed with
the Securities and Exchange Commission regarding the announcement of an
agreement between Heller Financial, Inc. and The CIT Group/Commercial Services,
Inc., pursuant to which CIT would purchase the assets of Heller's domestic
factoring business.
A Current Report on Form 8-K, dated October 25, 1999 was filed with the
Securities and Exchange Commission reporting CIT's announcement of results for
the quarter ended September 30, 1999.
A Current Report on Form 8-K, dated October 26, 1999, was filed with the
Securities and Exchange Commission regarding the approval by stockholders at a
Special Meeting of Stockholders of the pending acquisition of Newcourt Credit
Group Inc. and the declaration of a dividend for the quarter ended September 30,
1999.
A Current Report on Form 8-K, dated November 15, 1999, was filed with the
Securities and Exchange Commission reporting CIT's announcements of the
completion of the acquisition of Newcourt Credit Group Inc. and of CIT's
guarantee of all public indebtedness of Newcourt and of AT&T Capital
Corporation.
A Current Report on Form 8-K, dated November 23, 1999, was filed with the
Securities and Exchange Commission reporting CIT's announcement of a consent
solicitation relating to certain of its public debt.
66
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE CIT GROUP, INC.
By: /s/ ERNEST D. STEIN
-------------------------------------------
Ernest D. Stein
Executive Vice President, General Counsel
and Secretary
March 28, 2000
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)
DANIEL P. AMOS*
- -------------------------------------------------
Daniel P. Amos
Director
ANTHEA DISNEY*
- -------------------------------------------------
Anthea Disney
Director
WILLIAM A. FARLINGER*
- -------------------------------------------------
William A. Farlinger
Director
GUY HANDS*
- -------------------------------------------------
Guy Hands
Director
THOMAS H. KEAN*
- -------------------------------------------------
Thomas H. Kean
Director
PAUL MORTON*
- -------------------------------------------------
Paul Morton
Director
TAKATSUGU MURAI*
- -------------------------------------------------
Takatsugu Murai
Director
WILLIAM M. O'GRADY*
- -------------------------------------------------
William M. O'Grady
Director
JOSEPH A. POLLICINO*
- -------------------------------------------------
Joseph A. Pollicino
Director
PAUL N. ROTH*
- -------------------------------------------------
Paul N. Roth
Director
PETER J. TOBIN*
- -------------------------------------------------
Peter J. Tobin
Director
67
<PAGE>
Signature and Title Date
---------------- ----
KEIJI TORII*
- -------------------------------------------------
Keiji Torii
Director
THEODORE V. WELLS, JR.*
- -------------------------------------------------
Theodore V. Wells, Jr.
Director
ALAN F. WHITE*
- -------------------------------------------------
Alan F. White
Director
/s/ JOSEPH M. LEONE March 28, 2000
- -------------------------------------------------
Joseph M. Leone
Executive Vice President and
Chief Financial Officer
(principal accounting officer)
*BY: /s/ ERNEST D. STEIN March 28, 2000
- -------------------------------------------------
Ernest D. Stein
Attorney-In-Fact
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.
68
EXHIBIT 10.3
THE CIT GROUP, INC.
November 1, 1999
Mr. Albert R. Gamper, Jr.
650 CIT Drive
Livingston, New Jersey 07039
Dear Al:
Reference is made to your employment agreement, dated December 29, 1989
(the "Employment Agreement"), with The CIT Group, Inc. (the "Company"), as
amended by letter agreements dated November 16, 1992, December 20, 1994, and
April 1, 1997. 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 letter agreement will be effective as of November 1, 1999.
The term of this Agreement (the "Term") will be for a period of thirty-eight
months beginning on November 1, 1999 and, except as otherwise provided in
paragraph 4 below, ending on December 31, 2002. This letter agreement and the
Term may be extended for one or more additional periods as provided in paragraph
7 or by written agreement signed by you and the Company at any time prior to the
end of the Term then in effect.
2. Duties and Authority. During the Term, you shall serve as the Chief
Executive Officer, President, Chairman of the Executive Committee and a member
of the Board of the Company. You agree to accept the position of Chairman of the
Board of the Company if the position is offered to you. Subject to the overall
direction and control of the Board, as Chief Executive Officer and President,
you shall have general charge and control of the business and affairs of the
Company, which shall include but shall not be limited to responsibility
for overall policy making as well as day-to-day operations (including hiring and
firing of personnel, establishing credit policy, personnel compensation and the
nature and pricing of the business of the Company). You agree to devote
substantially all of your business time and energies to the business of the
Company and to faithfully, diligently and competently perform your duties
hereunder, except that you may devote a reasonable amount of time to serving as
a director of not-for-profit institutions, and with the approval of the Board,
of business corporations. You
<PAGE>
shall not be assigned any duties that are inconsistent with your status as Chief
Executive Officer of the Company.
3. Compensation and Benefits. In full consideration for all services
rendered by you in all capacities during the Term, you will receive the
following compensation and benefits:
(a) Base Salary. An annual base salary of $875,000 payable in
accordance with the customary payroll practices of the Company. Your Base Salary
and performance will be reviewed by the Board during the Term pursuant to normal
Company practices. Your Base Salary may be increased (but not reduced) by the
Board from time to time, based upon your performance and responsibilities,
pursuant to the Company's standard procedures for salary adjustments.
(b) Bonuses. You will participate in all executive bonus and
incentive compensation plans (collectively, "Incentive Plans") now or hereafter
maintained by the Company for which your level of employment makes you eligible
in accordance with the Company's policies and the terms of such Incentive Plans.
(c) Expense Reimbursement. The Company will reimburse you for your
ordinary and necessary business and travel expenses incurred by you in the
performance of your duties. When traveling on Company business or personal
travel, you shall be authorized for security reasons to travel on CIT's
corporate aircraft. The cost of your personal travel on CIT's corporate aircraft
shall be imputed to you as income. If you are flying on commercial airlines for
Company business, first class is authorized.
(d) Other Benefits. You will be eligible to participate in all
employee retirement and welfare benefit plans now or hereafter maintained by or
on behalf of the Company, including the Company's Executive Retirement Program
and receive all fringe benefits and vacations, for which your level of
employment makes you eligible in accordance with the Company's policies and the
terms of such plans. In addition, the Company will provide you with (i) a
supplemental pension benefit and (ii) a supplemental savings benefit, in each
case in an amount equal to the value of the benefit you would be entitled to
receive under the Company's Retirement Plan or Savings Incentive Plan, as the
case may be, but for the limitations on the amount of such benefits imposed by
Internal Revenue Code Sections 415 and 401(a)(17). In connection with your
benefits under the Company's Executive Retirement Program, the Company will not
unreasonably withhold its consent to your retirement.
(e) Additional Benefits. In addition to the benefits described
above, the Company shall provide the following special benefits to you:
(1) Attorney and Accountant Expense Reimbursement. The Company
shall reimburse you for up to $25,000 annually for attorneys' fees
and
-2-
<PAGE>
disbursements incurred by you for tax advice or other legal counsel
and for accounting fees incurred by you for tax advice or other
financial planning;
(2) Office and Staff. The Company shall provide you with
suitable offices located in northern New Jersey, and you shall not
be required to relocate your residence from the New Jersey area. You
may also employ secretaries and assistants of your own selection as
you deem appropriate or necessary. The Company shall also provide
you with a car and driver substantially equivalent to that enjoyed
by you under the your past employment agreement.
(3) Dues. The Company shall reimburse you for the full cost
(annual dues plus initiation fees) of one country club or luncheon
club membership of your choice; and
(4) Indemnification and Insurance. The Company will provide
you with suitable director's and officer's liability insurance to
the extent available on commercially reasonable terms. The Company
shall not amend the provisions of Article ELEVENTH and TWELFTH of
its Restated Certificate of Incorporation or Article X of its
By-Laws in any manner adverse to you without your consent.
(f) Modifications. The Company may at any time or from time to time
amend, modify, suspend or terminate any bonus, incentive compensation or other
benefit plans or programs provided hereunder for any reason and without your
consent; provided that, without your consent, the Company may not reduce the
aggregate value of the benefits provided to the Executive hereunder, or
administer the Company Executive Retirement Program in a manner substantially
inconsistent with past practices.
4. Termination of the Executive's Employment.
(a) Termination Date. The effective date of your termination of
employment with the Company shall be the "Termination Date."
(b) By the Company. The Board by majority vote may terminate your
employment in its sole discretion at any time during the Term, with or without
Cause. For purposes of this letter agreement, "Cause" means (A) your gross
negligence, recklessness or malfeasance in the performance of your duties
hereunder, (B) your committing any criminal act, act of fraud or other
misconduct resulting or intending to result directly or indirectly in gain or
personal enrichment at the expense of the Company, or (C) your willfully
engaging in any conduct relating to the business of the Company that could
reasonably be expected to have a materially detrimental effect on the business
or financial condition of the Company.
(c) By You. You may terminate your employment with the Company at
any time during the Term, with or without Good Reason, upon fifteen (15) days
prior written notice by you to the Company. For purposes of this letter
agreement,
-3-
<PAGE>
"Good Reason" means the assignment to you of duties and responsibilities not
commensurate with your status as Chief Executive Officer of the Company, the
failure of the Company to provide compensation and benefits to your at the
levels required herein, you are required without your consent to 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 the failure of the Company to adhere in any substantial manner to
any of its other covenants herein. Termination of your employment by you
following the completion of a Change of Control contract extension as provided
in 7(a) will be deemed a "Good Reason" termination entitling you to the benefits
and payments covered in paragraph 5 reduced by the amount of any "Special
Payment" previously paid to you pursuant to paragraph 7(b). The failure of the
Company to offer to renew this Employment Agreement, at least ninety (90) days
prior to the Termination Date, on terms and conditions (including payment of
base salary and participation in incentive plans and benefits) at least as
favorable as in the final year of your last Term shall also be deemed a "Good
Reason" termination entitling you to the benefits and payments covered in
paragraph 5.
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 your under paragraph 3
hereof will cease as of the Termination Date and the Company will provide to
you, subject to paragraph 6, the following sums and benefits:
(1) A payment of three times your Base Salary on the
Termination Date, plus three times the average annual
bonus you received in the prior two years, plus a pro-rata
annual bonus 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; the sum of
which is payable in 24 equal installments at the end of
each of the 24 months following the Termination Date. If,
however, prior to the second anniversary of the
Termination Date, you violate the noncompetition
provisions of paragraph 6(b)(A), then the Company will
have no obligation to make any of the payments that remain
payable by the Company under this paragraph 5(a)(1) on or
after the date of such violation.
(2) Immediate vesting of each outstanding unvested stock
option, stock appreciation right, tandem
-4-
<PAGE>
option, tandem stock appreciation right, restricted stock,
performance share, performance unit, annual incentive
award, or any similar equity or incentive share or unit.
(3) All previously earned and accrued entitlements and
benefits from the Company, including any such entitlements
and benefits under the Company's pension, disability and
life insurance plans, policies and programs.
(4) Continued benefit coverage which permits you to continue
to receive, for three (3) 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. Three (3) 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 three
(3) 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 law, or in the event not paid from
the applicable benefit or retirement plan, such benefit
shall be paid by the Company.)
(5) The reasonable costs of outplacement services, a fully
equipped office and secretary to be utilized by you for up
to two years, and a car and driver for two years that are
substantially equivalent to the car and driver you had on
the Termination Date.
(6) Any awards due to you under the terms of the Company's
Long Term Equity Compensation Plan or any plan as may have
been hereafter adopted by the Company. Upon such payment,
all of your rights under all such plans will then
terminate.
-5-
<PAGE>
(7) All benefits payable to you under the terms and
conditions of the Company's Executive Benefits Program, if
any.
All of the amounts and benefits to be provided pursuant to clauses (4),
(5), (6) and (7) above shall be provided without duplication for the amounts and
benefits to be provided pursuant to clause (3) above.
(b) For Cause Termination - or Termination By You Without Good
Reason. 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)(3). In the event
you are eligible under the terms and conditions of the Company's various
executive benefit plans, if any, you will also receive the benefits
specified in paragraph 5(a)(7) provided you are not in breach of this
Agreement.
(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 Employment Term will terminate as of the date of
your death or disability and you or your estate will receive the benefits
specified in paragraphs 5(a)(2), 5(a)(3), 5(a)(7) and, in the case of
disability, you shall also receive the benefits specified in paragraph
5(a)(4). In addition, you or your estate shall receive an amount equal to
your Base Salary on the date of your death or disability for three years.
Disability will be determined by the Board in a manner consistent with the
Company's Long Term Disability Plan.
6. Confidentiality and Competitive Activity.
(a) You acknowledge that you have acquired and will continue to
acquire during the Term, confidential information regarding the business of the
Company, Dai-Ichi Kangyo Bank (DKB) 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 letter agreement.
(b) During the Term and, if you resign with or without Good Reason
or your employment is terminated by the Company with or without Cause, you
retire under the terms of the Company's Retirement Plan prior to the end of the
Term or you resign following the expiration of this Employment Agreement, then
for two years after the Termination Date, you will not, without the written
consent of the Board,
-6-
<PAGE>
directly or indirectly, (A) knowingly engage or be interested in (as owner,
partner, stockholder, employee, director, officer, agent, consultant or
otherwise), with or without compensation, any business in the 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 (except in the event
of a termination of your employment within eighteen months of a Change of
Control), you may so compete from and after the six month anniversary of the
Termination Date in which event you shall forfeit your right to receive future
severance payments pursuant to paragraph 5(a)(1) hereof, and (B) whether or not
your termination of employment occurred without Cause or for Good Reason, hire
any person who was employed by the Company or any of its subsidiaries or
affiliates (other than persons employed in a clerical or other non-professional
position) within the six-month period preceding the date of such hiring, or
solicit, entice, persuade or induce any person or entity doing business with the
Company 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 of any class of publicly traded securities of any such business;
provided that such securities entitle you to no more than one percent of the
total outstanding votes entitled to be cast by securityholders of such business
in matters on which such securityholders are entitled to vote. Notwithstanding
anything in the foregoing to the contrary, in the event of a Change of Control,
the provisions of clause (A) and clause (B) shall apply following termination of
your employment for any reason.
(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 an actual or
threatened breach of such covenants. In addition, and without limiting the
Company's other remedies, in the event of any breach by you of such covenants,
the Company will have no obligation to pay any of the amounts that remain
payable by the Company under paragraph 5(a)(1).
-7-
<PAGE>
7. Change of Control.
(a) Termination/Contract Extension. In the event of a Change of
Control during the Term, you may elect, on 90 days prior written notice, to
terminate your employment upon the first anniversary of the change of control,
and have such termination deemed "Good Reason." 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 earlier of: (i) ninety (90) days after the end of
the Term or (2) the first anniversary of the Change of Control.
(b) Special Payment. In addition to the compensation and benefits
already required under the provisions of your Employment Agreement, if a Change
of Control should occur on or prior to December 31, 2002, you will receive a
special payment (the "Special Payment"). The amount of such Special Payment
shall equal the sum of your prior four years' annual bonuses under The CIT Group
Bonus Plan and will be payable over a one-year period as follows: 1/2 of the
payment shall be paid to you within 30 days after the date of the Change of
Control; 1/2 shall be paid to you on or before the first anniversary date of
such Change of Control. Notwithstanding the foregoing provisions of this
paragraph, all or any part of such Special Payment shall not be payable to you:
if during the one-year period commencing on the date of a Change of Control, and
ending on the first anniversary of such date: (i) your employment is
involuntarily terminated by the Company for "Cause" as defined in the Employment
Agreement; (ii) you voluntarily terminate employment with the Company for any
reason other than "Good Reason" as defined in the Employment Agreement; (iii)
you breach any non-competition or confidentiality covenant under Section 6 of
the Employment Agreement or (iv) you have received previously a payment pursuant
to paragraph 5(a)(1). For purposes of this Paragraph (b) "Special Payment", a
termination of your employment on account of your death, disability or
retirement on or after age 55 under the terms of the Company's retirement plan
(provided such is consistent with Section 7(a)) shall constitute a termination
for "Good Reason." In the absence of a separate beneficiary designation, your
beneficiary under the Group Life Insurance Plan will receive any Special Payment
remaining to be paid upon your death.
(c) Change of Control Defined. For purposes of this letter
agreement, a "Change of Control" shall be deemed to have occurred if: (1) any
Person or Group other than DKB or its Affiliates becomes the Beneficial Owner,
directly or indirectly, of securities representing a majority of the combined
voting power of the Company's then outstanding securities generally entitled to
vote for the election of directors (capitalized terms not otherwise defined
herein are used as defined under the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder); or (2) as a
result of a cash tender offer, merger or other business combinations, sales or
assets or contested election, or any combination of the foregoing transactions
(a "Transaction"), the combination of the persons who were directors of the
Company immediately before the Transaction and persons designated by the persons
who
-8-
<PAGE>
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. Miscellaneous.
(a) Survival; Notices. The obligations of the Company in paragraph 5
and your obligations in paragraph 6 will survive the termination of this letter
agreement. Any notice, consent or other communication made or given in
connection with this letter agreement will be in writing and will be deemed to
have been duly given when delivered or five days after mailed by United States
registered or certified mail, return receipt requested, to the parties at the
address set forth on the first page of this letter agreement (attention: General
Counsel, if to the Company).
(b) Entire Agreement. This letter agreement supersedes any and all
existing agreements between you and the Company or any of its subsidiaries or
affiliates relating to the terms of your employment.
(c) Amendments and Waivers. No provisions of this letter agreement
may be amended, modified, waived or discharged except as agreed to in writing by
you and the Board. The failure of a party to insist upon strict adherence to any
term of this letter agreement on any occasion will not be considered a waiver
thereof or deprive that party of the right thereafter to insist upon strict
adherence to that term or any other term of this letter agreement.
(d) Successors. This letter agreement shall be binding upon and
inure to the benefit of you and the Company and its successors and permitted
assigns. Neither this letter agreement nor any of the rights of the parties
hereunder may be assigned by either party hereto except that the Company may
assign its rights and obligations hereunder to a corporation or other entity
that acquires substantially all of its assets. Any assignment or transfer of
this letter agreement in violation of the foregoing provisions will be void.
(e) Governing Law. This letter agreement will be governed by and
construed in accordance with the laws of the State of New York applicable to
agreements made and/or to be performed in that State.
(f) Legal Counsel; Offsets and Reductions. In the event you obtain
legal counsel to enforce your rights under this letter agreement, the Company
will pay you reasonable legal fees if you recover any amount on such claim.
Except as provided in paragraph 6, if your employment is terminated by the
Company, your severance shall not be subject to any offsets or reductions for
your subsequently earned income or reduction by reason of any claim by the
Company.
-9-
<PAGE>
(g) Severability. If the provision of this letter agreement is
invalid or unenforceable, the balance of this letter agreement will remain in
effect, and if such provision is inapplicable to any person or circumstance, it
will nevertheless remain applicable to all other persons and circumstances.
(h) Withholdings. 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 Internal Revenue Code of 1986, as amended (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 under Section 4999 of the
Code with respect to payments made pursuant to this letter agreement.
The determination of amounts required to be paid under this letter 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/ Hisao Kobayashi
--------------------------------
Name: Hisao Kobayashi
Title: Chairman
Agreed:
/s/ Albert R. Gamper, Jr.
- ------------------------------------
Albert R. Gamper, Jr.
-10-
EXHIBIT 12
The CIT Group, Inc. and Subsidiaries
Computation of Ratios of Earnings to Fixed Charges
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1999 1998 1997
---- ---- ----
Dollars in Millions
<S> <C> <C> <C>
Net income ........................................................ $ 389.4 $ 338.8 $ 310.1
Provision for income taxes ........................................ 207.6 185.0 178.0
-------- -------- --------
Earnings before provision for income taxes ........................ 597.0 523.8 488.1
-------- -------- --------
Fixed charges:
Interest and debt expenses on indebtedness ...................... 1,293.4 1,040.8 937.2
Minority interest in subsidiary trust holding solely
debentures of the Company ..................................... 19.2 19.2 16.3
Interest factor -- one-third of rentals on real and personal
properties .................................................... 10.6 7.9 8.5
-------- -------- --------
Total fixed charges ............................................... 1,323.2 1,067.9 962.0
-------- -------- --------
Total earnings before provisions for income taxes and
fixed charges ................................................... $1,920.2 $1,591.7 $1,450.1
======== ======== ========
Ratios of Earnings to Fixed Charges ............................... 1.45x 1.49x 1.51x
</TABLE>
EXHIBIT 21
THE CIT GROUP, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
December 31, 1999
Jurisdiction of
Name of Subsidiary Incorporation
------------------ --------------
1143986 Ontario Limited ....................................... Ontario
1145820 Ontario Limited ....................................... Ontario
1181922 Ontario Inc. .......................................... Ontario
1244773 Ontario Limited ....................................... Ontario
1302839 Ontario Limited ....................................... Ontario
1328327 Ontario Limited ....................................... Ontario
1347395 Ontario Limited ....................................... Ontario
1385224 Ontario Limited ....................................... Ontario
2630--3958 Quebec Inc. ........................................ Quebec
2705 Parkhill Drive Inc. ...................................... Ontario
2705 Parkhill Drive Limited Partnership ....................... Ontario
3026192 Nova Scotia Company ................................... Nova Scotia
544211 Alberta Ltd. ........................................... Alberta
555565 Alberta Ltd. ........................................... Alberta
555566 Alberta Ltd. ........................................... Alberta
650 Management Corp. .......................................... New Jersey
667825 Alberta Ltd. ........................................... Alberta
Adams Capital Limited ......................................... Barbados
Antigua Funding Corporation ................................... Delaware
APS Land Developments Inc. .................................... Ontario
Arctic Shipping Co., Inc. ..................................... Delaware
Arrendadora Atlas, S.A. ....................................... Mexico
Arrendora Capita Corporation S.A. de C.V. ..................... Mexico
Asset Finance (Bermuda) Limited ............................... Bermuda
Assurers Exchange, Inc. ....................................... Delaware
AT&T Automotive Services, Inc. ................................ Delaware
AT&T Capital Corporation ...................................... Delaware
AT&T Capital FSC, Inc. ........................................ Barbados
AT&T Credit Consumer Finance Corporation ...................... Delaware
Atlantic Shipping Co., Inc. ................................... Delaware
ATMOR Holdings, Inc. .......................................... Delaware
ATMOR Properties Inc. ......................................... Delaware
Baffin Shipping Co., Inc. ..................................... Delaware
Baltic Shipping Co., Inc. ..................................... Delaware
Banord Limited ................................................ England
Barrow Capital Limited ........................................ Barbados
BDAC Investments, Inc. ........................................ Delaware
Bering Shipping Co., Inc. ..................................... Delaware
Boat Dealers Acceptance Company, L.L.C. ....................... Delaware
Bunga Bebaru, Ltd. ............................................ Bermuda
C.I.T. Corporation (Maine) .................................... Maine
C.I.T. Corporation of the South, Inc. ......................... Delaware
C.I.T. Financial Management Inc. .............................. Delaware
C.I.T. Foreign Sales Corporation One, Ltd. .................... Barbados
C.I.T. Leasing Corporation .................................... Delaware
C.I.T. Realty Corporation ..................................... Delaware
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT (Continued)
December 31, 1999
Jurisdiction of
Name of Subsidiary Incorporation
------------------ --------------
Canadian Income Partners I Limited Partnership ................ Alberta
Canadian Income Partners II Limited Partnership ............... Alberta
Canadian Income Partners III Limited Partnership .............. Alberta
Canadian Income Partners IV Limited Partnership ............... Alberta
Canadian Income Partners V Limited Partnership ................ Alberta
Canadian Income Partners VI Limited Partnership ............... Alberta
Canadian Income Partners VII Limited Partnership .............. Alberta
Canadian Income Partners VIII Limited Partnership ............. Alberta
Capita Columbia Holding Corp. ................................. Delaware
Capita Corporation CIS, LLC. .................................. Russia
Capita Global Finance Corporation ............................. Delaware
Capita International L.L.C. ................................... Delaware
Capita Premium Finance Corporation ............................ Delaware
Capita Resources, Inc. ........................................ Delaware
Capita Russia Holdings I Corp. ................................ Delaware
Capita Russia Holdings II Corp. ............................... Delaware
Capita Servicios, S.A. de C.V. ................................ Mexico
Capital Syndication Corporation ............................... Delaware
Caribbean Shipping Co., Inc. .................................. Delaware
CCG Capital Limited ........................................... Barbados
CCG International Finance Corporation ......................... Ontario
CCG Ireland ................................................... Ireland
CCG Limited ................................................... P.E.I.
CCG Partners I Limited Partnership ............................ Ontario
CCG Trust Corporation ......................................... Barbados
CIBC Equipment Finance Limited ................................ Federal
CICL Caribbean International Capital Limited .................. Barbados
CIEL Caribbean International Equipment Ltd. ................... Barbados
CIEL International Finance Corporation ........................ Ontario
CIEL Ltd. ..................................................... P.E.I.
CIT Capital Trust I ........................................... Delaware
CIT China 2, Inc. ............................................. Delaware
CIT China 3, Inc. ............................................. Delaware
CIT China I, Inc. ............................................. Delaware
CIT Exchangeco Inc. ........................................... Nova Scotia
CIT FSC Eight, Ltd. ........................................... Bermuda
CIT FSC Eighteen, Ltd. ........................................ Bermuda
CIT FSC Eleven, Ltd. .......................................... Bermuda
CIT FSC Fifteen, Ltd. ......................................... Bermuda
CIT FSC Five, Ltd. ............................................ Bermuda
CIT FSC Four, Ltd. ............................................ Bermuda
CIT FSC Fourteen, Ltd. ........................................ Bermuda
CIT FSC Nine, Ltd. ............................................ Bermuda
CIT FSC Nineteen, Ltd. ........................................ Bermuda
CIT FSC Seven, Ltd. ........................................... Bermuda
CIT FSC Six, Ltd. ............................................. Bermuda
CIT FSC Sixteen, Ltd. ......................................... Bermuda
CIT FSC Ten, Ltd. ............................................. Bermuda
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT (Continued)
December 31, 1999
Jurisdiction of
Name of Subsidiary Incorporation
------------------ --------------
CIT FSC Three, Ltd. ........................................... Bermuda
CIT FSC Twelve, Ltd. .......................................... Bermuda
CIT FSC Twenty, Ltd. .......................................... Bermuda
CIT FSC Two, Ltd. ............................................. Bermuda
CIT Holdings (Barbados) SRL ................................... Barbados
CIT Holdings, LLC ............................................. Delaware
CIT Ireland Leasing Limited ................................... Ireland
CIT Leasing (Bermuda) Ltd. .................................... Bermuda
CIT Leasing Two (Bermuda) Ltd. ................................ Bermuda
CIT Small Business Lending Corporation ........................ Delaware
CMG Capital Limited ........................................... Barbados
CMG International Finance Corporation ......................... Ontario
CMG Limited ................................................... P.E.I.
Crestpointe Financial Corp. ................................... Delaware
CSW Leasing, Inc. ............................................. Delaware
Cummins Capital Limited ....................................... Barbados
Danka Equipment Rentals Ltd. .................................. U.K.
Dell Credit Company, L.L.C. ................................... Delaware
Dell Financial Services (Australia) Pty Ltd. .................. Australia
Dell Financial Services (New Zealand) Pty Ltd. ................ New Zealand
Dell Financial Services Canada Limited ........................ Ontario
Dell Financial Services, L.P. ................................. Delaware
Dental Advantage .............................................. Delaware
DFS-GP, Inc. .................................................. Delaware
DFS-SPV L.P. .................................................. Delaware
Durham Capital Limited ........................................ Barbados
EDCO Insurance Services, Inc. ................................. Delaware
Equipment Acceptance Corporation .............................. Delaware
Equipment Credit Services, Inc. ............................... Delaware
Equipment Dealers Credit Canada Inc. .......................... Ontario
Equipment Dealers Credit Company, L.L.C. ...................... Delaware
ERF Finance Limited ........................................... U.K.
ERF Leasing Limited ........................................... U.K.
ERF Network Rentals ........................................... U.K.
Erie Capital Limited .......................................... Barbados
Essex Capital Limited ......................................... Barbados
FinanciaLinx Corporation ...................................... Ontario
Frontenac Capital Limited ..................................... Barbados
Gardiner Merchant Rentals Ltd. ................................ U.K.
GATX Asset Residual Management Canada Limited ................. Federal
GFSC Aircraft Acquisition Financing ........................... Delaware
Global Vendor Services LTDA ................................... Columbia
Global Vendor Services Venezuela .............................. Venezuela
Graybar Financial Services, LLC ............................... Delaware
Grey Capital Limited .......................................... Barbados
Groupe Financier Laplante (1997) Inc. ......................... Federal
Haliburton Capital Limited .................................... Barbados
Healthgroup Funding Ltd. ...................................... Ontario
Highlands Insurance Company Limited ........................... Barbados
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT (Continued)
December 31, 1999
Jurisdiction of
Name of Subsidiary Incorporation
------------------ --------------
Hudson Shipping Co., Inc. ..................................... Delaware
Hunter Leasing Limited ........................................ Australia
Image Financial Services Inc. ................................. Ontario
Indian Shipping Co., Inc. ..................................... Delaware
Ironbridge Capital Limited .................................... Barbados
Iroquois Capital Limited ...................................... Barbados
Iroquois Limited .............................................. P.E.I.
Ittelson-Beaumont Fund ........................................ New York
Jam Funding Corp. ............................................. Delaware
Joly Capital Limited .......................................... Barbados
Kanata Capital Limited ........................................ Barbados
Lonsfield Pty. Limited ........................................ Australia
M.D.P. Services (Alta) Inc. ................................... Alberta
M.D.P. Services Inc. .......................................... B.C.
MCC Capital Limited ........................................... Barbados
MCC International Finance Corporation ......................... Ontario
MCC Limited ................................................... P.E.I.
Mediterranean Shipping Co., Inc. .............................. Delaware
Meinhard-Commercial Corporation ............................... New York
MGM International Finance Corporation ......................... Ontario
Midrange Solutions Group, Inc. ................................ Delaware
Midwest Properties Holding LLC ................................ Delaware
Millenium Leasing Company I, LLC .............................. Delaware
Misener Financial Corporation ................................. Ontario
NCT Capital Inc. .............................................. Delaware
NCT Capital Limited ........................................... U.K.
NCT Funding Company, L.L.C. ................................... Delaware
NCU Railcar Holdings LLC ...................................... Delaware
New Creditcirp SPC LLC ........................................ Delaware
Newcourt A.G. & Co OHG ........................................ Germany
Newcourt Aerospace Finance, Inc. .............................. Delaware
Newcourt Asset Finance International .......................... Ireland
Newcourt Beteiligungs AG ...................................... Germany
Newcourt Capital (UK) of Canada Limited ....................... U.K.
Newcourt Capital Inc. ......................................... Ontario
Newcourt Capital Pty Ltd. ..................................... Australia
Newcourt Capital Securities, Inc. ............................. Delaware
Newcourt Capital USA Inc. ..................................... Delaware
Newcourt Commercial Finance Corporation ....................... Delaware
Newcourt Communications Finance Corporation ................... Delaware
Newcourt Credit GmbH .......................................... Germany
Newcourt Credit Group (Alberta) Inc. .......................... Alberta
Newcourt Credit Group Inc. .................................... Ontario
Newcourt Credit Group Pty Ltd. ................................ Australia
Newcourt Credit Group USA Inc. ................................ Delaware
Newcourt Credit Hong Kong Limited ............................. Hong Kong
Newcourt Credit Limited ....................................... U.K.
Newcourt Credit Services Limited .............................. U.K.
Newcourt DCC Inc. ............................................. Delaware
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT (Continued)
December 31, 1999
Jurisdiction of
Name of Subsidiary Incorporation
------------------ --------------
Newcourt DFS Inc. ............................................. Delaware
Newcourt Equipment Receivables Corp. .......................... Delaware
Newcourt Financial (Australia) Limited ........................ Australia
Newcourt Financial (Belguim) NV ............................... Belguim
Newcourt Financial (France) SNC ............................... France
Newcourt Financial (New Zealand) Limited ...................... New Zealand
Newcourt Financial (Singapore) Pte Ltd. ....................... Singapore
Newcourt Financial (Switzerland) Ltd. AG ...................... Switzerland
Newcourt Financial (UK) of Canada Limited ..................... U.K.
Newcourt Financial (Vendor Services) Limited .................. U.K.
Newcourt Financial Holdings B.V. .............................. Netherlands
Newcourt Financial Ireland Limited ............................ Ireland
Newcourt Financial Italy, S.p.A. .............................. Italy
Newcourt Financial Leasing GmbH ............................... Austria
Newcourt Financial Limited .................................... U.K.
Newcourt Financial Ltd. ....................................... Ontario
Newcourt Financial Ltd. of Puerto Rico ........................ Delaware
Newcourt Financial Nederland B.V. ............................. Netherlands
Newcourt Financial Polska Sp. zo.o ............................ Poland
Newcourt Financial Receivables Corp. II ....................... Delaware
Newcourt Financial Receivables Corp. I ........................ Delaware
Newcourt Financial USA Inc. ................................... Delaware
Newcourt Funding Pty Limited .................................. Australia
Newcourt Funding Services, L.L.C. ............................. Delaware
Newcourt Funds Inc. ........................................... Ontario
Newcourt Healthcare Finance of Canada ......................... U.K.
Newcourt Holding Germany GmbH ................................. Germany
Newcourt Holdings (France) S.A. ............................... France
Newcourt Holdings (Singapore) Limited ......................... Ontario
Newcourt Holdings U.K. Limited ................................ U.K.
Newcourt Hungary Financial Servicing Limited .................. Hungary
Newcourt Insurance Services, Inc. ............................. Delaware
Newcourt Insurance Services, Inc. of Alabama .................. Alabama
Newcourt Insurance Services, Inc. of Kentucky ................. Kentucky
Newcourt Insurance Services, Inc. of Mississippi .............. Mississippi
Newcourt Insurance Services, Inc. of New Mexico ............... New Mexico
Newcourt International Inc. ................................... Ontario
Newcourt Inventory Finance Corporation ........................ Delaware
Newcourt Investments Inc. ..................................... Ontario
Newcourt Investments of Canada (USA) Inc. ..................... Delaware
Newcourt Leaseco Four Ltd. .................................... Ontario
Newcourt Leaseco Three Ltd. ................................... Ontario
Newcourt Leasing Columbia S.A. ................................ Columbia
Newcourt Leasing Corporation .................................. China
Newcourt Leasing Corporation .................................. Mass
Newcourt Leasing Limitada ..................................... Chile
Newcourt Linc Receivables Corporation ......................... Delaware
Newcourt NationaLease Inc. .................................... Ontario
Newcourt Premium Finance, Inc. ................................ Ohio
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT (Continued)
December 31, 1999
Jurisdiction of
Name of Subsidiary Incorporation
------------------ --------------
Newcourt Project Finance, L.L.C. ..................... Delaware
Newcourt Rail Holdings Inc. .......................... Delaware
Newcourt Rail, L.L.C. ................................ Delaware
Newcourt Receivables Corporation ..................... Delaware
Newcourt Receivables Corporation II .................. Delaware
Newcourt Securities Inc. ............................. Ontario
Newcourt Securities of Canada Limited ................ U.K.
Newcourt Services Barbados SRL ....................... Barbados
Newcourt Taiwan Company Limited ...................... Taiwan
Newcourt Technologies Corporation .................... Michigan
Newcourt Technologies Inc. ........................... Ontario
Newcourt Transportation Finance of Canada Limited .... U.K.
North American Exchange, Inc. ........................ Delaware
North Romeo Storage Corporation ...................... Delaware
Omni Financial Services of America, Inc. ............. Delaware
Owner-Operator Finance Company ....................... Delaware
Picker Financial Group, L.L.C. ....................... Delaware
Pol-Gart International Finance Corporation ........... Ontario
Professional Capital Inc. ............................ Ontario
Promed Leasing Inc. .................................. Quebec
Rail Car Leasing Inc. ................................ Delaware
RDAC Investments, Inc. ............................... Delaware
Recreational Dealers Acceptance Company, L.L.C. ...... Delaware
Refinery Company, L.C. ............................... Texas
Refinery Holding Company, L.P. ....................... Delaware
Ross Shipping Co., Inc. .............................. Delaware
Sargasso Shipping Co., Inc. .......................... Delaware
SCL Holding Company .................................. Delaware
Sharp Rentals ........................................ U.K.
SHL Financial Services Ltd. .......................... Ontario
Snap-On Credit LLC ................................... Delaware
Sulu Shipping Co,, Inc. .............................. Delaware
The Capita Corporation (Malaysia) Sdn Bhd ............ Malaysia
The Capita Corporation de Argentina SA ............... Argentina
The Capita Corporation de Brasil Ltda. ............... Brazil
The Capita Corporation de Mexico S.A. de C.V. ........ Mexico
The Capita Credit Corporation ........................ Delaware
The Capita Leasing Corporation (BVI) Ltd. ............ British Virgin Islands
The CIT Financial Group Canada Ltd. .................. Canada
The CIT GP Corporation ............................... Illlinois
The CIT GP Corporation II ............................ Delaware
The CIT GP Corporation III ........................... Delaware
The CIT GP Corporation V ............................. Delaware
The CIT Group Holdings, Inc. ......................... Delaware
The CIT Group Securitization Corporation ............. Delaware
The CIT Group Securitization Corporation II .......... Delaware
The CIT Group Securitization Corporation III ......... Delaware
The CIT Group Securitization Corporation IV .......... Delaware
The CIT Group, Inc. .................................. Delaware
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT (Continued)
December 31, 1999
Jurisdiction of
Name of Subsidiary Incorporation
------------------ --------------
The CIT Group, Inc. (NJ) ...................................... New Jersey
The CIT Group/BC Securities Investment, Inc. .................. New Jersey
The CIT Group/Business Credit, Inc. ........................... New York
The CIT Group/Capital Aircraft, Inc. .......................... Delaware
The CIT Group/Capital Finance, Inc. ........................... Delaware
The CIT Group/Capital Investments, Inc. ....................... Delaware
The CIT Group/Capital Transportation, Inc. .................... Delaware
The CIT Group/CmS Securities Investment, Inc. ................. New Jersey
The CIT Group/Commercial Services (Asia) Ltd. ................. Hong Kong
The CIT Group/Commercial Services, Inc. ....................... New York
The CIT Group/Consumer Finance, Inc. (TN) ..................... New Jersey
The CIT Group/Corporate Aviation, Inc. ........................ Delaware
The CIT Group/Credit Finance, Inc. ............................ Delaware
The CIT Group/CrF Securities Investment, Inc. ................. New Jersey
The CIT Group/El Paso Refinery, Inc. .......................... Delaware
The CIT Group/Equipment Financing Canada Ltd. ................. Ontario
The CIT Group/Equipment Financing, Inc. ....................... New York
The CIT Group/Equity Investments, Inc. ........................ New Jersey
The CIT Group/Factoring One, Inc. ............................. New York
The CIT Group/FM Securities Investment, Inc. .................. New Jersey
The CIT Group/LsC Securities Investment, Inc. ................. New Jersey
The CIT Group/Sales Financing, Inc. ........................... Delaware
The CIT Group/Securities Investment, Inc. ..................... Delaware
The CIT Group/Venture Capital, Inc. ........................... New Jersey
The Equipment Insurance Company ............................... Vermont
Thermo Capital Company, LLC ................................... Delaware
Thomas Credit Corporation ..................................... Delaware
Thomas Credit Corporation Inc. ................................ Ontario
Transitions Alberta Inc. ...................................... Alberta
TTC Funding Company, LLC ...................................... Delaware
Wajax Finance Ltd. ............................................ Ontario
Wajax Finance, Inc. ........................................... Delaware
Wellington Capital Corporation ................................ Barbados
Western Star Finance (Australia) Pty Ltd. ..................... Australia
Western Star Finance Ltd. ..................................... Ontario
Western Star Finance, Inc. .................................... Delaware
Western Star Insurance Services, Inc. ......................... Delaware
William Iselin & Co., Inc. .................................... New York
Worrell Capital Limited ....................................... Barbados
YMAF Pty Ltd. ................................................. Australia
YMCF Inc. ..................................................... Ontario
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
To the Stockholders and Board of Directors
of The CIT Group, Inc.:
We consent to the incorporation by reference in Registration Statements
No. 33-85224, No. 333-70249, No. 333-36061, No. 333-22283, No. 333-43323, No.
333-64539, No. 333-64529, No. 333-73255, No. 333-74847, No. 333-34793 and No.
333-71361 on Form S-3 of The CIT Group, Inc. of our report dated February 2,
2000, relating to the consolidated balance sheets of The CIT Group, Inc. and
subsidiaries as of December 31, 1999 and 1998, 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, 1999, which report appears
in the December 31, 1999 Annual Report on Form 10-K of The CIT Group, Inc.
KPMG LLP
Short Hills, New Jersey
March 24, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial informaion extracted from the
Consolidated Balance Sheets and Consolidated Income Statements and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,073
<SECURITIES> 0
<RECEIVABLES> 31,007
<ALLOWANCES> 447
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 45,081
<CURRENT-LIABILITIES> 0
<BONDS> 26,400
250
0
<COMMON> 3
<OTHER-SE> 5,554
<TOTAL-LIABILITY-AND-EQUITY> 45,081
<SALES> 0
<TOTAL-REVENUES> 2,917
<CGS> 0
<TOTAL-COSTS> 542
<OTHER-EXPENSES> 374
<LOSS-PROVISION> 110
<INTEREST-EXPENSE> 1,294
<INCOME-PRETAX> 597
<INCOME-TAX> 208
<INCOME-CONTINUING> 389
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 389
<EPS-BASIC> 2.24
<EPS-DILUTED> 2.22
</TABLE>
