-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Gsvec6YFTpcFY80A9sY73CPNfbtw1mtIVBsBgjytnt5fFQI8YvDWQUiKh6rAHisn YPf0IEt0p9fQ02hZXQG2+Q== 0000912057-01-539224.txt : 20020410 0000912057-01-539224.hdr.sgml : 20020410 ACCESSION NUMBER: 0000912057-01-539224 CONFORMED SUBMISSION TYPE: 10-12B PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20011113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TYCO CAPITAL LTD CENTRAL INDEX KEY: 0001162014 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: 10-12B SEC ACT: 1934 Act SEC FILE NUMBER: 001-16775 FILM NUMBER: 1785040 BUSINESS ADDRESS: STREET 1: THE ZURICH CENTRE SECOND FLOOR STREET 2: SUITE 201 90 PITTS BAY CITY: PEMBROKE BERMUCA HM08 STATE: D0 ZIP: 00000 10-12B 1 a2062535z10-12b.txt 10-12B AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 13, 2001 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10 GENERAL FORM FOR REGISTRATION OF SECURITIES PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------------------ TYCO CAPITAL LTD. (Exact name of registrant as specified in its charter) BERMUDA NOT APPLICABLE (State or other jurisdiction (I.R.S. Employer of Identification No.) incorporation or organization)
THE ZURICH CENTRE, SECOND FLOOR, SUITE 201 90 PITTS BAY ROAD PEMBROKE HM 08, BERMUDA* (Address, including zip code, of registrant's principal executive offices) Registrant's telephone number, including area code: (441) 298-9767 * Tyco Capital Ltd. maintains its registered and principal executive offices at The Zurich Centre, Second Floor, Suite 201, 90 Pitts Bay Road, Pembroke HM 08, Bermuda. The executive office of Tyco Capital Ltd.'s principal United States subsidiary is located at 1211 Avenue of the Americas, New York, New York 10036. The telephone number there is (212) 536-1390. ------------------------ COPIES TO: MEREDITH B. CROSS FATI SADEGHI ROBERT J. INGATO WILMER, CUTLER & PICKERING SENIOR CORPORATE COUNSEL EXECUTIVE VICE PRESIDENT AND 2445 M STREET, N.W. C/O TYCO INTERNATIONAL (US) GENERAL COUNSEL WASHINGTON, D.C. 20037 INC. TYCO CAPITAL CORPORATION (202) 663-6000 ONE TYCO PARK 1 TYCO DRIVE EXETER, NEW HAMPSHIRE 03833 LIVINGSTON, NEW JERSEY 07039 (603) 778-9700 (973) 740-5000
------------------------ SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON WHICH EACH CLASS TITLE OF EACH CLASS TO BE SO REGISTERED IS TO BE REGISTERED - --------------------------------------- ------------------------ Guarantees by Tyco Capital Ltd. of 5 7/8% Notes due October 15, 2008 issued by Tyco Capital Corporation................. New York Stock Exchange
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None Registrant meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this Form 10 with a reduced disclosure format. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TYCO CAPITAL LTD. FORM 10 GENERAL FORM FOR REGISTRATION OF SECURITIES TABLE OF CONTENTS
ITEM PAGE - ---- -------- 1. Business.................................................... 1 2. Financial Information....................................... 11 3. Properties.................................................. 41 4. Security Ownership of Certain Beneficial Owners and Management....................................... 41 5. Directors and Executive Officers............................ 41 6. Executive Compensation...................................... 41 7. Certain Relationships and Related Transactions.............. 41 8. Legal Proceedings........................................... 41 9. Market Price of and Dividends on the Registrant's Common Equity and Related Shareholder Matters...................... 41 10. Recent Sales of Unregistered Securities..................... 42 11. Description of Registrant's Securities to be Registered..... 42 12. Indemnification of Directors and Officers................... 42 13. Financial Statements and Supplementary Data................. 43 The CIT Group, Inc. (subsequently renamed Tyco Capital Corporation): Independent Auditors' Report (KPMG LLP)..................... 44 Consolidated Balance Sheets as of December 31, 2000 and 1999............................................. 45 Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998................. 46 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998............................................. 47 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998................. 48 Notes to Financial Statements............................... 49 Tyco Capital Ltd.: Report of Independent Accountants (PricewaterhouseCoopers)......................... 84 Balance Sheet as of September 30, 2000...................... 85 Notes to Financial Statement................................ 86 Tyco Capital Ltd. Interim Financial Statements: Unaudited Consolidated Balance Sheet as of June 30, 2001 (successor) and Consolidated Balance Sheet as of December 31, 2000 (predecessor).................. 87 Unaudited Consolidated Income Statements for the period January 1, 2001 through June 1, 2001 (predecessor), June 2, 2001 through June 30, 2001 (successor), and January 1, 2000 through June 30, 2000 (predecessor)............................... 88 Unaudited Consolidated Statements of Changes in Shareholder's Equity for the period January 1, 2001 through June 1, 2001 (predecessor) and June 2, 2001 through June 30, 2001 (successor)........ 89 Unaudited Consolidated Statements of Cash Flows for the period January 1, 2001 through June 1, 2001 (predecessor), June 2, 2001 through June 30, 2001 (successor), and January 1, 2000 through June 30, 2000 (predecessor)............................... 90 Notes to Consolidated Financial Statements (Unaudited)...... 91 14. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................... 97 15. Financial Statements and Exhibits........................... 97 (a) Financial Statements................................... 97 (b) Exhibits............................................... 98 Signatures.................................................. 99
ITEM 1. BUSINESS. OVERVIEW Tyco Capital Ltd. (formerly Tyco Holdings (Bermuda) No. 9 Limited) was incorporated on February 25, 2000 as a Bermuda company and wholly-owned subsidiary of Tyco International Ltd. ("Tyco") and serves as the holding company for Tyco's financial services business. Substantially all of Tyco Capital Ltd.'s operating activities are performed by its subsidiaries, including Tyco Capital Corporation (formerly known as The CIT Group, Inc., or CIT) and its subsidiaries. Except as otherwise specified, Tyco Capital Ltd. and its subsidiaries are referred to in this document collectively as "Tyco Capital" or the "Company". On June 1, 2001 CIT was acquired by a wholly-owned subsidiary of Tyco, in a purchase business combination and subsequently changed its name to Tyco Capital Corporation. Tyco Capital Corporation was contributed to Tyco Capital Ltd. on November 8, 2001 and accordingly, as a company under the control of Tyco Capital Ltd., Tyco Capital Corporation is reflected as a wholly-owned subsidiary of Tyco Capital Ltd. in its consolidated financial statements for periods beginning on June 2, 2001. In accordance with the guidelines for accounting for business combinations, the purchase price paid by Tyco for Tyco Capital Corporation plus related purchase accounting adjustments have been "pushed-down" and recorded in Tyco Capital Ltd.'s consolidated financial statements for periods subsequent to June 1, 2001. This resulted in a new basis of accounting reflecting the fair market value of Tyco Capital Corporation's assets and liabilities for the "successor" period beginning on June 2, 2001. Because the results of operations of Tyco Capital Ltd. for the period from inception (February 25, 2000) through June 1, 2001 are not material (a cumulative deficit of $5,000), information for all "predecessor" periods prior to the acquisition is presented on a historical basis of accounting and represents the activities of Tyco Capital Corporation. We have included the following financial statements in Item 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA of this document: - audited consolidated financial statements of The CIT Group, Inc. (subsequently renamed Tyco Capital Corporation) as of December 31, 2000 and 1999 and for each of the years in the three years ended December 31, 2000; - audited financial statement of Tyco Capital Ltd. as of September 30, 2000; and - unaudited consolidated financial statements of Tyco Capital Ltd. as of June 30, 2001 (successor) and December 31, 2000 (predecessor), and for the periods January 1, 2001 through June 1, 2001 (predecessor), June 2, 2001 through June 30, 2001 (successor) and the six months ended June 30, 2000 (predecessor). Tyco Capital is a leading global source of financing and leasing capital for companies in more than 30 industries, including many of today's leading industries and emerging businesses, offering vendor, equipment, commercial, factoring, consumer, and structured financing capabilities. Tyco Capital will continue to operate its business independently within Tyco and will continue to report its results separately. 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. We had $51.09 billion of managed assets and $10.52 billion of shareholder's equity at June 30, 2001. Managed assets comprise financing and leasing assets and finance receivables previously securitized that we continue to manage. The financial data in this section reflects the four business segments that comprise Tyco Capital, as follows: - Equipment Financing and Leasing - Specialty Finance 1 - Commercial Finance - Structured Finance The former Vendor Technology Finance and Consumer segments were combined to form the Specialty Finance segment in 2001. 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 below. Our commercial lending and leasing businesses, which are conducted in all four of the segments, 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: manufacturing, retailing, transportation, aerospace, construction, technology, communication and various service-related industries. The secured lending, leasing and factoring products of our 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, debtor-in-possession and turnaround financing, and acquisition and expansion financing. Our consumer lending business consists primarily of home equity lending to consumers originated largely through a network of brokers and correspondents. Transactions are generated through direct calling efforts with borrowers, lessees, equipment end-users, vendors, manufacturers and distributors and through referral sources and other intermediaries. Tyco also sources transactions to us from its customers. In addition, our strategic business units jointly structure certain transactions and refer or cross-sell transactions to other Tyco Capital units to best meet our customers' overall financing needs. 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 select finance receivables and equipment under operating leases for risk and other balance sheet management purposes, or to improve profitability. EQUIPMENT FINANCING AND LEASING SEGMENT Our Equipment Financing and Leasing operations had total financing and leasing assets of $17.32 billion at June 30, 2001, representing 42.7% of total financing and leasing assets. On a managed basis, Equipment Financing and Leasing totaled $21.93 billion or 42.9% of total managed assets. We conduct our Equipment Financing and Leasing operations through two strategic business units: - EQUIPMENT FINANCING offers secured equipment financing and leasing and focuses on the broad distribution of its products through manufacturers, dealers/distributors, intermediaries and direct calling efforts primarily in manufacturing, construction, transportation, food services/stores and other industries. - CAPITAL FINANCE offers secured equipment financing and leasing by directly marketing customized transactions of commercial aircraft and rail equipment. Equipment Financing and Capital Finance personnel have extensive expertise in managing equipment over its full life cycle, including purchasing new equipment, maintaining and repairing equipment, estimating residual values and re-marketing via re-leasing or selling equipment. Equipment Financing's and Capital Finance's equipment and industry expertise enables them to effectively manage residual value risk. For example, Capital Finance can repossess commercial aircraft, if necessary, obtain any required maintenance and repairs for such aircraft, and recertify such aircraft with appropriate authorities. We manage the equipment, residual value, and the risk of equipment remaining idle for extended periods of time and where appropriate, we locate alternative equipment users or purchasers. For each year in the period 1997 through 2000 and for the six months ended June 30, 2001, Equipment 2 Financing and Capital Finance have realized in excess of 100% of the aggregate booked residual values in connection with their equipment sales. The following table sets forth the managed assets of our Equipment Financing and Leasing segment at June 30, 2001 and at December 31 for each of the years in the four-year period ended December 31, 2000 ($ in millions).
DECEMBER 31, JUNE 30, ---------------------------------------------- EQUIPMENT FINANCING AND LEASING 2001 2000 1999 1998 1997 - ------------------------------- ----------- --------- ---------- --------- --------- (SUCCESSOR) (PREDECESSOR) Finance receivables................... $12,108.5 $14,202.7 $12,999.6 $10,592.9 $ 9,804.1 Operating lease equipment, net........ 5,210.3 5,875.3 4,017.1 2,774.1 1,905.6 --------- --------- --------- --------- --------- Total financing and leasing assets............................ 17,318.8 20,078.0 17,016.7 13,367.0 11,709.7 Finance receivables previously securitized and still managed by us.................................. 4,608.3 6,387.2 2,189.4 -- -- --------- --------- --------- --------- --------- Total managed assets.................. $21,927.1 $26,465.2 $19,206.1 $13,367.0 $11,709.7 ========= ========= ========= ========= =========
During the six months ended June 30, 2001, certain intersegment transfers of assets were completed to better align marketing and risk management efforts, to further improve operating efficiencies and to implement a more uniform North American strategy. EQUIPMENT FINANCING Equipment Financing has total financing and leasing assets of $11.64 billion at June 30, 2001, representing 28.7% of our total financing and leasing assets. On a managed asset basis, Equipment Financing represents $16.25 billion or 31.8% of total managed assets. Equipment Financing offers secured equipment financing and leasing products, including loans, leases, wholesale and retail financing for distributors and manufacturers, loans guaranteed by the U.S. Small Business Administration, operating leases, sale and leaseback arrangements, portfolio acquisitions, municipal leases, revolving lines of credit and in-house syndication capabilities. Equipment Financing is a diversified, middle-market, secured equipment lender with a global presence and strong North American marketing coverage. At June 30, 2001, its portfolio included significant financing and leasing assets to customers in a number of different industries, with manufacturing being the largest as a percentage of financing and leasing assets, followed by construction and transportation. Products are originated through direct calling on customers and through relationships with manufacturers, dealers, distributors and intermediaries that have leading or significant marketing positions in their respective industries. This provides Equipment Financing with efficient access to equipment end-users in many industries across a variety of equipment types. 3 The following table sets forth the managed assets of Equipment Financing at June 30, 2001 and at December 31 for each of the years in the four-year period ended December 31, 2000 ($ in millions).
DECEMBER 31, JUNE 30, -------------------------------------------- EQUIPMENT FINANCING 2001 2000 1999 1998 1997 - ------------------- ----------- --------- ---------- -------- -------- (SUCCESSOR) (PREDECESSOR) Finance receivables..................... $10,213.1 $12,153.7 $10,899.3 $8,497.6 $7,403.4 Operating lease equipment, net.......... 1,430.0 2,280.7 1,066.2 765.1 623.8 --------- --------- --------- -------- -------- Total financing and leasing assets...... 11,643.1 14,434.4 11,965.5 9,262.7 8,027.2 Finance receivables previously securitized and still managed by us... 4,608.3 6,387.2 2,189.4 -- -- --------- --------- --------- -------- -------- Total managed assets.................... $16,251.4 $20,821.6 $14,154.9 $9,262.7 $8,027.2 ========= ========= ========= ======== ========
CAPITAL FINANCE Capital Finance had financing and leasing assets of $5.68 billion at June 30, 2001, which represented 14.0% of our total financing and leasing assets and 11.1% of managed assets. Capital Finance specializes in providing customized leasing and secured financing 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. New business is generated through direct calling efforts supplemented with transactions introduced by intermediaries and other referral sources. 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, with a fleet of approximately 200 aircraft and an average age of approximately nine years. Capital Finance has developed strong direct relationships with most major airlines and all major aircraft and aircraft engine manufacturers. This provides Capital Finance with access to technical information, which enhances customer service, and provides opportunities to finance new business. During 2000 and 1999, we entered into agreements with both Airbus Industrie and the Boeing Company to purchase approximately 110 new aircraft, with options to acquire additional units. Deliveries of these new aircraft, which are scheduled to take place over a five-year period, started in the fourth quarter of 2000. Aircrafts scheduled for delivery through fiscal 2001 have been placed on lease, with a majority of customers already in place for 2002 and 2003 deliveries. Capital Finance has over 25 years of 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 railroads and rail shippers 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. Railcars total in excess of 43,000, with approximately 78% less than six years old. The rail portfolio also includes over 350 locomotives. 4 The following table sets forth the financing and leasing assets of Capital Finance at June 30, 2001 and at December 31 for each of the years in the four-year period ended December 31, 2000 ($ in millions).
DECEMBER 31, JUNE 30, ------------------------------------------- CAPITAL FINANCE 2001 2000 1999 1998 1997 - --------------- ----------- -------- ---------- -------- -------- (SUCCESSOR) (PREDECESSOR) Finance receivables....................... $1,895.4 $2,049.0 $2,100.3 $2,095.3 $2,400.7 Operating lease equipment, net............ 3,780.3 3,594.6 2,950.9 2,009.0 1,281.8 -------- -------- -------- -------- -------- Total financing and leasing assets...... $5,675.7 $5,643.6 $5,051.2 $4,104.3 $3,682.5 ======== ======== ======== ======== ========
SPECIALTY FINANCE SEGMENT Specialty Finance assets include certain small ticket commercial financing and leasing assets, vendor programs and consumer home equity. The former Vendor Technology Finance and Consumer segments were combined to form the Specialty Finance segment during the second quarter of 2001. At June 30, 2001, the Specialty Finance financing and leasing assets totaled $12.41 billion, representing 30.6% of total financing and leasing assets. Total Specialty Finance managed assets, including vendor alliances, were $18.38 billion, representing 36.0% of total managed assets. Vendor alliances are with industry-leading equipment vendors, including manufacturers, dealers and distributors, to deliver customized asset-based sales and financing solutions in a wide array of vendor programs. These alliances allow Specialty Finance's vendor partners to better utilize core competencies, reduce capital needs and drive incremental sales volume. As part of the vendor alliances, credit financing to the manufacturer's customers for the purchase or lease of the manufacturer's products is offered, and enhanced sales tools are offered to manufacturers and vendors, such as asset management services, efficient loan processing, and real-time credit adjudication. By working in partnership with select vendors, vendor alliances permit integration with the vendor's business planning process and product offering systems to improve execution and reduce cycle times. Specialty Finance has significant vendor programs in information technology and telecommunications equipment and serves many other industries through its global network. These vendor alliances are characterized by the use of traditional vendor finance programs, joint ventures, profit sharing and other transaction structures entered into with large, sales-oriented corporate vendor partners. In the case of joint ventures, Specialty Finance and the vendor combine financing activities through a distinct legal entity that is jointly owned. Generally, these arrangements are accounted for on an equity basis, with profits and losses distributed according to the joint venture agreement. Additionally, Specialty Finance generally purchases finance receivables originated by the joint venture entities. Specialty Finance also utilizes "virtual joint ventures," whereby the assets are originated on Specialty Finance's balance sheet, while profits and losses are shared with the vendor. These types of strategic alliances are a key source of business for Specialty Finance. New vendor alliance business is also generated through intermediaries and other referral sources, as well as through direct end-user relationships. As part of our review of non-strategic businesses, in the second quarter of 2001 we sold $1.4 billion of our manufactured housing loan portfolio. In addition, subsequent to June 30, 2001, we exited the recreational vehicle origination market and placed the existing portfolio in liquidation status. Accordingly, the primary focus of the consumer business is currently home equity lending. As part of an ongoing strategy to maximize the value of its origination network and to improve overall profitability, Specialty Finance sells individual loans and portfolios of loans to banks, thrifts and other originators of consumer loans. 5 Consumer contract servicing for securitization trusts and other third parties is provided through a centralized Asset Service Center. These third-party portfolios totaled $3.3 billion at June 30, 2001. Commercial assets are serviced via our several centers in the United States, Canada and internationally. The following table sets forth the managed assets of our Specialty Finance segment at June 30, 2001 and at December 31 for each of the years in the four-year period ended December 31, 2000 ($ in millions). The reduction in financing and leasing assets during 2001 reflects the disposition (or partial disposition) of non-strategic businesses, including the United Kingdom dealer business and manufactured housing loans.
DECEMBER 31, JUNE 30, -------------------------------------------- SPECIALTY FINANCE 2001 2000 1999 1998 1997 - ----------------- ----------- --------- ---------- -------- -------- (SUCCESSOR) (PREDECESSOR) Finance receivables Commercial............................ $ 6,811.1 $ 6,864.5 $ 7,488.9 $ -- $ -- Home equity........................... 2,523.5 2,451.7 2,215.4 2,244.4 1,992.3 Manufactured housing.................. 244.0 1,802.1 1,666.9 1,417.5 1,125.7 Liquidating portfolio *............... 1,036.5 946.2 824.0 1,592.4 815.0 Operating lease equipment, net.......... 1,795.3 1,256.5 2,108.8 -- -- --------- --------- --------- -------- -------- Total financing and leasing assets...... 12,410.4 13,321.0 14,304.0 5,254.3 3,933.0 Finance receivables previously securitized and still managed by us... 5,966.8 4,729.1 8,849.9 2,516.9 2,385.6 --------- --------- --------- -------- -------- Total managed assets.................... $18,377.2 $18,050.1 $23,153.9 $7,771.2 $6,318.6 ========= ========= ========= ======== ========
- ------------------------ * Balances include recreational boat and wholesale loan product lines exited in 1999 and recreational vehicle product line exited in 2001. Prior year balances have been conformed. The home equity products include both fixed and variable rate closed-end loans and variable rate lines of credit. This unit primarily originates, purchases and services 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. Specialty Finance primarily originates loans through brokers and correspondents with a high proportion of home equity applications processed electronically over the internet via BrokerEdge(SM) using proprietary systems. Through experienced lending professionals and automation, Specialty Finance provides rapid turnaround time from application to loan funding, a characteristic considered to be critical by its broker relationships. COMMERCIAL FINANCE SEGMENT At June 30, 2001, the financing and leasing assets of our Commercial Finance segment totaled $7.78 billion, representing 19.2% of total financing and leasing assets and 15.2% of managed assets. We conduct our Commercial Finance operations through two strategic business units, both of which focus on accounts receivable and inventories as the primary source of security for their lending transactions. - COMMERCIAL SERVICES provides secured financing, as well as factoring and receivable/collection management products to companies in apparel, textile, furniture, home furnishings and other industries. - BUSINESS CREDIT provides secured financing to a full range of borrowers from small to larger-sized companies. 6 The following table sets forth the financing and leasing assets of Commercial Finance at June 30, 2001 and at December 31 for each of the years in the four-year period ended December 31, 2000 ($ in millions).
DECEMBER 31, JUNE 30, ------------------------------------------- COMMERCIAL FINANCE 2001 2000 1999 1998 1997 - ------------------ ----------- -------- ---------- -------- -------- (SUCCESSOR) (PREDECESSOR) Commercial Services....................... $4,182.3 $4,277.9 $4,165.1 $2,481.8 $2,113.1 Business Credit........................... 3,593.7 3,415.8 2,837.0 2,514.4 2,137.7 -------- -------- -------- -------- -------- Total financing and leasing assets...... $7,776.0 $7,693.7 $7,002.1 $4,996.2 $4,250.8 ======== ======== ======== ======== ========
In 1999, Commercial Services completed the acquisitions of certain domestic factoring businesses, which added in excess of $1.5 billion in financing and leasing assets. COMMERCIAL SERVICES Commercial Services had total financing and leasing assets of $4.18 billion at June 30, 2001, which represented 10.3% of our total financing and leasing assets and 8.2% of managed 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 receivables or 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 and improving management information. Further, with the TotalSource(SM) product, clients can outsource bookkeeping, collection and other receivable processing activities. These services are attractive to industries outside the typical factoring markets, providing growth opportunities for Commercial Services. Commercial Services generates business regionally from a variety of sources, including direct calling efforts and referrals from existing clients and other sources. BUSINESS CREDIT Financing and leasing assets of Business Credit totaled $3.59 billion at June 30, 2001 and represented 8.9% of our total financing and leasing assets and 7.0% of managed 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 financing, reorganization and restructurings, and 7 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. STRUCTURED FINANCE SEGMENT Structured Finance had financing and leasing assets of $3.01 billion, comprising 7.4% of our total financing and leasing assets and 5.9% of managed assets at June 30, 2001. Structured Finance operates internationally through operations in the United States, Canada, and Europe. Structured Finance provides specialized investment banking services to the international corporate finance and institutional finance markets by providing asset-based financing for large ticket asset acquisitions and project financing and related advisory services to equipment manufacturers, corporate clients, regional airlines, governments and public sector agencies. Communications, transportation, and the power and utilities sectors are among the industries that Structured Finance serves. Structured Finance also serves as an origination conduit to its lending partners by seeking out and creating investment opportunities. Structured Finance has established relationships with insurance companies and institutional investors and can arrange financing opportunities that meet asset class, yield, duration and credit quality requirements. Accordingly, Structured Finance has considerable syndication and fee generation capacity. Structured Finance continues to arrange transaction financing and participate in merger and acquisition transactions and has investments in emerging growth enterprises in selected industries, including the information technology, communications, life science and consumer products industries. The following table sets forth the financing and leasing assets of Structured Finance at June 30, 2001 and December 31, 2000 and 1999 ($ in millions).
DECEMBER 31, JUNE 30, --------------------- STRUCTURED FINANCE 2001 2000 1999 - ------------------ ----------- ---------- -------- (SUCCESSOR) (PREDECESSOR) Finance receivables......................................... $2,615.2 $2,347.3 $1,933.9 Operating lease equipment, net.............................. 56.2 58.8 -- Other--Equity Investments................................... 336.2 285.8 137.3 -------- -------- -------- Total financing and leasing assets........................ $3,007.6 $2,691.9 $2,071.2 ======== ======== ========
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 an array of securitization programs to access both the public and private asset-backed securitization markets. Current products included in these programs 8 include commercial receivables and leases and consumer loans secured by recreational vehicles, residential real estate and equipment. During the six months ended June 30, 2001, we securitized $2.4 billion of financing and leasing assets and the outstanding securitized asset balance at June 30, 2001 was $10.58 billion or 20.7% of our total managed assets. Under a typical asset-backed securitization, we sell a "pool" of secured loans or leases to a special-purpose entity, typically a trust. 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 special-purpose entity, cash reserve accounts on deposit in the special-purpose entity or interest only receivables) and recognize a gain. In estimating residual cash flows and the value of the retained interests, we make a variety of financial assumptions, including pool credit losses, prepayment speeds and discount rates. These assumptions are supported by both our historical experience and anticipated trends relative to the particular products securitized. Subsequent to recording the retained interests, we review them regularly for impairment based upon estimated fair values. These reviews are performed on a disaggregated basis. Fair values of retained interests are estimated utilizing current pool demographics, actual note/ certificate outstandings, current and anticipated credit losses, prepayment speeds and discount rates. Retained interests are subject to credit and prepayment risk. Our interests relating to commercial securitized assets are generally subject to lower prepayment risk because of their contractual terms. These assets are subject to the same credit granting and monitoring processes which are described in the "Credit Risk Management" section of "Risk Management" in Item 2. FINANCIAL INFORMATION--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. INDUSTRY CONCENTRATION See the "Industry Composition" section of "Concentrations" in Item 2. FINANCIAL INFORMATION--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 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 with global reach. 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 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. Competition has been enhanced in recent years by a strong economy and growing marketplace liquidity, although, during 2001, the economy has slowed and marketplace liquidity has tightened. The markets for most of our products are characterized by a large number of competitors, although there continues to be consolidation in the industry. However, with respect to some of our products, competition is more concentrated. 9 We compete primarily on the basis of pricing, terms and structure. From time to time, our competitors seek to compete aggressively on the basis of these factors and we may lose market share to the extent we are unwilling to match competitor pricing and terms in order to maintain interest margins and/or credit standards. Other primary competitive factors include industry experience and client service and relationships. In addition, demand for our products with respect to certain industries, such as the commercial airline industry, will be affected by demand for such industry's services and products and by industry regulations. REGULATION Our operations are subject, in certain instances, to supervision and regulation by state, 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. In addition to the foregoing, CIT Online Bank, a Utah industrial loan corporation wholly owned by Tyco Capital, is subject to regulation and examination by the Federal Deposit Insurance Corporation and the Utah Department of Financial Institutions. 10 ITEM 2. FINANCIAL INFORMATION. INTRODUCTION Tyco Capital Ltd. was incorporated on February 25, 2000 as a Bermuda company and wholly-owned subsidiary of Tyco and serves as the holding company for Tyco's financial services business. Substantially all of Tyco Capital Ltd's. operating activities are performed by its subsidiaries. On June 1, 2001, Tyco Capital Corporation was acquired by a wholly-owned subsidiary of Tyco in a purchase business combination (see Note 2 to the unaudited consolidated financial statements of Tyco Capital Ltd.). Tyco Capital Corporation was contributed to Tyco Capital Ltd. on November 8, 2001 and accordingly, as a company under the control of Tyco Capital Ltd., Tyco Capital Corporation is reflected as a wholly-owned subsidiary of Tyco Capital Ltd. in its consolidated financial statements for periods beginning on June 2, 2001. In accordance with the guidelines for accounting for business combinations, the purchase price paid by Tyco for Tyco Capital Corporation plus related purchase accounting adjustments have been "pushed-down" and recorded in Tyco Capital Ltd.'s consolidated financial statements for periods subsequent to June 1, 2001. This resulted in a new basis of accounting reflecting the fair market value of Tyco Capital Corporation's assets and liabilities for the "successor" period beginning June 2, 2001. Because the results of operations of Tyco Capital Ltd. for the period from inception (February 25, 2000) through June 1, 2001 are not material (a cumulative deficit of $5,000), information for all "predecessor" periods prior to the acquisition is presented on a historical basis of accounting and represents the activities of Tyco Capital Corporation. We have included the following financial statements in Item 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA of this document: - audited consolidated financial statements of The CIT Group, Inc. (subsequently renamed Tyco Capital Corporation) as of December 31, 2000 and 1999, and for each of the years in the three years ended December 31, 2000; - audited financial statement of Tyco Capital Ltd. as of September 30, 2000; and - unaudited consolidated financial statements of Tyco Capital Ltd. as of June 30, 2001 (successor) and December 31, 2000 (predecessor), and for the periods January 1, 2001 through June 1, 2001 (predecessor), June 2, 2001 through June 30, 2001 (successor) and the six months ended June 30, 2000 (predecessor). SELECTED FINANCIAL DATA The following tables set forth selected consolidated financial information regarding Tyco Capital Ltd.'s and Tyco Capital Corporation's results of operations and balance sheets. The financial data at and for each of the five years in the period ended December 31, 2000 were derived from the historical audited consolidated financial statements of The CIT Group, Inc. (subsequently renamed Tyco Capital Corporation). To assist in the comparability of our financial results the financial information in the following tables combines the "predecessor period" (January 1 through June 1, 2001) with the "successor period" (June 2 through June 30, 2001) to present "combined" results for the six months ended June 30, 2001. The data presented below should be read in conjunction with MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND QUANTITATIVE 11 AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK below and Item 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, --------------------------- --------------------------------------------------------- 2001 2000 2000 1999(2) 1998 1997 1996 ----------- ------------- --------- --------- --------- --------- --------- (COMBINED) (PREDECESSOR) (PREDECESSSOR) ($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS) RESULTS OF OPERATIONS Net finance income.............. $ 1,532.2 $ 1,327.8 $ 2,750.7 $ 1,272.5 $ 974.3 $ 887.5 $ 797.9 Net finance margin.............. 834.1 708.3 1,469.4 917.4 804.8 740.7 676.2 Operating revenue............... 1,167.5 1,178.8 2,381.4 1,268.2 1,060.2 1,046.5(3) 920.3 Salaries and general operating expenses...................... 531.4 525.7 1,035.2 516.0 407.7 420.0 385.3 Provision for credit losses..... 235.0 125.6 255.2 110.3 99.4 113.7 111.4 Goodwill amortization........... 52.2 41.1 86.3 25.7 10.1 8.4 7.8 Net income...................... 158.3(1) 295.3 611.6 389.4 338.8 310.1 260.1 Net income per diluted share.... -- 1.12 2.33 2.22 2.08 1.95 1.64
AT JUNE 30, AT DECEMBER 31, --------------------------- --------------------------------------------------------- 2001 2000 2000 1999(2) 1998 1997 1996 ----------- ------------- --------- --------- --------- --------- --------- (SUCCESSOR) (PREDECESSOR) (PREDECESSSOR) ($ IN MILLIONS) BALANCE SHEET DATA Total finance receivables....... $30,865.7 $33,121.6 $33,497.5 $31,007.1 $19,856.0 $17,719.7 $16,996.6 Reserve for credit losses....... 463.8 460.3 468.5 446.9 263.7 235.6 220.8 Operating lease equipment, net........................... 7,182.4 6,427.6 7,190.6 6,125.9 2,774.1 1,905.6 1,402.1 Goodwill and other intangibles, net........................... 6,101.7 2,009.8 1,964.6 1,850.5 216.5 134.6 129.5 Total assets.................... 51,894.5 47,089.4 48,689.8 45,081.1 24,303.1 20,464.1 18,932.5 Commercial paper................ 9,155.8 9,356.2 9,063.5 8,974.0 6,144.1 5,559.6 5,827.0 Variable-rate senior notes...... 9,856.3 10,161.7 11,130.5 7,147.2 4,275.0 2,861.5 3,717.5 Fixed-rate senior notes......... 17,646.6 17,626.7 17,571.1 19,052.3 8,032.3 6,593.8 4,761.2 Subordinated fixed-rate notes... 100.0 200.0 200.0 200.0 200.0 300.0 300.0 Tyco Capital Corporation obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of Tyco Capital Corporation...... 260.0 250.0 250.0 250.0 250.0 250.0 -- Shareholder's equity............ 10,517.3 5,748.8 6,007.2 5,554.4 2,701.6 2,432.9 2,075.4
- ------------------------------ (1) Includes non-recurring charges of $221.6 million ($158.0 million after tax) consisting of the following: provision of $89.5 million for certain non-strategic and under-performing equipment leasing and loan portfolios of which the Company expects to dispose; write-downs of $78.1 million for certain equity investments in the telecommunications industry and e-commerce markets of which the Company plans to dispose; and transaction costs of $54.0 million associated with Tyco's acquisition of Tyco Capital Corporation. (2) Includes results of operations of Newcourt Credit Group Inc. from the November 15, 1999 acquisition date. (3) Includes a 1997 gain of $58.0 million on the sale of an equity interest acquired in connection with a loan workout. 12
SIX MONTHS ENDED JUNE 30, AT OR FOR THE YEARS ENDED DECEMBER 31, --------------------------- --------------------------------------------------------- SELECTED DATA AND RATIOS 2001 2000 2000 1999(1) 1998 1997 1996 - ------------------------ ----------- ------------- --------- --------- --------- --------- --------- (COMBINED) (PREDECESSOR) (PREDECESSSOR) ($ IN MILLIONS) PROFITABILITY Net finance margin as a percentage of average earning assets ("AEA")(1)............. 4.03% 3.56% 3.61% 3.59% 3.93% 4.06% 4.09% Return on average tangible shareholder's equity(2)....... 7.6%(3) 15.6% 16.0% 14.2% 14.0% 14.6% 14.0% Return on AEA................... 0.77%(3) 1.48% 1.50% 1.52% 1.65% 1.70%(9) 1.57% Ratio of earnings to fixed charges(4).................... 1.24x 1.39x 1.39x 1.45x 1.49x 1.51x 1.49x Salaries and general operating expenses (excluding goodwill amortization) as a percentage of average managed assets ("AMA")(5).................... 2.27% 2.09% 2.01% 1.75% 1.78% 2.11%(9) 2.18% Efficiency ratio (excluding goodwill amortization)(6)..... 50.6%(3) 45.0% 43.8% 41.3% 39.2% 40.8%(9) 41.9% CREDIT QUALITY 60+ days contractual delinquency as a percentage of finance receivables................... 3.53% 2.80% 2.98% 2.71% 1.75% 1.67% 1.72% Net credit losses as a percentage of average finance receivables................... 0.94% 0.73% 0.71% 0.42% 0.42% 0.59% 0.62% Reserve for credit losses as a percentage of finance receivables................... 1.50% 1.39% 1.40% 1.44% 1.33% 1.33% 1.30% LEVERAGE Total debt (net of overnight deposits) to tangible shareholder's equity(2)(7).... 7.79x 9.27x 8.78x 8.75x 6.82x 5.99x 7.49x Tangible shareholder's equity(2) to managed assets............. 9.2% 7.5% 7.8% 7.7% 10.4% 11.4% 9.7% OTHER Total managed assets(8)......... $51,087.9 $53,370.9 $54,900.9 $51,433.3 $26,216.3 $22,344.9 $20,005.4 Employees....................... 7,230 7,400 7,355 8,255 3,230 3,025 2,950
- ------------------------------ (1) "AEA" means average earning assets, which is the average of finance receivables, operating lease equipment, finance receivables held for sale and certain investments, less credit balances of factoring clients. (2) Tangible shareholder's equity excludes goodwill. (3) Excluding the non-recurring charge of $221.6 million ($158.0 million after tax) in the six months ended June 30, 2001, (i) the return on average tangible shareholder's equity would have been 15.3%, (ii) the return on AEA would have been 15.3%, (iii) the efficiency ratio would have been 43.0% and (iv) salaries and general operating expenses as a percentage of AMA would have been 2.06%. (4) For purposes of determining the ratio of earnings to fixed charges, earnings consist of income before income taxes and fixed charges. Fixed charges consist of interest on indebtedness, minority interest in subsidiary trust holding debentures of Tyco Capital Corporation and one-third of rent expense which is deemed representative of an interest factor. (5) "AMA" means average managed assets, which is average earning assets plus the average of finance receivables previously securitized and still managed by us. (6) Efficiency ratio equals the ratio of salaries and general operating expenses to the sum of operating revenue less minority interest in subsidiary trust holding solely debentures of Tyco Capital Corporation. (7) Total debt excludes, and shareholder's equity includes, Tyco Capital Corporation obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of Tyco Capital Corporation. (8) "Managed assets" include (i) financing and leasing assets, (ii) certain investments and (iii) off-balance sheet finance receivables previously securitized and still managed by us. (9) Excluding the gain of $58.0 million on the sale of an equity interest acquired in a loan workout and certain non-recurring expenses, for the year ended December 31, 1997, (i) the return on AEA would have been 1.58%, (ii) the efficiency ratio would have been 41.1% and (iii) salaries and general operating expenses as a percentage of AMA would have been 2.01%. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK YOU SHOULD READ THIS DISCUSSION IN CONJUNCTION WITH ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. SIX MONTHS ENDED JUNE 30, 2001 AND 2000 OVERVIEW To assist in the comparability of our financial results and to make it easier to discuss and understand our results of operations, the financial information presented below combines the "predecessor period" (January 1 through June 1, 2001) with the "successor period" (June 2 through June 30, 2001) to present "combined" results for the six months ended June 30, 2001 ($ in millions).
COMBINED SIX MONTHS ENDED SIX MONTHS ENDED JUNE 30, 2001 JUNE 30, 2000 ---------------- ---------------- Net income, before non-recurring charges.................... $316.3 $295.3 Net income, after non-recurring charges..................... $158.3 $295.3 Return on average tangible shareholder's equity, before non- recurring charges......................................... 15.3% 15.6% Return on average tangible shareholder's equity, after non-recurring charges..................................... 7.6% 15.6% Return on average earning assets, before non-recurring charges................................................... 1.5% 1.5% Return on average earning assets, after non-recurring charges................................................... 0.8% 1.5%
Net income for the combined six months ended June 30, 2001 included a non-recurring charge of $221.6 million ($158.0 million after-tax) consisting of the following: provision of $89.5 million for certain non-strategic and under-performing equipment leasing and loan portfolios, primarily in the telecommunications industry, of which the Company expects to dispose; write-downs of $78.1 million for certain equity investments in the telecommunications industry and e-commerce markets of which the Company plans to dispose; and transaction costs of $54.0 million incurred by Tyco Capital Corporation prior to and in connection with its acquisition by Tyco. The transaction costs are presented separately in our Consolidated Income Statement, while the remaining charges have been included in Provision for credit losses and Other revenue, net, respectively. The return on tangible shareholder's equity for the combined six months ended June 30, 2001 declined due to: the de-leveraging (the decrease in the debt to equity ratio) of the Company over the past year as a result of sales of non-strategic assets; increases in goodwill amortization expense as a result of push-down accounting; and an increase in the effective tax rate from June 2 through June 30, 2001 due to additional non-deductible goodwill amortization. 14 NET FINANCE MARGIN A comparison of finance income and net finance margin for the combined six months ended June 30, 2001 and the six months ended June 30, 2000 is set forth in the table below ($ in millions):
COMBINED SIX MONTHS SIX MONTHS INCREASE INCREASE ENDED ENDED (DECREASE) (DECREASE) JUNE 30, 2001 JUNE 30, 2000 AMOUNT PERCENT -------------- -------------- ---------- ---------- Finance income.................................. $ 2,716.7 $ 2,530.6 $ 186.1 7.4% Interest expense................................ 1,184.5 1,202.8 (18.3) (1.5)% --------- --------- -------- Net finance income.............................. 1,532.2 1,327.8 204.4 15.4% Depreciation on operating lease equipment....... 698.1 619.5 78.6 12.7% --------- --------- -------- Net finance margin.............................. $ 834.1 $ 708.3 $ 125.8 17.8% ========= ========= ======== Average earning assets ("AEA").................. $41,373.3 $39,778.6 $1,594.7 4.0% Net finance margin as a % of AEA................ 4.03% 3.56%
Net finance margin for the combined six months ended June 30, 2001 increased $125.8 million to $834.1 million as compared to the six months ended June 30, 2000. This increase reflects higher yields over cost of funds, as well as growth in our financing and leasing assets. Net finance margin as a percentage of AEA was 4.03% for the combined six months ended June 30, 2001 as compared to 3.56% for the six months ended June 30, 2000. This increase primarily reflects the exit of lower return businesses, lower short-term market interest rates and improved pricing in certain markets. Finance income (interest on loans and lease rentals) for the combined six months ended June 30, 2001 increased $186.1 million to $2,716.7 million from the comparable 2000 period. As a percentage of AEA, finance income (excluding interest income relating to short-term interest-bearing deposits) was 12.95% for the combined six months ended June 30, 2001, compared to 12.51% for the comparable 2000 period. Interest expense for the combined six months ended June 30, 2001 decreased $18.3 million from the comparable 2000 period. As a percentage of AEA, interest expense (excluding interest expense relating to short-term interest-bearing deposits and dividends related to preferred capital securities) for the combined six months ended June 30, 2001 decreased to 5.54% from 5.83% for the six months ended June 30, 2000 as market interest rates declined. The operating lease equipment portfolio was $7.2 billion at June 30, 2001 as compared to $6.4 billion at June 30, 2000, and $7.2 billion at December 31, 2000. Operating lease margin (rental income less depreciation expense) was 6.6% for the combined six months ended June 30, 2001 as compared to 6.9% for the six months ended June 30, 2000. Depreciation on operating lease equipment was $698.1 million for the combined six months ended June 30, 2001 and $619.5 million for the comparable 2000 period, reflecting the increase in the operating lease equipment portfolio. As a percentage of average operating leases, annualized depreciation expense was 19.5% for both six-month periods ended June 30, 2001 and 2000. Our depreciable assets range from smaller ticket (for example, computers), shorter term leases to larger ticket (airline and rail assets), longer term leases. We seek to mitigate interest rate risk by matching the repricing characteristics of our assets with our liabilities, which is done in part through the use of derivative financial instruments, principally interest rate swaps. The aggregate notional amount of our interest rate swaps was $8.2 billion at June 30, 2001. See "Liquidity Risk Management" for further discussion. 15 A comparative analysis of the weighted average principal outstanding and interest rates paid on our debt before and after the effect of interest rate swaps is shown in the following table ($ in millions):
COMBINED SIX MONTHS ENDED JUNE 30, 2001 ------------------------------------------ BEFORE SWAPS AFTER SWAPS ------------------ ------------------ Commercial paper and variable rate senior notes........... $20,831.2 5.31% $13,777.8 5.32% Fixed rate senior and subordinated notes.................. 17,146.2 6.75% 24,199.6 6.81% --------- --------- Composite................................................. $37,977.4 5.96% $37,977.4 6.27% ========= ========= SIX MONTHS ENDED JUNE 30, 2000 ------------------------------------------ BEFORE SWAPS AFTER SWAPS ------------------ ------------------ Commercial paper and variable rate senior notes........... $19,290.8 6.26% $15,097.8 6.49% Fixed rate senior and subordinated notes.................. 17,849.7 6.68% 22,042.7 6.58% --------- --------- Composite................................................. $37,140.5 6.46% $37,140.5 6.54% ========= =========
The weighted average composite interest rate after swaps in each of the periods presented increased from the composite interest rate before swaps primarily because a larger proportion of our debt, after giving effect to interest rate swaps, was subject to a fixed interest rate. The weighted average interest rates before swaps do not necessarily reflect the interest expense that would have been incurred had we chosen to manage interest rate risk without the use of such swaps. OTHER REVENUE, NET Other revenue, net is as follows ($ in millions):
COMBINED SIX MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, 2001 2000 -------------- ---------- Fees and other income....................................... $223.9 $242.5 Gains on securitizations.................................... 72.1 42.0 Factoring commissions....................................... 72.0 76.7 Gains on sales of leasing equipment......................... 36.8 61.2 Gains on venture capital investments........................ 6.7 48.1 Non-recurring charges....................................... (78.1) -- ------ ------ Total other revenue, net.................................... $333.4 $470.5 ====== ======
Other revenue, net was $333.4 million for the combined six months ended June 30, 2001 as compared to $470.5 million during the six months ended June 30, 2000. Other revenue, net for the combined six months ended June 30, 2001 includes $78.1 million of non-recurring charges for the write-downs of certain equity investments in the telecommunications industry and e-commerce markets of which the Company plans to dispose. Excluding these charges, other revenue, net for the period decreased to $411.5 million due principally to lower gains on equipment sales and venture capital investments. Fees and other income includes miscellaneous fees, syndication fees and gains from receivable sales. Securitization gains were $72.1 million, or 13.9% of pre-tax income, excluding non-recurring charges, on $2.4 billion of volume securitized, as compared to $42.0 million or 8.6% of pre-tax income on $1.6 billion of volume in the six months ended June 30, 2000. Gains on equipment sales decreased due to the impact of push-down accounting during the successor June 2001 period. Weak economic conditions in the public equity markets resulted in venture capital gains of $6.7 million, down from $48.1 million last year. 16 SALARIES AND GENERAL OPERATING EXPENSES Salaries and general operating expenses were $531.4 million for the combined six months ended June 30, 2001, up 1.1% from $525.7 million for the six months ended June 30, 2000. In conjunction with the integration of Tyco Capital Corporation and its subsidiaries into Tyco, corporate staff reductions and related business restructurings were initiated. As a result, approximately 350 people will be terminated. The staff reductions and business restructurings implemented through June 30, 2001 are expected to result in approximately $70 million in annual savings. Management monitors productivity via the efficiency ratio and the ratio of salaries and general operating expenses to average managed assets ("AMA"). Both of these annualized ratios, which exclude goodwill amortization, improved in 2001 as set forth in the following table:
COMBINED SIX MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, 2001 2000 -------------- ---------- Efficiency ratio (excluding non-recurring charges).......... 43.0% 45.0% Salaries and general operating expenses as a percent of AMA....................................................... 2.06% 2.09%
The efficiency ratio improved modestly from 2000 to 2001 but is still above management's target of 40% or less. Salaries and general operating expenses as a percent of AMA decreased to 2.06% for the combined six months ended June 30, 2001 from 2.09% in the six months ended June 30, 2000. Management believes that the expense initiatives under our integration plan noted above will impact this ratio favorably in the future. Beginning after June 1, 2001 (the date of Tyco Capital Corporation's acquisition by Tyco), Tyco began charging Tyco Capital a management fee equal to 1% of operating revenue for the estimated costs of services provided to the Company by Tyco, primarily related to the tax, audit, legal, human resource and treasury functions. GOODWILL AND OTHER INTANGIBLE ASSETS AMORTIZATION As disclosed in Note 2 to the unaudited consolidated financial statements of Tyco Capital Ltd., $4.2 billion of incremental goodwill and other intangible assets was "pushed-down" to Tyco Capital Corporation as a result of the acquisition by Tyco. Accordingly, goodwill and other intangible assets amortization was $52.2 million for the combined six months ended June 30, 2001 as compared to $41.1 million for the six months ended June 30, 2000. Goodwill and other intangible assets are being amortized, from the acquisition date, on a straight-line basis over the lives of the underlying identifiable assets, which range from 5 to 40 years. PROVISION AND RESERVE FOR CREDIT LOSSES/CREDIT QUALITY The provision for credit losses for the combined six months ended June 30, 2001 was $235.0 million, up from $125.6 million in the six months ended June 30, 2000. The $235.0 million includes a provision for certain non-strategic and under-performing equipment leasing and loan portfolios expected to be disposed of totaling $89.5 million, primarily in the Structured Finance telecommunications portfolio. For the combined six months ended June 30, 2001, net credit losses, including non-recurring charges, were $223.4 million compared to $113.7 million for the comparable 2000 period. Excluding non-recurring charges, net credit losses for the combined six months ended June 30, 2001 were $143.9 million, or 0.87% of average finance receivables, as compared to $113.7 million or 0.70% for the six months ended June 30, 2000, reflecting higher charge-offs due to economic weakness in 2001, notably in the trucking and technology portfolios. During the six months ended June 30, 2001, we transferred financing and leasing assets between Equipment Financing and Specialty Finance-commercial. The impact of these movements is not 17 reflected in the prior year data included in the tables relating to charge-offs, past due and nonperforming assets, and financing and leasing assets. The following table sets forth our net charge-off experience, excluding non-recurring charges, in amount and as a percentage of average finance receivables on an annualized basis ($ in millions):
COMBINED SIX MONTHS SIX MONTHS ENDED ENDED JUNE 30, 2001 JUNE 30, 2000 --------------- --------------- Equipment Financing and Leasing............................. $ 48.8 0.77% $ 25.4 0.40% Specialty Finance-commercial................................ 44.9 1.29% 33.8 0.93% Commercial Finance.......................................... 14.4 0.38% 25.6 0.70% Structured Finance.......................................... 6.1 0.64% 0.3 0.05% ------ ------ Total Commercial.......................................... 114.2 0.79% 85.1 0.60% Specialty Finance-consumer.................................. 29.7 1.45% 28.6 1.41% ------ ------ Total..................................................... $143.9 0.87% $113.7 0.70% ====== ======
Excluding non-recurring charges, commercial net credit losses for the combined six months ended June 30, 2001 increased to 0.79% in 2001 from 0.60% in 2000 due mainly to higher trucking and construction portfolio charge-offs in Equipment Financing. Consumer net credit losses were relatively unchanged at 1.45% for the combined six months ended June 30, 2001 as compared to 1.41% for the six months ended June 30, 2000. The Specialty Finance-commercial portfolio, which includes small-ticket loans and leases, and the Specialty Finance-consumer portfolio, which includes manufactured housing loans, have higher charge-off rates corresponding to their risk characteristics, as reflected in the table above. 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 credit losses inherent in the portfolios. We review finance receivables periodically to determine the probability of loss, and take charge-offs after considering such factors as delinquencies, the financial condition of obligors, the value of underlying collateral, as well as third party credit enhancements such as guarantees and recourse from manufacturers. Charge-offs are recorded on consumer receivables and certain small ticket commercial finance receivables beginning at 180 days of contractual delinquency based upon historical loss severity. The consolidated reserve for credit losses is intended to provide for losses inherent in the portfolio, which requires the application of estimates and significant judgment as to the ultimate outcome of collection efforts and realization of collateral, among other things. 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. All portfolios are provided for at different reserve levels based on our risk assessment. The reserve was $463.8 million (1.50% of finance receivables) at June 30, 2001 as compared to $468.5 million (1.40% of finance receivables) at December 31, 2000 and $460.3 million (1.39% of finance receivables) at June 30, 2000. 18 PAST DUE AND NON-PERFORMING ASSETS The following table sets forth certain information concerning past due and non-performing assets (and the related percentages of finance receivables) at June 30, 2001, March 31, 2001 and December 31, 2000 ($ in millions):
DECEMBER 31, JUNE 30, 2001 MARCH 31, 2001 2000 --------------- --------------- ---------------- Finance receivables, past due 60 days or more: Equipment Financing and Leasing........... $ 427.6 3.67% $ 377.1 3.10% $399.8 2.88% Specialty Finance-commercial.............. 278.7 4.38% 283.1 4.04% 184.9 3.07% Commercial Finance........................ 125.5 1.62% 105.0 1.31% 107.9 1.40% Structured Finance........................ 91.0 4.46% 117.7 6.13% 96.2 5.59% -------- -------- ------ Total Commercial.......................... 922.8 3.29% 882.9 3.03% 788.8 2.69% Specialty Finance-consumer................ 165.9 5.97% 199.7 4.76% 211.1 5.03% -------- -------- ------ Total................................... $1,088.7 3.53% $1,082.6 3.25% $999.9 2.98% ======== ======== ====== Non-performing assets: Equipment Financing and Leasing........... $ 356.3 2.99% $ 349.2 2.87% $351.0 2.53% Specialty Finance-commercial.............. 146.1 2.29% 163.6 2.33% 93.9 1.56% Commercial Finance........................ 73.4 0.94% 67.9 0.85% 65.3 0.85% Structured Finance........................ 109.0 5.34% 130.0 6.77% 118.6 6.90% -------- -------- ------ Total Commercial.......................... 684.8 2.44% 710.7 2.44% 628.8 2.15% Specialty Finance-consumer................ 165.2 5.94% 187.6 4.47% 199.3 4.75% -------- -------- ------ Total................................... $ 850.0 2.75% $ 898.3 2.70% $828.1 2.47% ======== ======== ======
Non-performing assets reflect both finance receivables on non-accrual status and assets received in satisfaction of loans. Past due and non-performing accounts as a percentage of finance receivables increased from March 31, 2001 as a result of declining economic conditions impacting certain sectors, most notably trucking, technology and retail. Trends in these sectors resulted in the increases in past due and non-performing assets in Equipment Financing and Leasing, Specialty Finance and Commercial Finance. Certain assets transferred to Specialty Finance-commercial, such as small ticket loans and leases, are higher risk in nature; therefore, past due and non-performing balances are generally higher. INCOME TAXES The effective income tax rate, excluding the impact of non-recurring charges, was 37.6% for the combined six months ended June 30, 2001, as compared to 38.1% in the six months ended June 30, 2000. The increase in the effective income tax rate in 2001 was primarily due to additional non-deductible goodwill amortization resulting from Tyco's acquisition of Tyco Capital Corporation. FINANCING AND LEASING ASSETS Managed assets, comprised of financing and leasing assets and finance receivables previously securitized that we continue to manage, totaled $51.1 billion at June 30, 2001, down from $54.9 billion at December 31, 2000, and $53.4 billion at June 30, 2000. Owned financing and leasing portfolio assets totaled $40.5 billion at June 30, 2001 compared to $43.8 billion at December 31, 2000 and $42.6 billion at June 30, 2000. The lower asset levels at June 30, 2001 reflect the disposition of non-strategic businesses and our focus on managing down our leverage ratios coupled with disciplined pricing and a lower level of 19 originations. During the combined six months ended June 30, 2001 over $2.8 billion of receivables and assets were sold. These sales included our United Kingdom dealer business and manufactured housing portfolio. In addition, we have exited the recreational vehicle origination market and placed our existing portfolio in liquidation status. New business origination volume was $10.3 billion for the combined six months ended June 30, 2001, as compared to $12.9 billion for the six months ended June 30, 2000 due to a lower level of portfolio purchases, the exiting of certain non-strategic businesses and the effects of the slower economic environment in 2001. We will continue our ongoing review of non-strategic businesses. The managed assets of our business segments and the corresponding strategic business units are presented in the following table ($ in millions):
JUNE 30, DECEMBER 31, 2001 2000 CHANGE PERCENT --------- ------------- --------- -------- Equipment Financing................................. $11,643.1 $14,434.4 $(2,791.3) (19.3)% Capital Finance..................................... 5,675.7 5,643.6 32.1 0.6% --------- --------- --------- Total Equipment Financing and Leasing Segment....... 17,318.8 20,078.0 (2,759.2) (13.7)% --------- --------- --------- Specialty Finance: Commercial.......................................... 8,606.4 8,121.0 485.4 6.0% Consumer............................................ 3,804.0 5,200.0 (1,396.0) (26.8)% --------- --------- --------- Total Specialty Finance Segment..................... 12,410.4 13,321.0 (910.6) (6.8)% --------- --------- --------- Commercial Services................................. 4,182.3 4,277.9 (95.6) (2.2)% Business Credit..................................... 3,593.7 3,415.8 177.9 5.2% --------- --------- --------- Total Commercial Finance Segment.................... 7,776.0 7,693.7 82.3 1.1% Structured Finance Segment.......................... 3,007.6 2,691.9 315.7 11.7% --------- --------- --------- TOTAL FINANCING AND LEASING PORTFOLIO ASSETS........ 40,512.8 43,784.6 (3,271.8) (7.5)% Finance receivables previously securitized and still managed by us..................................... 10,575.1 11,116.3 (541.2) (4.9)% --------- --------- --------- TOTAL MANAGED ASSETS................................ $51,087.9 $54,900.9 $(3,813.0) (6.9)% ========= ========= =========
CONCENTRATIONS FINANCING AND LEASING ASSETS COMPOSITION Our ten largest financing and leasing asset accounts at June 30, 2001 in the aggregate accounted for 4.0% of total financing and leasing assets, all of which are commercial accounts secured by equipment, accounts receivable and inventory. 20 GEOGRAPHIC COMPOSITION The following table presents financing and leasing assets by customer location ($ in millions):
AT JUNE 30, 2001 AT DECEMBER 31, 2000 -------------------- ---------------------- AMOUNT PERCENT AMOUNT PERCENT --------- -------- ---------- --------- United States: Northeast........................................... $ 8,258.9 20.4% $ 9,099.3 20.8% West................................................ 7,798.5 19.2 8,336.9 19.0 Midwest............................................. 7,075.2 17.5 7,723.1 17.6 Southeast........................................... 5,812.7 14.3 6,228.6 14.2 Southwest........................................... 4,578.7 11.3 4,940.3 11.4 --------- ----- --------- ----- Total United States................................... 33,524.0 82.7 36,328.2 83.0 --------- ----- --------- ----- Foreign: Canada.............................................. 2,128.4 5.3 2,357.4 5.4 Other............................................... 4,860.4 12.0 5,099.0 11.6 --------- ----- --------- ----- Total foreign......................................... 6,988.8 17.3 7,456.4 17.0 --------- ----- --------- ----- Total................................................. $40,512.8 100.0% $43,784.6 100.0% ========= ===== ========= =====
At June 30, 2001, 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 June 30, 2001, with the exception of California (10.5%), Texas (7.7%), and New York (6.9%), no state represented more than 4.2% of financing and leasing assets. Our managed and owned asset geographic composition did not significantly differ from our December 31, 2000 managed and owned asset geographic composition. Financing and leasing assets to foreign obligors totaled $7.0 billion at June 30, 2001. After Canada, $2.1 billion (5.3% of financing and leasing assets), the largest foreign exposures were England, $814.9 million (2.0%), and Australia, $353.9 million (0.9%). Our remaining foreign exposure was geographically dispersed, with no other individual country exposure greater than 0.7% of financing and leasing assets. Financing and leasing assets to foreign obligors totaled $7.5 billion at December 31, 2000. After Canada, $2.4 billion (5.4% of financing and leasing assets), the largest foreign exposures were England, $1.2 billion (2.8%), and Australia, $399.6 million (0.9%). Our remaining foreign exposure was geographically dispersed, with no other individual country exposure greater than 0.8% of financing and leasing assets. 21 INDUSTRY COMPOSITION The following table presents financing and leasing assets by major industry class ($ in millions):
AT JUNE 30, 2001 AT DECEMBER 31, 2000 -------------------- ---------------------- AMOUNT PERCENT AMOUNT PERCENT --------- -------- ---------- --------- Manufacturing(1) (none greater than 3.5%)............................ $ 8,707.5 21.5% $ 8,787.2 20.1% Retail(2)............................................. 3,927.6 9.7 4,211.3 9.6 Commercial airlines................................... 3,566.4 8.8 3,557.2 8.1 Transportation(3)..................................... 3,169.8 7.8 3,431.0 7.8 Home mortgage......................................... 2,523.5 6.2 2,451.7 5.6 Construction equipment................................ 2,400.1 5.9 2,697.8 6.2 Service industries.................................... 1,693.5 4.2 1,987.1 4.5 Wholesaling........................................... 1,484.7 3.7 1,445.0 3.3 Communications........................................ 1,427.3 3.5 1,496.7 3.4 Other (none greater than 2.6%)........................ 11,612.4 28.7 13,719.6 31.4 --------- ----- --------- ----- Total............................................... $40,512.8 100.0% $43,784.6 100.0% ========= ===== ========= =====
- ------------------------ (1) Includes manufacturers of steel and metal products, textiles and apparel, printing and paper products, and other industries. (2) Includes retailers of apparel (3.6%) and general merchandise (2.5%). (3) Includes rail, bus, over-the-road trucking and business aircraft. LIQUIDITY RISK MANAGEMENT Liquidity risk refers to the inability to meet potential cash outflows promptly and cost effectively. Factors that could cause such a risk to arise might be a disruption of securities markets or other funding sources. 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. and Europe) and asset-backed securities (U.S. and Canada). We also maintain committed bank lines of credit aggregating $8.5 billion to provide back-stop support of commercial paper borrowings and approximately $243.5 million of local bank lines to support our international operations. Additional sources of liquidity are loan and lease payments from customers and whole loan sales, syndications and asset-backed receivable conduits. As of June 30, 2001, we have $15.2 billion of registered, but unissued, debt securities available under a shelf registration statement. To ensure uninterrupted access to capital at competitive interest rates, we maintain strong investment grade ratings as outlined below:
SHORT TERM LONG TERM ---------- --------- Moody's................................................ P-1 A2 Standard & Poor's...................................... A-1 A+ Fitch.................................................. F1 A+
The security ratings stated above are not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal by the assigning rating organization. Each rating should be evaluated independently of any other rating. As part of our continuing program of accessing the public and private asset-backed securitization markets as an additional liquidity source, general equipment finance receivables of $2.4 billion were securitized during the combined six months ended June 30, 2001. At June 30, 2001, we had $7.7 billion 22 of registered, but unissued, securities available under public shelf registration statements relating to our asset-backed securitization program. We also target and monitor certain liquidity metrics to ensure both a balanced liability profile and adequate alternate liquidity availability. Among the target ratios are commercial paper as a percentage of total debt and committed bank line coverage of outstanding commercial paper. Through June 30, 2001, our exposure to market risk from changes in interest rates and foreign currency exchange rates has not changed materially from our exposure during the year ended December 31, 2000 discussed under "Risk Management" beginning on page 34. CAPITALIZATION The following table presents information regarding our capital structure ($ in millions):
JUNE 30, DECEMBER 31, 2001 2000 --------- ------------- Commercial paper..................................... $ 9,155.8 $ 9,063.5 Term debt............................................ 27,602.9 28,901.6 Tyco Capital Corporation obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of Tyco Capital Corporation ("Preferred Capital Securities")....... 260.0 250.0 Shareholder's equity*................................ 10,535.6 6,007.2 --------- --------- Total capitalization................................. 47,554.3 44,222.3 Goodwill............................................. (6,101.7) (1,964.6) --------- --------- Total tangible capitalization........................ $41,452.6 $42,257.7 ========= ========= Tangible shareholder's equity* and Preferred Capital Securities to managed assets....................... 9.19% 7.82% Total debt (excluding overnight deposits) to tangible shareholder's equity* and Preferred Capital Securities......................................... 7.79x 8.78x
- ------------------------ * Shareholder's equity excludes the impact of the Accumulated other comprehensive loss relating to derivative financial instruments described in Note 3 to the unaudited consolidated financial statements of Tyco Capital Ltd. Management has made significant progress toward its goals of reducing leverage and improving profitability through sales of low margin businesses and non-strategic assets. As a result of such sales, the retention of earnings and the capital contributed by Tyco in June 2001, our target leverage ratio has been attained. 23 STATISTICAL DATA The following table presents components of net income as a percentage of AEA, along with other selected financial data ($ in millions):
COMBINED SIX MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, 2001(1) 2000 ---------- ---------- Finance income(2)..................................... 12.95% 12.51% Interest expense(2)................................... 5.54 5.83 --------- --------- Net finance income.................................. 7.41 6.68 Depreciation on operating lease equipment............. 3.37 3.12 --------- --------- Net finance margin.................................. 4.04 3.56 Fees and other income................................. 1.98 2.37 --------- --------- Operating revenue................................... 6.02 5.93 --------- --------- Salaries and general operating expenses............... 2.57 2.64 Provision for credit losses........................... 0.70 0.63 Goodwill amortization................................. 0.25 0.21 --------- --------- Operating expenses.................................. 3.52 3.48 --------- --------- Income before income taxes.......................... 2.50 2.45 Provision for income taxes............................ 0.94 0.94 Minority interest in subsidiary trust holding solely debentures of Tyco Capital Corporation.............. 0.03 0.03 --------- --------- Net income.......................................... 1.53% 1.48% ========= ========= Average earning assets................................ $41,373.3 $39,778.6 ========= =========
- ------------------------ (1) Excludes non-recurring charges of $221.6 million ($158.0 million after tax). Including non-recurring charges, net income as a percent of AEA was 0.77%. (2) Excludes interest income and interest expense relating to short-term interest-bearing deposits. ACCOUNTING AND TECHNICAL PRONOUNCEMENTS In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. In addition, companies will be required to review goodwill and intangible assets reported in connection with prior acquisitions, possibly disaggregate and report separately previously identified intangible assets and possibly reclassify certain intangible assets into goodwill. SFAS No. 142 establishes new guidelines on accounting for goodwill and other intangible assets. Tyco Capital expects to implement SFAS No. 142 at its earliest allowable adoption date, October 1, 2001. Upon adoption, existing goodwill will no longer be amortized, but instead will be assessed for impairment at least as often as annually. Goodwill resulting from acquisitions, if any, initiated after June 30, 2001 will be immediately subject to the nonamortization provisions of SFAS No. 142. We are currently assessing the impact of these new standards. Goodwill amortization expense was $37.8 million and $14.4 million for the periods January 1 through June 1, 2001 and June 2 through June 30, 2001, respectively. 24 YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 OVERVIEW For the year ended December 31, 2000, Tyco Capital Corporation's net income totaled a record $611.6 million, increasing from $389.4 million in 1999 and $338.8 million in 1998. The 2000 earnings represented the thirteenth consecutive increase in our annual earnings and the tenth consecutive year of record earnings. During the year, we sought to improve Tyco Capital Corporation's profitability by improving lower return businesses or by identifying lower performing portfolios for sale or liquidation, and by strengthening our pricing discipline. Additionally, the 2000 results reflect growth from 1999 acquisition activities, solid fee and other income generation, as well as considerable expense savings related to operational integrations. The improvements in 1999 over 1998 resulted from stronger revenues from a higher level of financing and leasing assets. Earnings per diluted share increased from the preceding year by 5.0% in 2000 and 6.7% in 1999. Earnings per share improved considerably less than the corresponding increases in net income due to 104.0 million shares issued in the acquisition of Newcourt in November 1999. Excluding the impact of goodwill amortization, earnings per diluted share increased from the preceding year by 12.4% in 2000 and by 10.4% in 1999. Return on average tangible stockholders' equity improved to 16.0% in 2000 and 14.2% in 1999 from 14.0% in 1998. Information pertaining to 1999 reflects the results of acquired operations from each acquisition date through year end. Segment data for 2000 reflects the realignment of Vendor Technology Finance and Structured Finance from the prior year Newcourt segment. In addition, during 2000 we continued to realign businesses and shift assets between business units, as $2,702.2 million of financing and leasing assets and $2,902.2 million of managed assets were transferred from Vendor Technology Finance to Equipment Financing, and a $313.0 million telecommunications portfolio was transferred to Structured Finance from Equipment Financing. These transfers were done to better align marketing and risk management efforts, to further improve operating efficiencies, and to implement a more uniform North American strategy. The following table summarizes our net income and related data.
YEARS ENDED DECEMBER 31, ------------------------------ 2000 1999 1998 -------- -------- -------- Net income ($ in millions).................................. $611.6 $389.4 $338.8 Earnings per diluted share ("EPS").......................... $ 2.33 $ 2.22 $ 2.08 EPS excluding goodwill amortization......................... $ 2.62 $ 2.33 $ 2.11 Return on average stockholders' equity ("ROE").............. 10.7% 12.0% 13.2% ROE excluding goodwill amortization......................... 12.0% 12.6% 13.6% Return on average tangible stockholders' equity ("ROTE").... 16.0% 14.2% 14.0% Return on average earning assets ("ROA").................... 1.50% 1.52% 1.65% ROA excluding goodwill amortization......................... 1.69% 1.60% 1.70%
Managed assets totaled $54.9 billion at December 31, 2000, $51.4 billion at December 31, 1999, and $26.2 billion at December 31, 1998, while financing and leasing portfolio assets totaled $43.8 billion, $40.4 billion and $23.7 billion at December 31, 2000, 1999 and 1998, respectively. The increase in both managed and portfolio assets over 1999 reflects increased volume of originations across all business segments, which was dampened by continued pricing discipline and by the sale of over $1 billion of non-strategic assets during the year. For the year 2000, financing and leasing assets grew 8.1% in the commercial segments and 10.5% in the consumer segment, with a 6.1% increase in finance receivables and a 17.4% increase in operating leases. In the commercial segments, 2000 growth, excluding the effect of the asset transfers, was particularly strong in Structured Finance and Vendor Technology Finance, while our consumer growth was driven by gains in the recreational vehicle and 25 home equity portfolios. The 1999 increase of 96.2% in managed assets over 1998 reflects primarily the acquisitions made in 1999. The remainder of the 1999 increase reflects strong new business volume, offset by a drop in consumer assets due to our decision to discontinue and liquidate our recreational boat and wholesale inventory finance portfolios. See "Financing and Leasing Assets" for additional information. NET FINANCE MARGIN A comparison of the components of 2000, 1999 and 1998 net finance margin is set forth below.
YEARS ENDED DECEMBER 31, --------------------------------- 2000 1999 1998 --------- --------- --------- DOLLARS IN MILLIONS Finance income.............................................. $ 5,248.4 $ 2,565.9 $ 2,015.1 Interest expense............................................ 2,497.7 1,293.4 1,040.8 --------- --------- --------- Net finance income........................................ 2,750.7 1,272.5 974.3 Depreciation on operating lease equipment................... 1,281.3 355.1 169.5 --------- --------- --------- Net finance margin........................................ $ 1,469.4 $ 917.4 $ 804.8 ========= ========= ========= Average earning assets ("AEA").............................. $40,682.5 $25,583.0 $20,495.8 Net finance margin as a % of AEA............................ 3.61% 3.59% 3.93%
Net finance margin increased 60.2% to $1,469.4 million in 2000 from 1999, and 14.0% in 1999 from 1998. The increase in 2000 primarily reflects growth in our loans, leases and operating leases due to acquisitions. The increase in 1999 from 1998 was due to acquisitions and strong internal business generation. As a percentage of AEA, net finance margin was 3.61% in 2000 versus 3.59% and 3.93% in 1999 and 1998, respectively. Net finance margin as a percentage of AEA increased from the prior year in 2000, as wider margins in our businesses acquired in 1999 more than offset the impact of the continued growth in operating leases. The operating leasing business, which generally has lower initial net finance margins than finance receivables, also generates equipment gains, renewal fees and tax depreciation benefits. Finance income totaled $5,248.4 million in 2000, $2,565.9 million in 1999 and $2,015.1 million in 1998. As a percentage of AEA, finance income (excluding interest income related to short-term interest-bearing deposits) was 12.69% in 2000, 9.88% in 1999 and 9.69% in 1998. The increase in yield in 2000 and 1999 primarily reflected changes in product mix due to acquisitions and the sale or liquidation of non-strategic, lower yielding assets. Interest expense totaled $2,497.7 million in 2000, $1,293.4 million in 1999 and $1,040.8 million in 1998. As a percentage of AEA, interest expense (excluding interest related to short-term interest-bearing deposits and dividends related to preferred capital securities) was 5.92% in 2000, 4.91% in 1999 and 4.94% in 1998, reflecting the impact of prevailing interest rates at the time of the Newcourt acquisition, the rising interest rate environment throughout most of 2000 and wider borrowing spreads over U.S. Treasury rates in 2000. We seek to mitigate interest rate risk by matching the repricing characteristics of our assets with our liabilities, which is in part done through portfolio management and the use of derivative financial instruments, principally interest rate swaps. For further discussion, see "Risk Management." The operating lease equipment portfolio was $7.2 billion at December 31, 2000 versus $6.1 billion and $2.8 billion at December 31, 1999 and December 31, 1998, respectively. As a result, depreciation on operating lease equipment increased to $1,281.3 million in 2000, versus $355.1 million and $169.5 million in 1999 and 1998, respectively. As a percentage of average operating leases, depreciation was 19.50%, 9.51%, and 7.66% in 2000, 1999 and 1998, respectively. The increase in 2000 over 1999 reflects the full year impact of the acquired assets, which include smaller ticket and shorter term leases. 26 This more than offsets the impact of an increase in airline and rail assets, with longer depreciable lives, from 1998 to 2000 in the Equipment Financing and Leasing segment. OTHER REVENUE We continue to emphasize growth and diversification of our other "non-spread" revenues to improve overall profitability of Tyco Capital Corporation. Other revenue improved to $912.0 million during 2000, from $350.8 million during 1999 and $255.4 million during 1998, primarily due to the 1999 acquisition activity, as set forth in the following table.
YEARS ENDED DECEMBER 31, ------------------------------ 2000 1999 1998 -------- -------- -------- DOLLARS IN MILLIONS Fees and other income....................................... $480.9 $161.0 $ 90.7 Factoring commissions....................................... 154.7 118.7 95.7 Gains on sales of leasing equipment......................... 113.2 56.4 45.2 Gains on securitizations.................................... 109.5 14.7 12.5 Gains on venture capital investments........................ 53.7 -- 11.3 ------ ------ ------ Total..................................................... $912.0 $350.8 $255.4 ====== ====== ======
Included in fees and other income are miscellaneous fees, syndication fees and gains from receivable sales. Receivable sales increased primarily in our consumer business, reflecting its receivable origination and whole loan sale strategy to maximize the value of our origination network. Miscellaneous fees increased across all commercial segments during 2000; however, the increase is primarily due to the 1999 acquisitions. Fees from syndication activity in the acquired Structured Finance segment also had a significant impact on the year over year increase. Factoring commissions were up due to the 1999 factoring acquisitions. Gains on sales of leasing equipment and securitizations each increased due to higher volumes in 2000. We also benefited from the maturation of certain venture capital investments and a strong IPO market in the early part of the year. The 1999 increase in other revenue from 1998 reflects primarily an increase in factoring commissions, due in part to the two acquisitions completed during the year, syndication fees from the Structured Finance segment and gains recognized on sales of receivables. SALARIES AND GENERAL OPERATING EXPENSES Salaries and general operating expenses were $1,035.2 million in 2000, $516.0 million in 1999, and $407.7 million in 1998. Expenses were up significantly in 2000 due to the prior year acquisitions, with the largest portion of this increase in employee costs and facilities expenses. Integration cost savings exceeded our original forecast of $150 million in annual cost savings from pre-acquisition levels. These cost savings were the result of an integration plan established in connection with the acquisition that identified certain real estate locations for elimination, as well as involuntary employee terminations. Our personnel decreased to approximately 7,355 at December 31, 2000 from 8,255 at December 31, 1999 due to integration reductions. This compared to 3,230 at December 31, 1998, reflecting the 1999 acquisitions. 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 computer equipment and software, including post-implementation evaluations. The efficiency ratio and the ratio of salaries and general operating expenses to AMA are two measurements that management uses to monitor productivity. AMA is comprised of average earning 27 assets plus the average of finance receivables previously securitized and still managed by us. These ratios exclude goodwill amortization and are set forth in the following table.
YEARS ENDED DECEMBER 31, ------------------------------ 2000 1999 1998 -------- -------- -------- Efficiency ratio............................................ 43.8% 41.3% 39.2% Salaries and general operating expenses as a percentage of AMA....................................................... 2.01% 1.75% 1.78%
The lower efficiency (higher ratio) in 2000 and 1999 from 1998 reflects the impact of the Newcourt acquisition, as that company's efficiency ratio was historically significantly higher than Tyco Capital Corporation's. Integration cost savings and efficiency enhancements improved the efficiency ratio for the year 2000 to 43.8% from the 48.3% level for the 1999 fourth quarter, when the acquisition was completed. GOODWILL AMORTIZATION Goodwill amortization was $86.3 million in 2000 versus $25.7 million and $10.1 million in 1999 and 1998, respectively, reflecting the full year impact of the 1999 acquisitions, all of which were accounted for under the purchase method. PROVISION AND RESERVE FOR CREDIT LOSSES/CREDIT QUALITY The provision for credit losses was $255.2 million for 2000, $110.3 million for 1999, and $99.4 million for 1998. Net charge-offs were $235.6 million for 2000, $95.0 million for 1999, and $78.8 million for 1998. Our net charge-off experience, in amount and as a percentage of finance receivables, is provided in the following table.
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------------ 2000 1999 1998 ---------------------- ---------------------- ---------------------- DOLLARS IN MILLIONS Equipment Financing and Leasing................. $102.9 0.71% $16.7 0.16% $18.2 0.18% Vendor Technology Finance....................... 31.7 0.54 -- -- -- -- Commercial Finance.............................. 46.2 0.60 29.0 0.47 14.8 0.31 Structured Finance.............................. 0.4 0.03 -- -- -- -- ------ ---- ----- ---- ----- ---- Total Commercial Segments..................... 181.2 0.62 45.7 0.25 33.0 0.22 Consumer........................................ 54.4 1.32 49.3 1.19 45.8 1.18 ------ ---- ----- ---- ----- ---- Total......................................... $235.6 0.71% $95.0 0.42% $78.8 0.42% ====== ==== ===== ==== ===== ====
The increase in Equipment Financing and Leasing net credit losses primarily reflects the impact of acquired assets. The increase in 2000 in Commercial Finance net credit losses primarily reflects one food wholesaler account charged-off in 2000. The 1999 increase over 1998 in Commercial Finance was due to high recoveries in 1998. Our consolidated reserve for credit losses increased to $468.5 million (1.40% of finance receivables) at December 31, 2000 from $446.9 million (1.44%) at December 31, 1999 and $263.7 million (1.33%) at December 31, 1998, as we recorded provisions of $19.6 million, $15.3 million and $20.6 million in excess of net charge-offs during 2000, 1999 and 1998, respectively. The increase in the 2000 and 1999 ratio of reserve to receivables from 1998 reflects the acquired assets, which carried a higher reserve percentage than Tyco Capital Corporation's historical ratio, and is commensurate with this historically higher past due loan and charge-off profile. The decrease in the ratio of reserve to finance receivables in 2000 from 1999, reflects product mix changes as well as the implementation of Tyco Capital Corporation credit standards in the acquired portfolios. 28 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, 2000, 1999 and 1998.
AT DECEMBER 31, ------------------------------------------------------------------------ 2000 1999 1998 ------------------- ---------------------- ------------------- DOLLARS IN MILLIONS Finance receivables, past due 60 days or more: Equipment Financing and Leasing........... $399.8 2.88% $ 209.6 1.93% $149.9 1.41% Vendor Technology Finance................. 184.9 3.07 314.9 4.16 -- -- Commercial Finance........................ 107.9 1.40 64.0 0.91 32.1 0.64 Structured Finance........................ 96.2 5.59 61.5 4.12 -- -- ------ ---- ------- ------ ------ ---- Total Commercial Segments............... 788.8 2.69 650.0 2.42 182.0 1.17 Consumer.................................. 211.1 5.03 189.1(1) 4.62(1) 166.0 3.89 ------ ---- ------- ------ ------ ---- Total................................... $999.9 2.98% $ 839.1 2.71% $348.0 1.75% ====== ==== ======= ====== ====== ==== Non-performing assets: Equipment Financing and Leasing........... $351.0 2.53% $ 139.9 1.29% $135.2 1.27% Vendor Technology Finance................. 93.9 1.56 247.9 3.27 -- -- Commercial Finance........................ 65.3 0.85 27.6 0.39 14.5 0.29 Structured Finance........................ 118.6 6.90 61.5 4.12 -- -- ------ ---- ------- ------ ------ ---- Total Commercial Segments............... 628.8 2.15 476.9 1.77 149.7 0.96 Consumer.................................. 199.3 4.75 158.5(1) 3.87(1) 129.0 3.02 ------ ---- ------- ------ ------ ---- Total................................... $828.1 2.47% $ 635.4 2.05% $278.7 1.40% ====== ==== ======= ====== ====== ====
- ------------------------ (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 2000 increase from 1999 in our Equipment Financing and Leasing segment delinquency and non-performing asset ratios was in large part due to the acquired assets, which historically carried a higher level of delinquency and non-performing assets, as well as an increase in trucking industry delinquencies and non-performing assets. The increase in Structured Finance delinquency and non-performing assets from December 31, 1999 was primarily due to one account which was classified as non-performing during the fourth quarter of 2000. In 1999, Equipment Financing and Leasing past due loans increased, but non-performing assets remained relatively stable at 1.29%. The increase in 1999 Equipment Financing and Leasing past dues also included three commercial aircraft that became past due in the fourth quarter. The increases in Commercial Finance in 2000 past due and non-performing balances was due to the over 20% growth in the Business Credit unit and economic softening in various markets. The increases, in both 2000 and 1999 Consumer past due and non-performing accounts are due to softening in the manufactured housing market. INCOME TAXES The provision for federal, foreign and state and local income taxes totaled $373.9 million in 2000, compared with $207.6 million in 1999, and $185.0 million in 1998. The effective income tax rate for 2000 was 37.9%, compared with 34.8% in 1999, and 35.3% in 1998, primarily as a result of an increase in non-deductible goodwill amortization and foreign taxes, partially offset by lower state and local taxes. 29 RESULTS BY BUSINESS SEGMENT In Equipment Financing and Leasing, net income increased 24.3% from 1999, as the dollar amounts of increased margin and non-spread revenues more than offset higher charge-offs and operating expenses. As a percentage of AEA, Equipment Financing and Leasing net income dropped from 1999, as the relative revenue and spread improvements fell short of credit provisions and operating expense increases. The increased net income in 2000 over 1999 for Equipment Financing and Leasing, as well as the return on AEA trends, reflect the transfers of acquired assets. Commercial Finance net income improved 14.4% from 1999, and reflected increased factoring commissions, largely from the 1999 acquisitions. Consumer segment earnings grew by 22.2% and benefited from improved efficiency and gains on receivable sales. Whole loan sales are part of our ongoing consumer business strategy to maximize the value of our origination network. The increased corporate expense in 2000 over 1999 included higher goodwill amortization and higher corporate interest expense. 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 two 1999 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 and higher corporate interest expense. The table below summarizes selected financial information by business segment, based upon a fixed leverage ratio across business units and the allocation of a majority of corporate expenses.
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------------ NET INCOME RETURN ON AEA ------------------------------------ ------------------------------------ 2000 1999 1998 2000 1999 1998 -------- -------- -------- -------- -------- -------- DOLLARS IN MILLIONS Equipment Financing & Leasing.............. $ 287.8 $231.5 $193.9 1.42% 1.65% 1.59% Vendor Technology Finance.................. 148.9 7.5 -- 1.91 --(1) --(1) Commercial Finance......................... 161.8 141.4 119.1 3.03 3.35 3.36 Structured Finance......................... 89.6 -- -- 4.04 --(1) -- ------- ------ ------ ---- ---- ---- Total Commercial Segments................ 688.1 380.4 313.0 1.93 1.85 1.98 Consumer................................... 73.3 60.0 44.3 1.45 1.18 0.99 ------- ------ ------ ---- ---- ---- Total Segments........................... 761.4 440.4 357.3 1.87 1.72 1.74 Corporate.................................. (149.8) (51.0) (18.5) --(1) --(1) --(1) ------- ------ ------ ---- ---- ---- Total.................................... $ 611.6 $389.4 $338.8 1.50% 1.52% 1.65% ======= ====== ====== ==== ==== ====
- -------------------------- (1) These percentages are not meaningful. 30 FINANCING AND LEASING ASSETS Our managed assets grew $3.5 billion (6.7%) to $54.9 billion in 2000, and grew $25.2 billion (96.2%) to $51.4 billion in 1999, due primarily to acquisitions. Financing and leasing assets that we own grew $3.4 billion (8.4%) to $43.8 billion in 2000, and grew $16.7 billion (70.4%) to $40.4 billion in 1999. 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 integration of Newcourt, we transferred various assets among our business units to better align core competencies, gain scale, raise efficiency and improve profitability. During 2000, we transferred $1,713.3 million of finance receivables, $988.9 million of operating leases and $2,902.2 million of securitized assets from Vendor Technology Finance to Equipment Financing. Also, a telecommunications portfolio totaling $313.0 million was transferred to Structured Finance from Equipment Financing. These transfers are in addition to 1999 movements when finance receivables of $2,149.4 million and operating leases of $208.4 million were transferred to Equipment Financing from Vendor Technology Finance and $229.4 million of finance receivables and $4.4 million of operating leases were transferred to Vendor Technology Finance from Equipment Financing. Additionally, in 1999, $231.3 million of finance receivables were transferred to Capital Finance from Structured Finance. Excluding the impact of asset transfers in 2000, Vendor Technology Finance and Structured Finance portfolio assets grew at a rate of 12.8% and 14.9%, respectively, during the year, while Commercial Finance was up 9.9%. Consumer managed assets were flat year 2000 over 1999; however, on an owned basis (excluding the liquidating portfolio), assets were up 15.5% as no consumer asset-backed securitizations were completed in 2000. Business volume, excluding factoring, was $25.3 billion in 2000, up from $13.2 billion in 1999, as volume was strong across all commercial segments and in the Consumer home equity portfolio. 31 The managed assets of our business segments and the corresponding strategic business units are presented in the following table and reflect the previously discussed transfers between business units.
AT DECEMBER 31, % CHANGE --------------------------------- ----------------------- 2000 1999 1998 '00 VS '99 '99 VS '98 --------- --------- --------- ---------- ---------- DOLLARS IN MILLIONS EQUIPMENT FINANCING: Finance receivables..................... $12,153.7 $10,899.3 $ 8,497.6 11.5% 28.3% Operating lease equipment, net.......... 2,280.7 1,066.2 765.1 113.9 39.4 --------- --------- --------- ----- ----- Total................................. 14,434.4 11,965.5 9,262.7 20.6 29.2 --------- --------- --------- ----- ----- CAPITAL FINANCE: Finance receivables..................... 1,863.1 1,838.0 1,655.4 1.4 11.0 Operating lease equipment, net.......... 3,594.6 2,931.8 1,982.0 22.6 47.9 Liquidating portfolio(1)................ 185.9 281.4 466.9 (33.9) (39.7) --------- --------- --------- ----- ----- Total................................. 5,643.6 5,051.2 4,104.3 11.7 23.1 --------- --------- --------- ----- ----- TOTAL EQUIPMENT FINANCING AND LEASING SEGMENT............................. 20,078.0 17,016.7 13,367.0 18.0 27.3 --------- --------- --------- ----- ----- VENDOR TECHNOLOGY FINANCE: Finance receivables..................... 6,864.5 7,488.9 -- (8.3) -- (3) Operating lease equipment, net.......... 1,256.5 2,108.8 -- (40.4) -- (3) TOTAL VENDOR TECHNOLOGY FINANCE SEGMENT............................. 8,121.0 9,597.7 -- (15.4) -- (3) --------- --------- --------- ----- ----- COMMERCIAL SERVICES....................... 4,277.9 4,165.1 2,481.8 2.7 67.8 BUSINESS CREDIT........................... 3,415.8 2,837.0 2,514.4 20.4 12.8 --------- --------- --------- ----- ----- TOTAL COMMERCIAL FINANCE SEGMENT...... 7,693.7 7,002.1 4,996.2 9.9 40.1 --------- --------- --------- ----- ----- STRUCTURED FINANCE: Finance receivables..................... 2,347.3 1,933.9 -- 21.4 -- (3) Operating lease equipment, net.......... 58.8 -- -- -- -- Other--Equity Investments............... 285.8 137.3 81.9 108.2 67.6 --------- --------- --------- ----- ----- TOTAL STRUCTURED FINANCE SEGMENT...... 2,691.9 2,071.2 81.9 30.0 -- (3) --------- --------- --------- ----- ----- TOTAL COMMERCIAL SEGMENTS............. 38,584.6 35,687.7 18,445.1 8.1 93.5 --------- --------- --------- ----- ----- CONSUMER: Home equity............................... 2,451.7 2,215.4 2,244.4 10.7 (1.3) Manufactured housing...................... 1,802.1 1,666.9 1,417.5 8.1 17.6 Recreational vehicles..................... 648.0 361.2 744.0 79.4 (51.5) Liquidating portfolio(2).................. 298.2 462.8 848.4 (35.6) (45.5) --------- --------- --------- ----- ----- TOTAL CONSUMER SEGMENT................ 5,200.0 4,706.3 5,254.3 10.5 (10.4) --------- --------- --------- ----- ----- TOTAL FINANCING AND LEASING PORTFOLIO ASSETS.............................. 43,784.6 40,394.0 23,699.4 8.4 70.4 --------- --------- --------- ----- ----- Finance receivables previously securitized: Commercial.............................. 9,075.9 8,471.5 -- 7.1 -- (3) Consumer................................ 1,582.7 1,987.0 2,025.0 (20.3) (1.9) Consumer liquidating portfolio(2)....... 457.7 580.8 491.9 (21.2) 18.1 --------- --------- --------- ----- ----- Total................................. 11,116.3 11,039.3 2,516.9 0.7 338.6 --------- --------- --------- ----- ----- TOTAL MANAGED ASSETS.................. $54,900.9 $51,433.3 $26,216.3 6.7% 96.2% ========= ========= ========= ===== =====
- ------------------------ (1) Consists primarily of ocean going maritime and project finance. Capital Finance discontinued marketing to these sectors in 1997. (2) Consists of recreational boat and wholesale loan product lines, which we exited in 1999. (3) These percentages are not meaningful. 32 CONCENTRATIONS FINANCING AND LEASING ASSETS COMPOSITION Our ten largest financing and leasing asset accounts in the aggregate represented 3.9% of our total financing and leasing assets at December 31, 2000 (with the largest account representing less than 1%) and 3.7% at December 31, 1999. 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, ------------------------------------------- 2000 1999 -------------------- -------------------- AMOUNT PERCENT AMOUNT PERCENT --------- -------- --------- -------- DOLLARS IN MILLIONS United States: Northeast............................................. $ 9,099.3 20.8% $ 8,257.2 20.5% West.................................................. 8,336.9 19.0 7,594.0 18.8 Midwest............................................... 7,723.1 17.6 7,042.7 17.4 Southeast............................................. 6,228.6 14.2 5,380.5 13.3 Southwest............................................. 4,940.3 11.4 4,426.1 11.0 --------- ----- --------- ----- Total United States..................................... 36,328.2 83.0 32,700.5 81.0 --------- ----- --------- ----- Foreign: Canada................................................ 2,357.4 5.4 2,797.5 6.9 All other............................................. 5,099.0 11.6 4,896.0 12.1 --------- ----- --------- ----- Total................................................. $43,784.6 100.0% $40,394.0 100.0% ========= ===== ========= =====
Our managed asset geographic diversity does not differ significantly from our owned asset geographic composition. Our financing and leasing asset portfolio in the United States is diversified by state. At December 31, 2000, with the exception of California (10.4% of financing and leasing assets), Texas (7.9%), and New York (6.9%), no state represented more than 4.6% of financing and leasing assets. Our 1998 managed and owned asset geographic composition did not significantly differ from our 1999 managed and owned asset geographic composition. Financing and leasing assets to foreign obligors totaled $7.5 billion at December 31, 2000. After Canada, $2.4 billion (5.4% of financing and leasing assets), the largest foreign exposures were to England, $1.2 billion (2.8%), and Australia, $399.6 million (0.9%). Our remaining foreign exposure was geographically dispersed, with no other individual country exposure greater than 0.8% of financing and leasing assets. At December 31, 1999, financing and leasing assets to foreign obligors totaled $7.7 billion. After Canada, $2.8 billion (6.9% of financing and leasing assets), the largest foreign exposures were to England, $1.6 billion (4.0%), and Australia, $397.6 million (1.0%). Our remaining foreign exposure was geographically dispersed, with no other individual country exposure greater than 0.8% of financing and leasing assets. 33 INDUSTRY COMPOSITION The following table presents our financing and leasing assets by major industry class.
AT DECEMBER 31, ------------------------------------------- 2000 1999 -------------------- -------------------- AMOUNT PERCENT AMOUNT PERCENT --------- -------- --------- -------- DOLLARS IN MILLIONS Manufacturing(1) (no industry greater than 2.6%)........ $ 8,787.2 20.1% $ 8,566.5 21.2% Retail(2)............................................... 4,211.3 9.6 4,032.0 10.0 Commercial airlines..................................... 3,557.2 8.1 3,091.2 7.7 Transportation(3)....................................... 3,431.0 7.8 3,348.2 8.3 Construction equipment.................................. 2,697.8 6.2 2,697.0 6.7 Home mortgage........................................... 2,451.7 5.6 2,215.4 5.5 Service industries...................................... 1,987.1 4.5 1,768.1 4.4 Communications.......................................... 1,496.7 3.4 1,372.6 3.4 Wholesaling............................................. 1,445.0 3.3 1,303.6 3.2 Other (no industry greater than 4.1%)................... 13,719.6 31.4 11,999.4 29.6 --------- ----- --------- ----- Total................................................... $43,784.6 100.0% $40,394.0 100.0% ========= ===== ========= =====
- ------------------------ (1) Includes manufacturers of textiles and apparel, industrial machinery and equipment, electrical and electronic equipment, and other industries. (2) Includes retailers of apparel (3.8%) and general merchandise (2.6%). (3) Includes rail, bus, over-the-road trucking and business aircraft. Our telecommunications portfolio is included in "Communications" in the industry composition table above. This portfolio is included in our Structured Finance segment and totals approximately $690 million at December 31, 2000, comprising approximately 1.6% of total financing and leasing assets, of which 10.0% are on non-accrual status. This portfolio consists of 60 accounts with an average balance of $11.4 million. The 10 largest accounts in the portfolio aggregate $277 million with the largest single account under $50.0 million. Our telecommunications transactions are collateralized by the assets of the customer (equipment, receivable, cash, etc.) and are also secured by a pledge of all of the stock of the non-public companies. Our 1998 managed and owned asset industry composition did not differ significantly from our 1999 managed and owned asset industry composition. 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. We review and monitor credit exposures, both owned and managed, 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 finance receivables across the entire organization. We 34 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 and the Chief Financial Officer of Tyco Capital Corporation. Periodically, the Committee meets with senior executives of our strategic business units and corporate credit risk management group to review portfolio status and performance, as well as the status of individual financing and leasing assets, owned and managed, greater than $500,000 to obligors with higher risk profiles. In addition, this committee periodically meets with the Chief Executive Officer of Tyco Capital Corporation to review overall credit risk, including geographic, industry and customer concentrations. 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, we formed a corporate credit risk management group, which reports to the Chief Risk Officer, in the fourth quarter of 1999 to oversee and manage credit risk throughout Tyco Capital Corporation. 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 large transactions, 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, Tyco Capital Corporation's Executive Credit Committee, which includes the Chairman and Chief Executive Officer, the Chief Risk Officer, three members of the corporate credit risk management group and two group Chief Executive Officers, approves credits that are beyond the authority of the business units. The credit risk management group also includes an independent credit audit function. 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: - acceptable maximum credit line; - selected target markets and products; - creditworthiness of borrowers, including credit history, financial condition, adequacy of cash flow and quality of management; and - 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 segment and the Consumer segment, we utilize automated credit scoring capabilities. 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. The design and monitoring of these automated statistical models is led by our Management Science Group, staffed by specialists with considerable experience and expertise in this discipline. 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 35 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. EQUIPMENT/RESIDUAL RISK MANAGEMENT We have developed systems, processes and expertise to manage the equipment and residual risk in our Commercial segments. Our process consists of a four-pronged approach: 1) residual setting and valuation at deal inception, 2) approvals and authorizations, 3) systematic residual reviews, and 4) monitoring of residual realizations. Over time, we have developed experienced internal equipment management specialists, as well as external consultant networks, who understand equipment values. We believe this to be one of our core competencies. These specialists set values in our larger-ticket transactional business, and develop standard residual matrices for our lower-ticket, higher-volume transaction business. Transactions outside of these standard residual matrices, or transactions over certain dollar limits, must be approved by various combinations of business unit management or Corporate risk management. Reviews for impairment are performed at least annually. Residual realizations, by business unit and product, are reviewed as part of our ongoing financial and asset quality review, both within the business units and by Corporate management. 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. As mentioned previously, senior business unit and credit risk management are actively involved in the ongoing, disciplined asset quality review process. CONSUMER AND SMALL-TICKET LEASING We have developed proprietary automated credit scoring models by 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 "Provision and Reserve for Credit Losses/Credit Quality". 36 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 what we believe are conservative management practices and policies designed to effectively mitigate such risks. The objectives of our market risk management efforts are to preserve company value by hedging changes in future expected net cash flows and to decrease 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. 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 includes members of senior management of Tyco Capital Corporation, including the Chief Executive Officer, the Chief Financial Officer, the Treasurer, and the Controller. Business unit executives also serve on the Capital Committee on a rotating basis. 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., basis risk) can affect the interest rates charged on interest-earning assets differently than the interest rates paid on interest-bearing liabilities, which can result in an increase in interest expense relative to finance income. We measure our asset/liability position in economic terms through duration measures and value at risk analysis, and we measure its periodic effect on earnings using maturity gap analysis. A matched asset/liability position is generally achieved through a combination of on and off-balance sheet financial instruments, including issuing commercial paper, medium term notes, long-term debt, interest rate and currency swaps, foreign exchange contracts, and through asset syndication and securitization. We do not speculate on interest rates or foreign exchange rates, but rather seek to mitigate the possible impact of such rate fluctuations encountered in the normal course of business. This process is ongoing due to prepayments, refinancings and 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) to manage liquidity and reduce interest rate risk at a lower overall funding cost than could be achieved by solely issuing debt. Interest rate swaps with notional principal amounts of $9.9 billion at December 31, 2000 and $8.8 billion at December 31, 1999 were designated as hedges against outstanding debt and were principally used to convert the interest rate on variable-rate debt to a fixed-rate, establishing a fixed-rate term debt borrowing cost for the life of the swap. These hedges reduce our exposure to rising interest rates, but also reduce the benefits from lower interest rates. 37 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.
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------ BEFORE SWAPS ------------------------------------------------------------------------ 2000 1999 1998 -------------------- -------------------- -------------------- DOLLARS IN MILLIONS Commercial paper and variable-rate senior notes.......................... $19,848.6 6.53% $11,896.2 5.26% $ 9,672.6 5.53% Fixed-rate senior and subordinated notes................................. 17,689.7 6.72 10,115.1 6.47 7,476.5 6.31 --------- ---- --------- ---- --------- ---- Composite............................... $37,538.3 6.62% $22,011.3 5.71% $17,149.1 5.87% ========= ==== ========= ==== ========= ====
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------ AFTER SWAPS ------------------------------------------------------------------------ 2000 1999 1998 -------------------- -------------------- -------------------- DOLLARS IN MILLIONS Commercial paper and variable-rate senior notes.......................... $14,762.1 6.74% $ 8,977.7 5.32% $ 7,069.9 5.47% Fixed-rate senior and subordinated notes................................. 22,776.2 6.67 13,033.6 6.25 10,079.2 6.39 --------- ---- --------- ---- --------- ---- Composite............................... $37,538.3 6.70% $22,011.3 5.87% $17,149.1 6.01% ========= ==== ========= ==== ========= ====
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 over the life of the borrowings had we chosen to manage interest rate risk without the use of such swaps. Derivatives are discussed further in Note 9--"Derivative Financial Instruments" to the audited consolidated financial statements of The CIT Group, Inc. (subsequently renamed Tyco Capital Corporation) and Note 3--"Derivative Financial Instruments" in the unaudited consolidated financial statements of Tyco Capital Ltd. in Item 13. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." Our foreign operations include Canada, Latin America, Europe, Asia and Australia and 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, 2000, $2.9 billion in notional principal amount of foreign exchange forwards and $1.2 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 derivative 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, 2000, $0.8 billion in notional principal of foreign exchange forwards were designated as hedges of net investments in foreign operations. 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 38 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 or leases 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, 2000, an immediate hypothetical 100 basis point parallel change in the yield curve on January 1, 2001 would affect net income by an estimated $25 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 enter into interest rate and currency swaps and foreign exchange forward contracts as part of our overall market risk management practices. We assess and manage the external and internal risks associated with these derivative instruments in accordance with the overall operating goals established by our Capital Committee. 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 actions taken in contravention of Tyco Capital Corporation policy. The primary external risk of derivative instruments is counterparty credit exposure, which is defined as the ability of a counterparty to perform its financial obligations under a derivative contract. We control the credit risk of our derivative agreements through counterparty credit approvals, pre-established exposure limits and monitoring procedures. The Capital Committee approves each counterparty and establishes exposure limits based on credit analysis and market value. All derivative agreements are with major money center financial institutions rated investment grade by nationally recognized rating agencies, with the majority of our counterparties rated "AA" or better. Credit exposures are measured based on the market value of outstanding derivative instruments. Both current exposures and potential exposures, based on two standard deviations in market rates, are calculated for each derivative contract, summarized by counterparty, and reported to the Capital Committee. LIQUIDITY RISK MANAGEMENT--Liquidity risk, which refers to the risk of Tyco Capital Corporation being unable to meet potential cash outflows promptly and cost effectively, is discussed above under "Liquidity Risk Management". CAPITALIZATION Leverage reduction and disciplined capital allocation are high priorities for us, and the ongoing evaluation of risk adjusted returns and growth prospects of business units across the organization will continue. Businesses that do not fit strategically, or portfolios that do not meet profitability requirements will be improved, liquidated or sold. Currently, we have approximately $5 billion in assets, which are under review or are being considered for sale or liquidation. Progress was made toward increasing tangible capitalization during the second half of 2000. As a result, the tangible equity to managed assets and total debt to tangible equity ratios improved to 7.82% and 8.78x from 7.47% and 9.27x at June 30, 2000, respectively. 39 The following table presents information regarding our capital structure.
AT DECEMBER 31, --------------------- 2000 1999 --------- --------- DOLLARS IN MILLIONS Commercial paper............................................ $ 9,063.5 $ 8,974.0 Term debt................................................... 28,901.6 26,399.5 Tyco Capital Corporation obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of Tyco Capital Corporation ("Preferred Capital Securities").............................................. 250.0 250.0 Stockholders' equity........................................ 6,007.2 5,554.4 --------- --------- Total capitalization...................................... 44,222.3 41,177.9 Goodwill.................................................... (1,964.6) (1,850.5) --------- --------- Total tangible capitalization............................. $42,257.7 $39,327.4 ========= ========= Tangible stockholders' equity and Preferred Capital Securities to managed assets.............................. 7.82% 7.69% Total debt (excluding overnight deposits) to tangible stockholders' equity and Preferred Capital Securities... 8.78x 8.75x Total debt (excluding overnight deposits) to stockholders' equity and Preferred Capital Securities................... 6.02x 5.96x
The Tyco Capital Corporation obligated mandatorily redeemable preferred securities are 7.70% Preferred Capital Securities issued in 1997 by CIT Capital Trust I, a wholly-owned subsidiary. CIT Capital Trust I invested the proceeds of that issue in Junior Subordinated Debentures of Tyco Capital Corporation having identical rates and payment dates. At December 31, 2000, CIT had 261,897,768 issued and outstanding shares of common stock, including 11,637,709 exchangeable shares of CIT Exchangeco Inc. At December 31, 2000, The Dai-Ichi Kangyo Bank, Limited ("DKB"), formerly the largest shareholder of CIT, owned approximately 27% of CIT's outstanding stock. RECENT ACCOUNTING PRONOUNCEMENTS During 1999, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("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 No. 133, which is now effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. During June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133." We adopted SFAS 133 and 138 as of January 1, 2001. The adoption did not have a material effect on either the statement of financial position or the results of operations. During September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities-a replacement of FASB Statement No. 125." SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001, and is effective for recognition and reclassification of collateral and for disclosures for fiscal years ending after December 15, 2000. We have adopted the disclosures for this statement and we do not expect the adoption of this standard to affect the accounting for, or the structure of, our securitization transactions. 40 FORWARD-LOOKING INFORMATION Statements contained in this Form 10 that are not historical facts are forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. When used in this document, the words "anticipate," "believe," "expect," "estimate," and similar expressions are generally intended to identify forward-looking statements. Because such statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Such risks and uncertainties include, but are not limited to, potential changes in interest rates, competitive factors, general economic conditions, the ability to integrate recent acquisitions and the ability to develop new business from recent business combinations. SUBSEQUENT EVENT On September 28, 2001, Tyco Capital Corporation changed its reported fiscal year end from December 31 to September 30. Tyco Capital Ltd.'s next consolidated audited financial statements will cover the nine-month transition period from January 1, 2001 to September 30, 2001. ITEM 3. PROPERTIES. The operations of Tyco Capital 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 and we utilize, or plan to utilize in the foreseeable future, substantially all of our leased office space. ITEM 4. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Omitted. ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS. Omitted. ITEM 6. EXECUTIVE COMPENSATION. Omitted. ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Omitted. ITEM 8. 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 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. All of the outstanding common shares of Tyco Capital Ltd. are, as of the date hereof, owned by Tyco International Ltd. There is no market for the common shares. At present, Tyco Capital Ltd. has no plans to pay dividends on the common shares. Any dividends will be paid when declared by the Board of Directors of Tyco Capital Ltd. 41 ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES. None. ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED. Tyco Capital Ltd. will fully and unconditionally guarantee the due and punctual payment of the principal of and interest on each of the 5 7/8% notes due October 15, 2008 of Tyco Capital Corporation and any other obligations of Tyco Capital Corporation under the indenture governing the 5 7/8% notes when and as the same shall become due and payable, whether at maturity, upon redemption, by acceleration or otherwise. Tyco Capital Ltd. guarantees are unsecured. With respect to the 5 7/8% notes, Tyco Capital Ltd. guarantees will be unsubordinated obligations of Tyco Capital Ltd. The guarantees provide that in the event of a default in payment on a 5 7/8% note, the holder of the 5 7/8% note may institute legal proceedings directly against Tyco Capital Ltd. to enforce the guarantees without first proceeding against Tyco Capital Corporation. The obligations of Tyco Capital Ltd. under the guarantees are limited to the maximum amount that will not result in the obligations of Tyco Capital Ltd. under its guarantees constituting a fraudulent conveyance or fraudulent transfer under applicable law. The guarantees will terminate upon full payment of the principal of and interest on the 5 7/8% notes. The guarantees will be reinstated if at any time any holder of the related 5 7/8% notes must restore payment of any sums paid under the 5 7/8% notes or the guarantees. The guarantees will be governed by and construed in accordance with the laws of the State of New York. ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 124 and 125 of the bye-laws of Tyco Capital Ltd. provide, in part, that Tyco Capital Ltd. shall indemnify its directors and officers for all liabilities, loss, damage or expense which they may incur in the performance of their duties as director or officer, provided that such indemnification is not otherwise prohibited under the Companies Act 1981 (as amended) of Bermuda. Section 98 of the Companies Act 1981 (as amended) of Bermuda prohibits such indemnification against any liability arising out of fraud or dishonesty of the director or officer. However, such section permits Tyco Capital Ltd. to indemnify a director or officer against any liability incurred by him in defending any proceedings, whether civil or criminal, in which judgment is given in his favor or in which he is acquitted or when other similar relief is granted to him. Tyco maintains $250 million of insurance to reimburse the directors and officers of Tyco and its subsidiaries, including Tyco Capital Ltd., for charges and expenses incurred by them for wrongful acts claimed against them by reason of their being directors or officers of Tyco or any of its subsidiaries. Such insurance specifically excludes reimbursement of any director or officer for any charge or expense incurred in connection with various designated matters, including libel or slander, illegally obtained personal profits, profits recovered by Tyco pursuant to Section 16(b) of the Exchange Act and deliberate dishonesty. 42 ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Tyco Capital Ltd. was incorporated on February 25, 2000 as a Bermuda company and wholly-owned subsidiary of Tyco International Ltd. and serves as the holding company for its financial services business. Substantially all of Tyco Capital's operating activities are performed by Tyco Capital Corporation (formerly known as The CIT Group, Inc.), acquired on June 1, 2001 by a wholly-owned subsidiary of Tyco in a purchase business combination. Tyco Capital Corporation was contributed to Tyco Capital Ltd. on November 8, 2001 and accordingly, as a company under the control of Tyco Capital Ltd., Tyco Capital Corporation is reflected as a wholly-owned subsidiary of Tyco Capital Ltd. in its financial statements for periods beginning on June 2, 2001. In accordance with the guidelines for accounting for business combinations, the purchase price paid by Tyco for Tyco Capital Corporation plus related purchase accounting adjustments have been "pushed-down" and recorded in Tyco Capital Ltd.'s consolidated financial statements for periods subsequent to June 1, 2001. This resulted in a new basis of accounting reflecting the fair market value of its assets and liabilities for the "successor" period beginning on June 2, 2001. Because the results of operations of Tyco Capital Ltd. for the period from inception (February 25, 2000) through June 1, 2001 are not material (a cumulative deficit of $5,000), information for all "predecessor" periods prior to the acquisition is presented on a historical basis of accounting and represents the activities of Tyco Capital Corporation. We have included the following financial statements in this filing: 1. audited consolidated financial statements of The CIT Group, Inc. (subsequently renamed Tyco Capital Corporation) as of December 31, 2000 and 1999 and for each of the years in the three years ended December 31, 2000; 2. audited financial statement of Tyco Capital Ltd. as of September 30, 2000; and 3. unaudited consolidated financial statements of Tyco Capital Ltd. as of June 30, 2001 (successor) and December 31, 2000 (predecessor), and for the periods January 1, 2001 through June 1, 2001 (predecessor), June 2, 2001 through June 30, 2001 (successor) and the six months ended June 30, 2000 (predecessor). 43 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, 2000 and 1999, 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, 2000. These consolidated financial statements are the responsibility of CIT'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 auditing standards generally accepted in the United States of America. 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, 2000 and 1999, and the results of their operations and cash flows for each of the years in the three-year period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Short Hills, New Jersey January 25, 2001, except as to Note 25, which is as of March 13, 2001 44 THE CIT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN MILLIONS)
DECEMBER 31, --------------------- 2000 1999 --------- --------- ASSETS FINANCING AND LEASING ASSETS: Loans and leases: Commercial.............................................. $29,304.0 $27,119.2 Consumer................................................ 4,193.5 3,887.9 --------- --------- Finance receivables................................... 33,497.5 31,007.1 Reserve for credit losses................................. (468.5) (446.9) --------- --------- Net finance receivables................................. 33,029.0 30,560.2 Operating lease equipment, net............................ 7,190.6 6,125.9 Finance receivables held for sale......................... 2,698.4 3,123.7 CASH AND CASH EQUIVALENTS................................... 812.1 1,073.4 GOODWILL.................................................... 1,964.6 1,850.5 OTHER ASSETS................................................ 2,995.1 2,347.4 --------- --------- Total assets.......................................... $48,689.8 $45,081.1 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY DEBT: Commercial paper.......................................... $ 9,063.5 $ 8,974.0 Variable-rate senior notes................................ 11,130.5 7,147.2 Fixed-rate senior notes................................... 17,571.1 19,052.3 Subordinated fixed-rate notes............................. 200.0 200.0 --------- --------- Total debt.............................................. 37,965.1 35,373.5 CREDIT BALANCES OF FACTORING CLIENTS........................ 2,179.9 2,200.6 ACCRUED LIABILITIES AND PAYABLES............................ 1,640.8 1,191.8 DEFERRED FEDERAL INCOME TAXES............................... 646.8 510.8 --------- --------- Total liabilities....................................... 42,432.6 39,276.7 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 2.7 Paid-in capital........................................... 3,527.2 3,521.8 Retained earnings......................................... 2,603.3 2,097.6 Accumulated other comprehensive income.................... 11.7 2.8 Treasury stock, at cost................................... (137.7) (70.5) --------- --------- Total stockholders' equity.............................. 6,007.2 5,554.4 --------- --------- Total liabilities and stockholders' equity.............. $48,689.8 $45,081.1 ========= =========
See accompanying notes to consolidated financial statements. 45 THE CIT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, ------------------------------ 2000 1999 1998 -------- -------- -------- Finance income.............................................. $5,248.4 $2,565.9 $2,015.1 Interest expense............................................ 2,497.7 1,293.4 1,040.8 -------- -------- -------- Net finance income........................................ 2,750.7 1,272.5 974.3 Depreciation on operating lease equipment................... 1,281.3 355.1 169.5 -------- -------- -------- Net finance margin........................................ 1,469.4 917.4 804.8 Other revenue............................................... 912.0 350.8 255.4 -------- -------- -------- Operating revenue......................................... 2,381.4 1,268.2 1,060.2 -------- -------- -------- Salaries and general operating expenses..................... 1,035.2 516.0 407.7 Provision for credit losses................................. 255.2 110.3 99.4 Goodwill amortization....................................... 86.3 25.7 10.1 Minority interest in subsidiary trust holding solely debentures of the Company................................. 19.2 19.2 19.2 -------- -------- -------- Operating expenses........................................ 1,395.9 671.2 536.4 -------- -------- -------- Income before provision for income taxes.................. 985.5 597.0 523.8 Provision for income taxes.................................. 373.9 207.6 185.0 -------- -------- -------- Net income................................................ $ 611.6 $ 389.4 $ 338.8 ======== ======== ======== Net income per basic share.................................. $ 2.34 $ 2.24 $ 2.09 Net income per diluted share................................ $ 2.33 $ 2.22 $ 2.08
See accompanying notes to consolidated financial statements. 46 THE CIT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN MILLIONS)
ACCUMULATED CLASS B OTHER TOTAL COMMON COMMON PAID-IN TREASURY RETAINED COMPREHENSIVE STOCKHOLDERS' STOCK STOCK CAPITAL STOCK EARNINGS INCOME EQUITY -------- -------- -------- -------- -------- ------------- ------------- 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 Net income....................... 611.6 611.6 Foreign currency translation adjustments.................... 4.3 4.3 Unrealized gain on equity and securitization investments, net............................ 4.6 4.6 -------- Total comprehensive income....... 620.5 -------- Cash dividends................... (105.9) (105.9) Repurchase of common stock....... (67.2) (67.2) Restricted common stock grants... 5.4 5.4 ------ ------- -------- ------- -------- ------ -------- Balance, December 31, 2000....... $ 2.7 $ -- $3,527.2 $(137.7) $2,603.3 $ 11.7 $6,007.2 ====== ======= ======== ======= ======== ====== ========
See accompanying notes to consolidated financial statements 47 THE CIT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN MILLIONS)
YEARS ENDED DECEMBER 31, ------------------------------------ 2000 1999 1998 ---------- ---------- ---------- CASH FLOWS FROM OPERATIONS Net income................................................ $ 611.6 $ 389.4 $ 338.8 Adjustments to reconcile net income to net cash flows from operations: Provision for credit losses............................. 255.2 110.3 99.4 Depreciation and amortization........................... 1,408.7 402.8 195.9 Provision for deferred federal income taxes............. 211.5 163.5 100.2 Gains on equipment, receivable and investment sales..... (371.8) (109.3) (75.1) Increase in accrued liabilities and payables............ 449.0 221.2 34.2 Increase in other assets................................ (690.9) (125.6) (89.2) Other................................................... 31.9 33.9 11.0 ---------- ---------- ---------- Net cash flows provided by operations................. 1,905.2 1,086.2 615.2 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Loans extended............................................ (49,275.8) (39,657.9) (35,818.9) Collections on loans...................................... 41,847.5 34,315.7 32,463.4 Proceeds from asset and receivable sales.................. 7,055.4 3,733.2 1,381.3 Purchases of assets to be leased.......................... (2,457.6) (1,633.2) (1,101.7) Purchases of finance receivable portfolios................ (1,465.6) (492.1) (600.0) Net increase in short-term factoring receivables.......... (175.4) (242.9) (255.4) Acquisitions, net of cash acquired........................ -- (538.0) -- Other..................................................... (79.4) (36.0) (19.5) ---------- ---------- ---------- Net cash flows used for investing activities.............. (4,550.9) (4,551.2) (3,950.8) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from the issuance of variable and fixed-rate notes................................................... 12,645.3 7,700.0 6,863.5 Repayments of variable and fixed-rate notes............... (10,143.2) (5,538.3) (4,111.5) Net increase in commercial paper.......................... 89.5 2,571.2 584.5 Net repayments of non-recourse leveraged lease debt....... (31.2) (156.8) 6.6 Cash dividends paid....................................... (105.9) (64.6) (48.9) Purchase of treasury stock................................ (67.2) (45.1) (25.4) ---------- ---------- ---------- Net cash flows provided by financing activities........... 2,387.3 4,466.4 3,268.8 ---------- ---------- ---------- Effect of exchange rate changes on cash................... (2.9) (1.6) -- ---------- ---------- ---------- Net (decrease) increase in cash and cash equivalents...... (261.3) 999.8 (66.8) Cash and cash equivalents, beginning of year.............. 1,073.4 73.6 140.4 ---------- ---------- ---------- Cash and cash equivalents, end of year.................... $ 812.1 $ 1,073.4 $ 73.6 ========== ========== ========== SUPPLEMENTAL CASH DISCLOSURES Interest paid............................................. $ 2,449.7 $ 1,268.9 $ 1,021.3 Federal, foreign and state and local income taxes paid.... $ 28.4 $ 66.4 $ 81.4 SUPPLEMENTAL NON-CASH DISCLOSURE Stock issued for acquisition.............................. $ -- $ 2,563.7 $ --
See accompanying notes to consolidated financial statements. 48 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS NOTE 1--THE COMPANY The CIT Group, Inc. ("CIT") is a diversified finance company engaging in vendor, equipment, commercial, consumer and structured financing and leasing activities. CIT operates extensively in the United States and Canada, with strategic locations in Europe, Latin America and the Pacific Rim. On November 15, 1999, CIT 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, CIT'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. At December 31, 2000, The Dai-Ichi Kangyo Bank, Limited ("DKB") owned approximately 27% of the outstanding stock (including the exchangeable shares). In November 1998, CIT's majority stockholder, 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. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements and accompanying notes include the accounts of CIT 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 statements of income reflect results of the acquired operations for the full year 2000, as compared to a partial year for each acquisition for 1999. FINANCING AND LEASING ASSETS CIT 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. At the time of designation for sale, securitization or syndication by management, assets are classified as finance receivables held for sale. These assets are carried at the lower of aggregate cost or market value. 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 CIT has a positive investment in the transaction, net of related deferred tax liabilities. Rental income on operating leases is recognized on an accrual basis. 49 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 credit related 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. 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. Other revenue 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 CIT 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 impairment, other than temporary, 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. Changes in economic conditions or other events affecting specific obligors or industries may necessitate additions or deductions to the consolidated reserve for credit losses. It is management's judgment that the consolidated reserve for credit losses is adequate to provide for credit losses inherent in the portfolio. 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 50 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. Charge-offs are recorded on consumer and certain small ticket commercial 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 individual review by CIT's Asset Quality Review Committee ("AQR"). The AQR is comprised of members of senior management, which reviews overall owned and managed portfolio performance across the organization, as well as individual accounts 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 estimated fair 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 from date of acquisition, 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 CIT are projected to be less than the carrying amount of goodwill, an impairment write-down equal to the difference between the discounted cash flows and the recorded goodwill would be recorded as a charge to operations. SECURITIZATIONS CIT's retained interests in securitized assets are included in other assets. Pools of assets are originated and sold to independent trusts which in turn, issue securities to investors backed by the asset pools. CIT retains the servicing rights and participates in certain cash flows from the pools. The present 51 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) value of expected net cash flows that exceeds the estimated cost of servicing is recorded at the time of sale as "retained interest". CIT, in its estimation of residual cash flows and retained interests, inherently employs a variety of financial assumptions, including loan pool credit losses, prepayment speeds and discount rates. These assumptions are empirically supported by both CIT's historical experience, market trends and anticipated trends relative to the particular products securitized. Subsequent to the recording of retained interests, CIT reviews such assets for impairment on a quarterly basis. These reviews are performed on a disaggregated basis. Fair values of retained interests are calculated utilizing current and anticipated credit losses, prepayment speeds and discount rates and are then compared to CIT'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 CIT's venture capital investment companies are included directly in operations. Unrealized gains and losses, representing the difference between carrying value and estimated 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 CIT primarily uses interest rate and currency swaps for worldwide market risk management. These transactions are entered into as hedges against the effects of future interest rate and currency fluctuations and, accordingly, are not carried at fair value. CIT 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 position. 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 position. CIT uses derivative instruments to hedge the interest rate associated with the anticipated securitization, syndication, or whole loan sale of financing and leasing assets. Such derivative transactions are designated as hedges against a sale that is probable and for which the significant 52 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) characteristics and terms have been identified, but for which there is no legally binding obligation. 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 may be liquidated with any gain or loss recognized in operations at such time, and the related assets would be reclassified to finance receivables. CIT 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. STOCK-BASED COMPENSATION Stock option plans are accounted for in accordance with Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees" ("APB 25".) In accordance with APB 25, no compensation expense is recognized for stock options issued. Pro forma disclosures, as if CIT applied the "Fair Value Based Method" for stock options granted to employees, have been provided in Note 16-- "Postretirement and Other Benefit Plans." Compensation expense associated with restricted stock awards is recognized over the associated vesting periods. FOREIGN CURRENCY TRANSLATION CIT has operations in Canada, Europe 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 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 of a change in tax rates is recognized in income at the time of enactment of such 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 original term is generally less than 90 days. 53 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) OTHER COMPREHENSIVE INCOME Other comprehensive income includes unrealized gains and losses on equity investments, securitization retained interests and foreign currency translation adjustments pertaining to both the net investment in foreign operations and the related derivatives designated as hedges of such investments. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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, CIT acquired Newcourt, a publicly traded, non-bank financial services enterprise that originated, invested in and securitized, syndicated and sold asset-based loans and leases. Newcourt's origination activities focused on the commercial and corporate finance segments of the asset-based financing market. Newcourt, which was headquartered in Toronto, Canada, operated extensively in the United States and Canada, with strategic locations in Europe, Latin America, and the Pacific Rim. 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 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 $1,583.2 million, which includes an increase of $200.1 million during 2000 following a refinement to the original purchase price allocations as summarized, on an after tax basis, in the table below ($ in millions).
AMOUNT -------- Retained interests in securitization transactions........... $117.6 Pre-acquisition contingencies............................... 32.2 Business restructuring, including adjustments to reflect dispositions.............................................. 26.4 Other....................................................... 23.9 ------ Total increase.............................................. $200.1 ======
This goodwill is being amortized on a straight-line basis over twenty-five years from the date of acquisition. In connection with the acquisition, CIT established an integration plan, which identified activities that would not continue and the associated costs of exiting those activities. The plan identified areas for adjusting the amount of real estate required, including the closing of the Newcourt corporate location 54 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 3--ACQUISITIONS (CONTINUED) in New Jersey, the reduction of corporate office space in Toronto, Canada, and the elimination of various other operating locations throughout the United States and Canada. The plan also identified employees for involuntary termination. The following table summarizes activity in the restructuring liability. The remaining accrual balances represent expenditures expected during 2001.
SEVERANCE AND OTHER LEASEHOLD TRANSACTION TERMINATION TERMINATION AND OTHER ($ IN MILLIONS) COSTS COSTS COSTS TOTAL - --------------- ------------- ----------- ----------- -------- Balance at November 15, 1999...................... $102.1 $24.5 $72.6 $199.2 Cash payments................................... (48.1) -- (38.0) (86.1) Transaction fees paid in CIT stock.............. -- -- (14.3) (14.3) Non-cash reductions............................. -- -- (2.5) (2.5) ------ ----- ----- ------ Balance at December 31, 1999...................... 54.0 24.5 17.8 96.3 Cash payments................................... (60.7) (10.2) (8.1) (79.0) Additions....................................... 6.7 -- -- 6.7 Non-cash reductions............................. -- (2.4) (6.2) (8.6) ------ ----- ----- ------ Balance at December 31, 2000...................... $ -- $11.9 $ 3.5 $ 15.4 ====== ===== ===== ======
On April 1, 1999, CIT purchased certain factoring assets of Congress Financial Corporation ("Congress") from First Union Corporation, and on December 1, 1999, CIT purchased the domestic factoring business of Heller Financial Inc. ("Heller"). 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 these purchases was $270.6 million. This goodwill is being amortized on a straight-line basis over twenty years from the dates of acquisition. The actual 2000 results and the unaudited pro forma condensed consolidated statement of income for the year ended December 31, 1999, which has been prepared assuming that the 1999 acquisitions had occurred at the beginning of that year, follow.
FOR THE YEARS ENDED DECEMBER 31, ------------------------- ($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 2000 1999 PRO FORMA - ----------------------------------------- -------- -------------- Operating revenue.................................... $2,381.4 $2,201.1 Net income........................................... $ 611.6 $ 448.1 Basic earnings per share............................. $ 2.34 $ 1.69 Diluted earnings per share........................... $ 2.33 $ 1.68
The pro forma results have been prepared for comparative purposes only. The pro forma results for the year ended December 31, 1999 are based on the historical operating results of the acquired companies prior to the acquisitions. The 1999 pro forma results include certain adjustments, primarily to recognize accretion and amortization based on the allocated purchase price of assets and liabilities. Further, the 1999 pro forma results do not include cost savings, reduced securitization activity and other initiatives introduced by CIT. Accordingly, management does not believe that the 1999 pro forma results are indicative of the actual results that would have occurred had the acquisition closed at the beginning of 1999, nor are they indicative of future results. 55 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 4--FINANCE RECEIVABLES The following table presents the breakdown of finance receivables by loans and lease receivables ($ in millions).
DECEMBER 31, --------------------- 2000 1999 --------- --------- Loans: Commercial........................................... $18,727.0 $16,997.9 Consumer............................................. 4,193.4 3,887.9 Lease receivables...................................... 10,577.1 10,121.3 --------- --------- Finance receivables.................................. $33,497.5 $31,007.1 ========= =========
Included in lease receivables at December 31, 2000 and 1999 are leveraged lease receivables of $1.1 billion and $931.9 million, respectively. Leveraged lease receivables exclude the portion funded by nonrecourse debt payable to third party lenders of $2.1 billion at both December 31, 2000 and 1999. Commercial and consumer loans are presented net of unearned income of $1.5 billion at both December 31, 2000 and 1999. Lease receivables are presented net of unearned income of $2.6 billion and $2.2 billion at December 31, 2000 and 1999, respectively. At December 31, 2000 and 1999, finance receivables exclude $11.1 billion and $11.0 billion, respectively, of finance receivables previously securitized and still managed by CIT. The following table sets forth the contractual maturities of finance receivables ($ in millions).
AT DECEMBER 31, ------------------------------------------- 2000 1999 -------------------- -------------------- AMOUNT PERCENT AMOUNT PERCENT --------- -------- --------- -------- Due within one year..................................... $14,185.7 42.3% $11,761.2 37.9% Due within one to two years............................. 5,450.6 16.3 5,375.1 17.3 Due within two to four years............................ 5,774.6 17.2 5,789.3 18.7 Due after four years.................................... 8,086.6 24.2 8,081.5 26.1 --------- ----- --------- ----- Total................................................. $33,497.5 100.0% $31,007.1 100.0% ========= ===== ========= =====
Information about concentrations of credit risk is set forth in "Concentrations" on page 33. The following table sets forth the information regarding total non-performing assets ($ in millions).
AT DECEMBER 31, ------------------------- 2000 1999 -------- -------- Non-accrual finance receivables......................... $704.2 $510.3 Assets received in satisfaction of loans................ 123.9 125.1 ------ ------ Total non-performing assets............................. $828.1 $635.4 ====== ====== Percent to finance receivables.......................... 2.47% 2.05% ====== ======
At December 31, 2000 and 1999, the recorded investment in impaired loans, which are generally collateral dependent, totaled $326.6 million and $241.5 million, respectively, with a corresponding specific reserve for credit losses allocation of $59.9 million and $24.9 million, respectively. The average monthly recorded investment in the impaired loans was $256.6 million, $116.9 million and $73.2 million 56 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 4--FINANCE RECEIVABLES (CONTINUED) for the years ended December 31, 2000, 1999 and 1998, respectively. There was no finance income recorded on these loans during 2000, 1999 or 1998 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 $38.1 million, $26.9 million, and $16.1 million in 2000, 1999, and 1998, respectively. NOTE 5--RESERVE FOR CREDIT LOSSES The following table presents changes in the reserve for credit losses ($ in millions).
AT DECEMBER 31, ------------------------------ 2000 1999 1998 -------- -------- -------- Balance, January 1.......................................... $446.9 $263.7 $235.6 ------ ------ ------ Provision for credit losses................................. 255.2 110.3 99.4 Reserves relating to acquisitions/dispositions.............. 2.0 167.9 7.5 ------ ------ ------ Additions to the reserve for credit losses.................. 257.2 278.2 106.9 ------ ------ ------ Finance receivables charged-off............................. (255.8) (111.1) (103.7) Recoveries on finance receivables previously charged-off.... 20.2 16.1 24.9 ------ ------ ------ Net credit losses........................................... (235.6) (95.0) (78.8) ------ ------ ------ Balance, December 31........................................ $468.5 $446.9 $263.7 ====== ====== ====== Reserve for credit losses as a percentage of finance receivables............................................... 1.40% 1.44% 1.33% ====== ====== ======
NOTE 6--OPERATING LEASE EQUIPMENT The following table provides an analysis of operating lease equipment by equipment type, net of accumulated depreciation of $1,080.9 million at December 31, 2000 and $719.4 million at December 31, 1999.
AT DECEMBER 31, ------------------- ($ IN MILLIONS) 2000 1999 - --------------- -------- -------- Commercial aircraft...................................... $1,885.5 $1,528.4 Railroad equipment....................................... 1,697.1 1,398.1 Information technology................................... 1,155.4 925.1 Telecommunications....................................... 560.4 468.7 Transportation........................................... 385.2 428.4 Business aircraft........................................ 364.0 334.3 Manufacturing............................................ 305.6 258.6 Other.................................................... 837.4 784.3 -------- -------- Total.................................................. $7,190.6 $6,125.9 ======== ========
Included in the preceding table is equipment not currently subject to lease agreements of $351.0 million and $235.9 million at December 31, 2000 and 1999, respectively. Rental income on operating leases, which is included in finance income, totaled $1.7 billion in 2000, $617.8 million in 1999, and $314.1 million in 1998. The following table presents future minimum lease rentals on non-cancelable operating leases as of December 31, 2000. Excluded from this table are variable rentals calculated on the level of asset usage, re-leasing rentals, and expected sales proceeds 57 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 6--OPERATING LEASE EQUIPMENT (CONTINUED) from remarketing operating lease equipment at lease expiration, all of which are important components of operating lease profitability.
YEARS ENDED DECEMBER 31, ------------ ($ IN MILLIONS) AMOUNT - --------------- ------------ 2001........................................................ $1,522.6 2002........................................................ 992.1 2003........................................................ 535.4 2004........................................................ 280.3 2005........................................................ 169.3 Thereafter.................................................. 298.4 -------- Total..................................................... $3,798.1 ========
NOTE 7--INVESTMENTS IN DEBT AND EQUITY SECURITIES At December 31, 2000 and 1999, CIT's investments in debt and equity securities designated as available for sale totaled $849.7 million and $892.0 million, respectively. Included in CIT's investments in debt and equity securities are retained interests in commercial securitized assets of $684.5 million and consumer securitized assets of $155.9 million at December 31, 2000 and commercial securitized assets of $676.8 million and consumer securitized assets of $194.8 million at December 31, 1999. 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 quarterly for valuation impairment. The securitization programs cover a wide range of products and collateral types with significantly different prepayment and credit risk characteristics. The prepayment speed, in the tables below, is based on CPR which expresses payments as a function of the declining amount of loans at a compound annual rate. Expected credit losses are based upon annual loss rates. The key economic assumptions used in measuring the retained interests at the date of securitization for transactions completed during 2000 by product type were as follows.
CONSUMER ----------------------------- MANUFACTURED COMMERCIAL HOUSING & RECREATIONAL EQUIPMENT HOME EQUITY VEHICLE & BOAT ------------ ------------ -------------- Prepayment speed............................ 4.50%-9.81% -- -- Expected credit losses...................... 0.52%-1.28% -- -- Weighted average discount rate.............. 8.50%-9.86% -- -- Weighted average life (in years)............ 0.69-2.69 -- --
58 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 7--INVESTMENTS IN DEBT AND EQUITY SECURITIES (CONTINUED) Ranges of key economic assumptions used in calculating the fair value of the retained interests in securitized assets by product type at December 31, 2000 were as follows.
CONSUMER ------------------------------- MANUFACTURED COMMERCIAL HOUSING & RECREATIONAL EQUIPMENT HOME EQUITY VEHICLE & BOAT -------------- -------------- -------------- Prepayment speed.................... 4.50%-9.08% 16.84%-30.00% 20.56%-30.00% Expected credit losses.............. 0.55%-4.03% 0.15%-0.90% 0.00%-0.94% Weighted average discount rate...... 8.74%-10.35% 8.00%-12.00% 8.00%-8.50% Weighted average life (in years).... 0.52-1.97 2.37-3.95 0.79-2.88
The impact of 10 percent and 20 percent adverse changes to the key economic assumptions on the fair value of retained interests as of December 31, 2000 is shown in the following tables ($ in millions).
CONSUMER ----------------------------- MANUFACTURED COMMERCIAL HOUSING & RECREATIONAL EQUIPMENT HOME EQUITY VEHICLE & BOAT ---------- ------------ -------------- Prepayment speed: 10 percent adverse change.................... $(0.8) $(1.8) $(5.0) 20 percent adverse change.................... (1.4) (3.6) (9.2) Expected credit losses: 10 percent adverse change.................... (20.6) (0.4) (3.4) 20 percent adverse change.................... (41.3) (0.8) (6.7) Weighted average discount rate: 10 percent adverse change.................... (8.7) (0.9) (2.0) 20 percent adverse change.................... (17.2) (1.7) (4.0)
These sensitivities are hypothetical and should be used with caution. Changes in fair value based on a 10 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumptions to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities. 59 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 7--INVESTMENTS IN DEBT AND EQUITY SECURITIES (CONTINUED) The following tables summarize static pool credit losses, which represent the sum of actual and projected future credit losses, divided by the original pool of the respective assets. Amounts shown for each year are a weighted average for the securitizations during the period.
COMMERCIAL EQUIPMENT SECURITIZATIONS DURING ------------------------- 2000 1999 ----------- ----------- Actual and projected losses at: December 31, 2000............................... 1.83% 3.92% December 31, 1999............................... -- 4.59%
RECREATIONAL VEHICLE AND BOAT SECURITIZATIONS DURING ----------------------------- 2000 1999 ------------- ------------- Actual and projected losses at: December 31, 2000............................... -- 2.32% December 31, 1999............................... -- 2.25%
The table that follows summarizes certain cash flows received from and paid to securitization trusts for the year ended December 31, 2000 ($ in millions).
YEAR ENDED DECEMBER 31, 2000 AMOUNT - ---------------------------- -------- Proceeds from new securitizations........................... $4,310.9 Other cash flows received on retained interests............. 327.7 Servicing fees received..................................... 65.2 Purchases of delinquent or foreclosed assets................ (11.0) Purchases of ineligible contracts........................... (44.2) Reimbursable servicing advances, net........................ (44.7) Purchases of contracts through clean up calls............... (259.0) -------- Total, net................................................ $4,344.9 ========
60 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 7--INVESTMENTS IN DEBT AND EQUITY SECURITIES (CONTINUED) Charge-offs for the year ended December 31, 2000 and receivables past due 60 days or more at December 31, 2000 are set forth below, for both finance receivables and managed receivables. In addition to finance receivables, managed receivables include finance receivables previously securitized and still managed by us, but exclude operating leases and equity investments.
CHARGE-OFFS FOR THE YEAR ENDED DECEMBER 31, 2000 -------------------------------------------------- MANAGED FINANCE RECEIVABLES RECEIVABLES ---------------------- ---------------------- ($ IN MILLIONS) AMOUNT PERCENT AMOUNT PERCENT - --------------- -------- -------- -------- -------- Commercial............................. $181.2 0.62% $346.2 0.88% Consumer............................... 54.4 1.32 85.7 1.15 ------ ---- ------ ---- Total................................ $235.6 0.71% $431.9 0.93% ====== ==== ====== ====
PAST DUE 60 DAYS OR MORE AT DECEMBER 31, 2000 -------------------------------------------------- FINANCE RECEIVABLES MANAGED RECEIVABLES ---------------------- ---------------------- ($ IN MILLIONS) AMOUNT PERCENT AMOUNT PERCENT - --------------- -------- -------- -------- -------- Commercial............................ $788.8 2.69% $1,279.6 3.18% Consumer.............................. 211.1 5.03 279.4 3.86 ------ ---- -------- ---- Total............................... $999.9 2.98% $1,559.0 3.29% ====== ==== ======== ====
NOTE 8--DEBT The following table presents data on commercial paper borrowings.
AT DECEMBER 31, ------------------------------------- ($ IN MILLIONS) 2000 1999 1998 - --------------- --------- -------- -------- Borrowings outstanding..................... $ 9,063.5 $8,974.0 $6,144.1 Weighted average interest rate............. 6.57% 5.71% 5.35% Weighted average maturity.................. 37 days 27 days 38 days
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------- ($ IN MILLIONS) 2000 1999 1998 - --------------- --------- -------- -------- Daily average borrowings................... $10,565.1 $6,694.5 $6,572.1 Maximum amount outstanding................. $12,868.2 $9,295.0 $7,655.9 Weighted average interest rate............. 6.23% 5.17% 5.51%
61 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 8--DEBT (CONTINUED) The following tables present the contractual maturities of total debt at December 31, 2000 and 1999 ($ in millions).
AT DECEMBER 31, 2000 -------------------------------------- TOTAL AT COMMERCIAL VARIABLE-RATE DECEMBER 31, PAPER SENIOR NOTES TOTAL 1999 ---------- ------------- --------- ------------ Due in 2000 (rates ranging from 4.00% to 7.57%)...................... $ -- $ -- $ -- $14,056.2 Due in 2001 (rates ranging from 5.90% to 6.97%)...................... 9,063.5 6,755.5 15,819.0 1,225.0 Due in 2002 (rates ranging from 6.58% to 8.52%)...................... -- 4,355.0 4,355.0 820.0 Due in 2003 (rates ranging from 5.81% to 6.04%)...................... -- 20.0 20.0 20.0 -------- --------- --------- --------- Total................................ $9,063.5 $11,130.5 $20,194.0 $16,121.2 ======== ========= ========= =========
The consolidated weighted average interest rates on variable senior notes at December 31, 2000 and 1999 were 6.76% and 6.03%, respectively.
AT DECEMBER 31, 2000 ------------------------------------ FIXED-RATE NOTES TOTAL AT ------------------------ DECEMBER 31, SENIOR SUBORDINATED TOTAL 1999 --------- ------------ --------- ------------ Due in 2000 (rates ranging from 5.00% to 9.34%)...................... $ -- $ -- $ -- $ 4,827.2 Due in 2001 (rates ranging from 5.50% to 9.25%)...................... 4,464.8 200.0 4,664.8 4,678.7 Due in 2002 (rates ranging from 5.50% to 8.26%)...................... 3,028.4 -- 3,028.4 2,885.0 Due in 2003 (rates ranging from 4.90% to 8.26%)...................... 3,851.5 -- 3,851.5 1,268.8 Due in 2004 (rates ranging from 4.41% to 8.26%)...................... 1,752.3 -- 1,752.3 1,766.4 Due in 2005 (rates ranging from 5.91% to 8.26%)...................... 2,890.6 -- 2,890.6 3,670.9 Due after 2005 (rates ranging from 3.25% to 8.25%)...................... 1,566.0 -- 1,566.0 -- --------- ------ --------- --------- Face amount of maturities.............. 17,553.6 200.0 17,753.6 19,097.0 Purchase accounting adjustment and issue discount....................... 17.5 -- 17.5 155.3 --------- ------ --------- --------- Total................................ $17,571.1 $200.0 $17,771.1 $19,252.3 ========= ====== ========= =========
Fixed-rate senior and subordinated debt outstanding at December 31, 2000 mature at various dates through 2028, with interest rates ranging from 3.25% to 9.25%. The consolidated weighted average interest rates on fixed-rate senior and subordinated debt at December 31, 2000 and 1999 were 6.83% 62 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 8--DEBT (CONTINUED) and 6.61%, respectively. The purchase accounting adjustment and issue discount was reduced during 2000 primarily by the cash settlement of a derivative contract. The following table represents information on unsecured committed lines of credit with 47 banks that can be drawn upon to support commercial paper borrowings at December 31, 2000 ($ in millions).
MATURITY AMOUNT - -------- -------- March 2001................................................ $4,053.9 April 2003................................................ 765.0 March 2005................................................ 3,720.0 -------- Total credit lines...................................... $8,538.9 ========
The credit line agreements contain clauses that allow CIT to extend the expiration dates upon written consent from the participating banks. Certain foreign operations utilize local financial institutions to fund operations. At December 31, 2000, local credit facilities totaled $198.0 million, of which $104.6 million was available. NOTE 9--DERIVATIVE FINANCIAL INSTRUMENTS As part of managing the exposure to changes in market interest rates, CIT, as an end-user, enters into various interest rate swap transactions, all of which are transacted in over-the-counter markets, with other financial institutions acting as principal counterparties. CIT 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 a hedge objective against: commercial paper, a specifically underwritten debt issue or a specific pool of assets. CIT'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 associated with anticipated securitization, syndication or whole loan sale of financing and leasing assets. The notional amounts, rates, indices and maturities of CIT's off-balance sheet derivatives are required to closely match the related terms of CIT's hedged assets and liabilities. CIT 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. CIT also utilizes foreign exchange forward contracts to hedge its net investment in foreign operations. 63 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 9--DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) 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... $ 8,916.6 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... 1,002.8 Effectively converts the interest rate on an equivalent amount of fixed-rate notes to a variable-rate. --------- Total interest rate swaps...... $ 9,919.4 =========
CIT's hedging activity increased interest expense by $25.9 million, $35.8 million and $23.4 million in 2000, 1999 and 1998, respectively, over the interest expense that would have been incurred with the existing debt structure but without CIT's hedging activity. However, this calculation of interest expense does not take into account any actions CIT 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. CIT is party to cross-currency interest rate swaps with a notional principal amount of $1.2 billion. The swaps hedge foreign currency risk and have maturities ranging from 2001 to 2019 that correspond with the terms of the debt. CIT also entered into foreign currency exchange and bond forward contracts with notional amounts of $2.9 billion and $26.9 million, respectively, with maturities ranging from 2001 to 2004, to hedge foreign currency and interest rate risk. CIT is exposed to credit risk to the extent that the 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 $151.6 million at December 31, 2000, reduced by the effects of master netting agreements as presented in Note 20--"Fair Values of Financial Instruments." CIT manages this credit risk by requiring all derivative transactions be conducted with counterparties rated investment grade by nationally recognized rating agencies, with the majority of the counterparties rated "AA" or higher, and by setting limits on the exposure with any individual counterparty. Accordingly, CIT's actual counterparty credit risk at December 31, 2000 is not considered significant. 64 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 9--DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) The following table presents the notional principal amounts, weighted average interest rates expected to be received or paid and the maturities of U.S. dollar interest rate swaps at December 31, 2000 ($ in millions).
FLOATING TO FIXED-RATE FIXED TO FLOATING-RATE ------------------------------------ ------------------------------------ WEIGHTED AVERAGE WEIGHTED AVERAGE ---------------------- ---------------------- NOTIONAL RECEIVE PAY NOTIONAL RECEIVE PAY YEARS ENDING DECEMBER 31, AMOUNT RATE RATE AMOUNT RATE RATE - ------------------------- -------- -------- -------- -------- -------- -------- 2001......................... $1,980.3 6.73% 6.52% $ 162.0 5.95% 6.80% 2002......................... 1,336.4 6.64 6.47 61.0 6.18 6.88 2003......................... 2,902.2 6.63 6.96 311.0 7.15 8.48 2004......................... 1,009.4 6.72 7.18 11.0 7.85 7.42 2005......................... 131.9 6.65 6.44 257.8 6.92 7.99 2006--Thereafter............. 986.2 6.71 6.94 200.0 5.92 6.76 -------- -------- ---- -------- ------ ---- Total...................... $8,346.4 6.68% 6.79% $1,002.8 6.60% 7.63% ======== ======== ==== ======== ====== ====
In addition, at December 31, 2000, CIT 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 amount of $394.8 million that converted floating-rate debt to fixed-rate debt at weighted average receive and pay rates of 5.88% and 6.20%, respectively. The Australian dollar derivatives convert U.S. dollar equivalent $163.9 million in floating-rate debt to fixed-rate debt at weighted average receive and pay rates of 6.29% and 6.37%, respectively. The contractual maturities for both the Canadian and Australian derivatives are predominately between 2001 and 2004. All other foreign currency derivatives had an outstanding notional balance of U.S. dollar equivalent $11.5 million, which converted floating--rate debt to fixed--rate debt, maturing through 2002, at weighted average receive and pay rates of 5.14% and 3.56%, respectively. All rates were those in effect at December 31, 2000. Variable-rates are based on the contractually determined rate or other market rate indices and may change significantly, affecting future cash flows. 65 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 9--DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) The following table presents the notional principal amounts of foreign exchange forwards, cross currency swaps and bond forwards at December 31, 2000. The bond forwards are utilized to hedge certain assets held for syndication.
CROSS-CURRENCY BOND FOREIGN EXCHANGE FORWARDS SWAPS FORWARDS ----------------------------------------- -------------- -------- HEDGES OF HEDGES OF NET DEBT INVESTMENTS IN TOTAL NOTIONAL FOREIGN OPERATIONS NOTIONAL NOTIONAL NOTIONAL YEARS ENDED DECEMBER 31, AMOUNT NOTIONAL AMOUNT AMOUNT AMOUNT AMOUNT - ------------------------ --------- ------------------ -------- -------------- -------- ($ IN MILLIONS) - --------------- 2001....................... $1,223.0 $ 573.4 $1,796.4 $ 183.4 $26.9 2002....................... 498.4 221.6 720.0 11.7 -- 2003....................... 293.1 35.7 328.8 131.7 -- 2004....................... 7.5 -- 7.5 125.5 -- 2005....................... -- -- -- 695.8 -- 2006--Thereafter........... -- -- -- 88.9 -- -------- -------- -------- -------- ----- Total.................... $2,022.0 $ 830.7 $2,852.7 $1,237.0 $26.9 ======== ======== ======== ======== =====
During 1999, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("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 No. 133, which is now effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. During June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133." We adopted SFAS 133 and 138 as of January 1, 2001. The adoption did not have a material effect on either the statement of financial position or the results of operations. NOTE 10--PREFERRED CAPITAL SECURITIES In February 1997, CIT Capital Trust I (the "Trust"), a wholly-owned subsidiary of CIT, issued in a private offering $250.0 million of 7.70% Preferred Capital Securities (the "Capital Securities"), which were subsequently registered with the Securities and Exchange Commission pursuant to an exchange offer. The Trust subsequently invested the offering proceeds in Junior Subordinated Debentures (the "Debentures") of CIT, having identical rates and payment dates. The Debentures of CIT 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 CIT 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 CIT to the extent that the Trust has funds available for distribution. CIT records distributions payable on the Capital Securities as an operating expense in the Consolidated Statements of Income. 66 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 11--STOCKHOLDERS' EQUITY Under the most restrictive provisions of agreements relating to outstanding debt, CIT may not, without the consent of the holders of such debt, permit stockholders' equity to be less than $200 million. Our primary bank line agreements include a minimum equity requirement of $3.8 billion. During 1998, CIT's Board of Directors authorized the purchase of up to 2,000,000 shares of common stock to provide for, among other things, its employee compensation programs. On March 14, 2000, the Board of Directors renewed and extended the 1998 stock repurchase program by authorizing the purchase of up to 3,000,000 additional shares of its common stock. Previously, on July 22, 1999, the Board of Directors renewed and extended the same program by authorizing the purchase of up to 2,000,000 additional shares. All 5,000,000 shares were repurchased under these extensions. CIT has common stock, par value $.01 per share, with 1,210,000,000 shares authorized as of December 31, 2000. The following table summarizes activity in the outstanding common stock and exchangeable shares for 2000 and 1999, respectively.
COMMON STOCK -------------------------------------- LESS EXCHANGEABLE ISSUED TREASURY OUTSTANDING SHARES ----------- ---------- ----------- ------------ 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 issued, net....... 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 Restricted shares issued, net....... 1,412,025 -- 1,412,025 -- Shares purchased, net............... -- (3,946,834) (3,946,834) -- Conversion of Exchangeco shares to common shares.................. 13,254,601 -- 13,254,601 (13,254,601) ----------- ---------- ----------- ----------- Balance at December 31, 2000........ 256,952,578 (6,692,519) 250,260,059 11,637,709 =========== ========== =========== ===========
On November 15, 1999, 27,577,082 exchangeable shares of CIT Exchangeco Inc., par value of $.01 per share, were issued in connection with the Newcourt acquisition. The holders of Exchangeco shares have dividend, voting and other rights equivalent to those of CIT common stock holders. These shares may be exchanged at any time at the option of the holder on a one-for-one basis for CIT common stock, and in any event CIT may redeem these shares on a one-for-one basis on or before November 1, 2004. 67 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 12--OTHER REVENUE The following table sets forth the components of other revenue ($ in millions).
YEARS ENDED DECEMBER 31, ------------------------------ 2000 1999 1998 -------- -------- -------- Fees and other income............................... $480.9 $161.0 $ 90.7 Factoring commissions............................... 154.7 118.7 95.7 Gains on sales of leasing equipment................. 113.2 56.4 45.2 Gains on securitizations............................ 109.5 14.7 12.5 Gains on venture capital investments................ 53.7 -- 11.3 ------ ------ ------ Total............................................. $912.0 $350.8 $255.4 ====== ====== ======
NOTE 13--SALARIES AND GENERAL OPERATING EXPENSES The following table sets forth the components of salaries and general operating expenses (excluding goodwill amortization) ($ in millions).
YEARS ENDED DECEMBER 31, ------------------------------ 2000 1999 1998 -------- -------- -------- Salaries and employee benefits.................... $ 600.7 $309.4 $245.4 Other operating expenses.......................... 434.5 206.6 162.3 -------- ------ ------ Total........................................... $1,035.2 $516.0 $407.7 ======== ====== ======
NOTE 14--INCOME TAXES The effective tax rate of CIT varied from the statutory federal corporate income tax rate as follows.
YEARS ENDED DECEMBER 31, ------------------------------------ PERCENTAGE OF PRETAX INCOME 2000 1999 1998 - --------------------------- -------- -------- -------- Federal income tax rate.............................. 35.0% 35.0% 35.0% Increase (decrease) due to: Goodwill amortization.............................. 2.1 0.2 0.1 Foreign income taxes............................... 2.0 -- -- State and local income taxes, net of federal income tax benefit...................................... 1.6 2.7 3.0 Other.............................................. (2.8) (3.1) (2.8) ---- ---- ---- Effective tax rate................................... 37.9% 34.8% 35.3% ==== ==== ====
68 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 14--INCOME TAXES (CONTINUED) The provision for income taxes is comprised of the following ($ in millions).
YEARS ENDED DECEMBER 31, ------------------------------ 2000 1999 1998 -------- -------- -------- Current federal income tax provision................ $ 24.6 $ 16.7 $ 60.4 Deferred federal income tax provision............... 211.5 163.5 100.2 ------ ------ ------ Total federal income taxes........................ 236.1 180.2 160.6 Foreign income taxes................................ 113.2 3.0 -- State and local income taxes........................ 24.6 24.4 24.4 ------ ------ ------ Total provision for income taxes.................. $373.9 $207.6 $185.0 ====== ====== ======
The tax effects of temporary differences that give rise to significant portions of the deferred federal and foreign income tax assets and liabilities are presented below ($ in millions).
AT DECEMBER 31, --------------------- 2000 1999 --------- --------- Assets: Amortization of intangibles.......................... $ (300.8) $ (282.1) Net operating loss carryforwards..................... (216.0) (153.8) Alternative minimum tax.............................. (85.7) (50.7) Provision for credit losses.......................... (73.4) (90.1) Loan origination fees................................ (29.7) (22.6) Other................................................ (96.3) (81.1) --------- --------- Total deferred tax assets............................ (801.9) (680.4) --------- --------- Liabilities: Leasing transactions................................. 1,006.6 932.7 Market discount income............................... 388.9 226.6 Other................................................ 51.6 29.7 --------- --------- Total deferred tax liabilities....................... 1,447.1 1,189.0 --------- --------- Net deferred tax liability............................. $ 645.2 $ 508.6 ========= =========
Included in deferred federal income taxes on the Consolidated Balance Sheets are unamortized investment tax credits of $1.6 million and $2.2 million at December 31, 2000 and 1999, respectively. Included in the accrued liabilities and payables caption in the Consolidated Balance Sheets are state and local deferred tax liabilities of $112.6 million and $66.8 million at December 31, 2000 and 1999, respectively, arising from the temporary differences shown in the above tables. At December 31, 2000 CIT has $538.6 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 $208.2 million will expire at various dates through the year 2007. Net operating losses pertaining to the U.S. operations of $330.4 million will expire at various dates through the year 2020. CIT had an alternative minimum tax credit carryforward for income tax purposes of $85.7 million at December 31, 2000. 69 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 14--INCOME TAXES (CONTINUED) During 2000, the net deferred tax liability was reduced by $95.6 million for the tax effect of purchase price allocation refinements recorded in goodwill. NOTE 15--EARNINGS PER SHARE ("EPS") Basic EPS is computed by dividing net income by the weighted-average number of common shares outstanding for the period. The diluted EPS computation includes the potential impact of dilutive securities, including stock options and restricted stock grants. The dilutive effect of stock options is computed using the treasury stock method, which assumes the repurchase of common shares by CIT at the average market price for the period. Options that have an anti-dilutive effect are not included in the denominator and averaged approximately 14.9 million shares for the year ended December 31, 2000. The reconciliation of the numerator and denominator of basic EPS with that of diluted EPS is presented for the years ended December 31, 2000 and 1999 and 1998 ($ in millions, except per share amounts).
INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- --------- FOR THE YEAR ENDED DECEMBER 31, 2000 Basic EPS: Income available to common shareholders................. $611.6 261,141,544 $2.34 Effect of dilutive securities: Restricted shares....................................... -- 1,386,353 (0.01) Stock options........................................... -- 169,082 -- ------ ----------- ----- Diluted EPS............................................... $611.6 262,696,979 $2.33 ====== =========== ===== 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 $2.08 ====== =========== =====
NOTE 16--POSTRETIREMENT AND OTHER BENEFIT PLANS RETIREMENT AND POSTRETIREMENT MEDICAL AND LIFE INSURANCE BENEFIT PLANS Certain employees of CIT who have completed one year of service and are 21 years of age or older participate in The CIT Group Holdings, Inc. Retirement Plan (the "Plan"). The retirement 70 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 16--POSTRETIREMENT AND OTHER BENEFIT PLANS (CONTINUED) benefits under the Plan are based on the employee's age, years of benefit service, and a percentage of qualifying compensation during the final years of employment. Plan assets consist of marketable securities, including common stock and government and corporate debt securities. CIT funds the Plan to the extent it qualifies for an income tax deduction. Such funding is charged to salaries and employee benefits expense. CIT also provides certain health care and life insurance benefits to eligible retired employees. Salaried participants generally become eligible for retiree health care benefits after reaching age 55 with 10 years of benefit service and 11 years of medical plan participation. Generally, the medical plans pay a stated percentage of most medical expenses reduced by a deductible as well as by payments made by government programs and other group coverage. The plans are funded on a pay as you go basis. 71 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 16--POSTRETIREMENT AND OTHER BENEFIT PLANS (CONTINUED) The following tables set forth the change in obligations, plan assets, and funded status of the plans as well as the net periodic benefit cost ($ in millions).
AT OR FOR THE YEARS ENDED DECEMBER 31, --------------------------------------------------------------- RETIREMENT BENEFITS POSTRETIREMENT BENEFITS ------------------------------ ------------------------------ 2000 1999 1998 2000 1999 1998 -------- -------- -------- -------- -------- -------- CHANGE IN BENEFIT OBLIGATIONS Benefit obligation at beginning of year.......... $107.9 $118.1 $100.4 $ 36.7 $ 37.2 $ 35.0 Service cost..................................... 7.0 7.2 6.3 2.0 1.8 1.5 Interest cost.................................... 8.5 7.6 6.9 3.0 2.3 2.3 Plan participants' contributions................. -- -- -- 0.2 -- -- Plan amendments.................................. 2.6 1.3 -- (7.8) -- -- Actuarial loss/(gain)............................ 4.6 (23.8) 7.0 5.1 (2.8) 1.2 Benefits paid.................................... (2.9) (2.5) (2.5) (2.9) (1.8) (2.8) ------ ------ ------ ------ ------ ------ Benefit obligation at end of year................ $127.7 $107.9 $118.1 $ 36.3 $ 36.7 $ 37.2 ====== ====== ====== ====== ====== ====== CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year... $140.7 $132.8 $128.5 $ -- $ -- $ -- Actual return on plan assets..................... (0.4) 10.4 6.8 -- -- -- Plan participants' contributions................. -- -- -- 0.2 -- -- Benefits paid.................................... (2.9) (2.5) (2.5) (2.9) (1.8) (2.8) Employer contributions........................... -- -- -- 2.7 1.8 2.8 ------ ------ ------ ------ ------ ------ Fair value of plan assets at end of year......... $137.4 $140.7 $132.8 $ -- $ -- $ -- ====== ====== ====== ====== ====== ====== RECONCILIATION OF FUNDED STATUS AT END OF YEAR Funded status.................................... $ 9.7 $ 32.8 $ 14.7 $(36.3) $(36.7) $(37.2) Unrecognized prior service cost.................. 2.4 (0.1) (1.5) -- -- -- Unrecognized net gain............................ (6.0) (25.8) (4.7) (3.0) (8.4) (6.2) Unrecognized net transition obligation........... -- -- -- 11.8 21.2 22.9 ------ ------ ------ ------ ------ ------ Prepaid/(accrued) benefit cost................... $ 6.1 $ 6.9 $ 8.5 $(27.5) $(23.9) $(20.5) ====== ====== ====== ====== ====== ====== WEIGHTED-AVERAGE ASSUMPTIONS Discount rate.................................... 7.50% 7.75% 6.50% 7.50% 7.75% 6.50% Rate of compensation increase.................... 4.50% 4.75% 4.25% 4.50% 4.75% 4.25% Expected return on plan assets................... 10.00% 10.00% 10.00% -- -- -- COMPONENTS OF NET PERIODIC BENEFIT COST Service cost..................................... $ 7.0 $ 7.2 $ 6.3 $ 2.0 $ 1.8 $ 1.5 Interest cost.................................... 8.5 7.6 6.9 3.0 2.3 2.3 Expected return on plan assets................... (14.0) (13.2) (12.8) -- -- -- Amortization of prior service cost............... 0.1 -- (0.2) -- -- -- Amortization of transition obligation............ -- -- -- 1.6 1.6 1.6 Amortization of gains............................ (0.8) -- (0.5) (0.4) (0.5) (0.8) ------ ------ ------ ------ ------ ------ Total net periodic expense/(benefit)............. $ 0.8 $ 1.6 $ (0.3) $ 6.2 $ 5.2 $ 4.6 ====== ====== ====== ====== ====== ======
72 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 16--POSTRETIREMENT AND OTHER BENEFIT PLANS (CONTINUED) For 2000, the assumed health care cost trend rates decline to an ultimate level of 5.25% in 2006 for all retirees; for 1999, 5.50% in 2005 for all retirees; and for 1998, 4.50% in 2005 for employees prior to reaching age 65. 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 DECEMBER 31, --------------------------------- ($ IN MILLIONS) 2000 1999 - --------------- --------------- --------------- EFFECT OF ONE-PERCENTAGE POINT INCREASE ON: Year end benefit obligation................................. $ 1.4 $ 2.8 Total of service and interest cost components............... $ 0.5 $ 0.4 EFFECT OF ONE-PERCENTAGE POINT DECREASE ON: Year end benefit obligation................................. $(1.3) $(2.6) Total of service and interest cost components............... $(0.4) $(0.4)
SAVINGS INCENTIVE PLAN Certain employees of CIT participate in The CIT Group Holdings, Inc. Savings Incentive Plan. This plan qualifies under section 401(k) of the Internal Revenue Code. CIT's expense is based on specific percentages of employee contributions and plan administrative costs and aggregated $13.2 million, $10.4 million and $9.6 million for 2000, 1999 and 1998, respectively. CORPORATE ANNUAL BONUS PLAN The CIT Group Bonus Plan ("Bonus Plan") is an annual bonus plan covering certain executive officers and other employees. The amount of awards depend 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. For the years ended December 31, 2000, 1999 and 1998, expenses for the Bonus Plan amounted to $40.0 million, $24.3 million and $18.6 million, respectively. Relating to their 1999 bonus, certain senior executive officers were permitted to defer up to fifty percent (50%) (in the form of CIT stock units). The deferred portion of the bonus was 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. No deferral was offered for 2000. LONG-TERM EQUITY COMPENSATION PLAN CIT sponsors a Long-Term Equity Compensation Plan (the "ECP"). The ECP allows CIT 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 73 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 16--POSTRETIREMENT AND OTHER BENEFIT PLANS (CONTINUED) granted in 2000, 1999 and 1998 vest one-third on the first, second and third anniversary of the date of grant. Data for the stock option plans is summarized as follows.
2000 1999 ---------------------------- ---------------------------- WEIGHTED WEIGHTED AVERAGE OPTION AVERAGE OPTION SHARES PRICE PER SHARE SHARES PRICE PER SHARE ---------- --------------- ---------- --------------- Outstanding at beginning of year.......... 16,551,643 $26.89 4,766,109 $27.39 Granted................................... 7,096,081 $14.22 7,556,714 $23.38 Exercised................................. (117,530) $12.40 (27,698) $27.00 Forfeited................................. (2,487,154) $26.99 (397,099) $26.10 Converted Newcourt options outstanding at year end 1999........................... -- -- 4,653,617 $32.02 ---------- ------ ---------- ------ Outstanding at end of year................ 21,043,040 $22.72 16,551,643 $26.89 ========== ====== ========== ====== Options exercisable at year end........... 7,801,955 $26.79 3,060,247 $26.13 ========== ====== ========== ====== Weighted average fair value of options granted (1999 excludes converted Newcourt options) during the year....... $ 4.50 $ 6.87 ====== ======
On November 18, 1999, 5,985,714 options were granted to certain employees as part of a broad-based incentive program. The CIT options that were granted to replace Newcourt options become vested and exercisable in accordance with the original grants. The fair value of options granted was determined at the date of grant using the Black-Scholes option pricing model, which assumed the following.
EXPECTED AVERAGE EXPECTED RISK FREE OPTION ISSUANCE OPTION LIFE RANGE DIVIDEND YIELD VOLATILITY RANGE INTEREST RATE RANGE - --------------- ----------------- -------------- --------------------- --------------------- 2000........................... 3-5 years 2.82% 36.23%-43.51% 5.70%-6.77% 1999........................... 3-5 years 1.75% 28.93%-34.82% 4.61%-5.92%
The following table summarizes information about stock options outstanding and options exercisable at December 31, 2000.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------ ---------------------------- REMAINING WEIGHTED WEIGHTED NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE RANGE OF EXERCISE PRICE OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE - ----------------------- ----------- ----------- -------------- ----------- -------------- $12.40 - $19.63.......................... 7,144,308 9.7 years $14.21 52,228 $12.86 $21.08 - $32.44.......................... 12,847,904 7.9 years $25.20 7,446,463 $25.99 $33.06 - $68.22.......................... 1,050,828 7.3 years $50.19 303,264 $49.04 ---------- --------- Total.................................. 21,043,040 7,801,955 ========== =========
74 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 16--POSTRETIREMENT AND OTHER BENEFIT PLANS (CONTINUED) EMPLOYEE STOCK PURCHASE PLAN In 1998, CIT adopted an Employee Stock Purchase Plan (the "ESPP"). Under the ESPP, CIT 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 CIT's stock at 85% of fair market value. During 2000, 1999 and 1998, CIT sold 207,177 shares, 132,084 shares and 21,214 shares, respectively, to participating employees under the ESPP. RESTRICTED STOCK In January 2000, CIT issued 114,037 restricted shares in connection with the Bonus Plan. In addition, in January and November 2000, CIT issued 10,350 and 933 shares respectively in connection with awards to outside members of the Board of Directors. All shares were issued at fair market value. The per share value of the January 2000 Bonus Plan grant was $19.625. The per share values of the January and November 2000 Directors' grants were $19.625 and $16.75 respectively. Restricted shares issued in connection with the Bonus Plan vest on the third anniversary of the grant (January 2003). Restricted shares awarded to the outside members of the Board of Directors all vest one-third on the first, second and third anniversary of the grant date. On January 1, 2000, CIT issued 1,284,080 restricted shares in connection with the Performance Accelerated Restricted Share program. The shares were issued at a fair market value of $20.75. Restricted shares under this grant can vest on an accelerated basis in either three or four years (January 1, 2003 or 2004) based on earnings per share performance of CIT. If conditions for accelerated vesting are not met in either year, the remaining awards will vest on the fifth anniversary of grant (January 1, 2005). In January 1999, CIT issued 68,225 restricted shares in connection with the Bonus Plan. Such shares were issued at fair market value, which was $32.44 per share. The 1999 shares granted vest one-third on the first, second and third anniversary of the date of grant. The holder of restricted stock generally has the rights of a stockholder of CIT, including the right to vote and to receive cash dividends. Restricted stock of 1,446,032 shares and 945,606 shares was outstanding at December 31, 2000 and 1999. For the years ended December 31, 2000, 1999 and 1998, compensation expense recognized in connection with restricted stock was $13.2 million, $4.9 million and $5.2 million, respectively. ACCOUNTING FOR STOCK-BASED COMPENSATION PLANS CIT has elected to apply Accounting Principles Board Opinion 25 ("APB 25") rather than the optional provisions of SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") in accounting for its stock-based compensation plans. Under APB 25, CIT 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, CIT has determined the pro forma information as if CIT had accounted for stock options granted under the fair value method of SFAS 123. Had the compensation cost of CIT's stock-based compensation plans been determined based on the operational provisions of SFAS 123, CIT's net income for 2000 and net income per diluted share would have been $591.8 million and $2.25, compared to $611.6 million and $2.33, as reported. For 1999, net income and net income per diluted share would 75 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 16--POSTRETIREMENT AND OTHER BENEFIT PLANS (CONTINUED) 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 $2.08, as reported. NOTE 17--LEASE COMMITMENTS CIT has entered into noncancellable long-term lease agreements for premises and equipment. The following table presents future minimum rentals under such noncancellable leases at December 31, 2000 ($ in millions).
YEARS ENDED DECEMBER 31, AMOUNT - ------------------------ ------ 2001........................................................ $ 60.1 2002........................................................ 53.5 2003........................................................ 47.8 2004........................................................ 41.6 2005........................................................ 36.4 Thereafter.................................................. 32.1 ------ Total..................................................... $271.5 ======
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 $54.8 million due in the future under noncancellable subleases. Rental expense, net of sublease income on premises and equipment, was as follows ($ in millions).
YEARS ENDED DECEMBER 31, ------------------------------ 2000 1999 1998 -------- -------- -------- Premises............................................... $47.7 $24.8 $17.1 Equipment.............................................. 11.1 7.1 6.5 Less sublease income................................... (5.7) (1.3) (1.3) ----- ----- ----- Total................................................ $53.1 $30.6 $22.3 ===== ===== =====
NOTE 18--LEGAL PROCEEDINGS In the ordinary course of business, there are various legal proceedings pending against CIT. Management believes that the aggregate liabilities, if any, arising from such actions will not have a material adverse effect on the consolidated financial position, results of operations or liquidity of CIT. NOTE 19--CREDIT-RELATED AND OTHER COMMITMENTS In the normal course of meeting the financing needs of its customers, CIT enters into various credit-related commitments. These financial instruments generate fees and involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the Consolidated Balance Sheets. To minimize potential credit risk, CIT generally requires collateral and other credit-related terms and 76 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 19--CREDIT-RELATED AND OTHER COMMITMENTS (CONTINUED) conditions from the customer. At the time credit-related commitments are granted, management believes the fair value of the underlying collateral and guarantees approximates or exceeds the contractual amount of the commitment. In the event a customer defaults on the underlying transaction, the maximum potential loss to CIT will be the contractual amount outstanding less the value of all underlying collateral and guarantees. The accompanying table summarizes the contractual amounts of credit-related commitments ($ in millions).
AT DECEMBER 31, ----------------------------------------------- DUE TO EXPIRE ------------------- TOTAL TOTAL WITHIN AFTER OUTSTANDING OUTSTANDING ONE YEAR ONE YEAR 2000 1999 -------- -------- ----------- ----------- Unused commitments to extend credit: Financing and leasing assets..................... $2,728.1 $371.4 $3,099.5 $3,128.1 Letters of credit and acceptances: Standby letters of credit........................ 171.9 2.0 173.9 168.5 Other letters of credit.......................... 467.8 32.5 500.3 373.9 Acceptances...................................... 6.7 -- 6.7 12.7 Guarantees......................................... 645.3 -- 645.3 351.2
During 2000 and 1999, we entered into agreements with both Airbus Industrie and the Boeing Company to purchase a total of 88 aircraft (at an estimated cost of approximately $5 billion), with options to acquire additional units, and with the flexibility to delay or terminate certain positions. Deliveries of these new aircraft are scheduled to take place over a five-year period, which started in the fourth quarter of 2000. Outstanding commitments to purchase aircraft, rail and other equipment from manufacturers to be placed on operating lease during 2001 totaled $694.0 million, of which $492.1 million have agreements in place to lease to third parties. Similar commitments to manufacturers for year 2000 purchases totaled $224.5 million at December 31, 1999. NOTE 20--FAIR VALUES OF FINANCIAL INSTRUMENTS SFAS No. 107 "Disclosures About Fair Value of Financial Instruments" requires disclosure of the estimated fair value of CIT's financial instruments, excluding leasing transactions accounted for under SFAS 13. The fair value estimates are made at a discrete point in time based on relevant market information and information about the financial instrument, assuming adequate market liquidity. Since no established trading market exists for a significant portion of CIT'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 77 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 20--FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) 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 CIT'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 19--"Credit-Related and Other Commitments", 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 CIT's financial instruments at December 31, 2000 and 1999 are set forth below ($ in millions).
2000 1999 ------------------------- ------------------------- CARRYING ESTIMATED CARRYING ESTIMATED VALUE FAIR VALUE VALUE FAIR VALUE ASSET ASSET ASSET ASSET (LIABILITY) (LIABILITY) (LIABILITY) (LIABILITY) ----------- ----------- ----------- ----------- Finance receivables--loans(a).................. $ 22,599.8 $ 22,878.4 $ 20,638.1 $ 20,726.4 Finance receivables held for sale.............. 2,698.4 2,698.4 3,123.7 3,123.7 Other assets(b)................................ 1,809.0 1,827.1 1,728.8 1,746.2 Commercial paper(c)............................ (9,063.5) (9,063.5) (8,974.0) (8,974.0) Fixed-rate senior notes and subordinated fixed-rate notes(d).......................... (18,145.7) (17,969.4) (19,405.6) (19,082.7) Variable-rate senior notes(d).................. (11,221.8) (11,127.2) (7,209.4) (7,146.7) Credit balances of factoring clients and other liabilities(d)(e)............................ (3,480.3) (3,480.3) (3,228.3) (3,228.3) Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the Company(f)................................... (250.0) (240.8) (250.0) (232.8) Derivative financial instruments:(g) Interest rate swaps, net..................... (15.5) (229.2) (125.4) (134.0) Cross-currency swaps, net.................... (4.0) (2.1) (16.5) 13.8 Foreign exchange forwards, net............... 84.7 60.3 25.4 19.1 Bond forwards, net........................... -- (2.2) 13.2 13.5
- ------------------------ (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 8.14% to 10.01% for 2000 and 8.32% to 10.37% for 1999. The maturities used represent the average contractual maturities adjusted for prepayments. For floating-rate loans that reprice frequently and have no significant change in credit quality, fair value approximates 78 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 20--FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) carrying value. The net carrying value of lease finance receivables not subject to fair value disclosure totaled $10.4 billion in 2000 and $10.0 billion in 1999. (b) Other assets subject to fair value disclosure include accrued interest receivable, retained interests in securitizations 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 $1,202.2 million in 2000 and $618.6 million in 1999. Excluded from other assets is ($16.1) million net premium on foreign exchange forwards, which is included in this table under derivative financial instruments. (c) The estimated fair value of commercial paper approximates carrying value due to the relatively short maturities. (d) The carrying value of fixed-rate senior notes and subordinated fixed-rate notes includes $288.6 million and $256.6 million of accrued interest at December 31, 2000 and 1999, respectively. The variable-rate senior notes include $91.2 million and $62.2 million of accrued interest at December 31, 2000 and 1999, respectively. These amounts are excluded from the other liabilities balances in this table. The carrying value of the fixed-rate senior notes excludes the net carrying value of derivative financial instruments (as presented in this footnote and explained in footnote "g") of $86.0 million and $103.3 million at December 31, 2000 and 1999, respectively. These derivative financial instrument values are included in the fixed-rate senior notes on the Consolidated Balance Sheets. Fixed-rate notes were valued using a present value discounted cash flow analysis with a discount rate approximating current market rates for issuances by CIT of similar term debt at the end of the year. Discount rates used in the present value calculation ranged from 6.10% to 8.31% in 2000 and 5.65% to 7.83% in 1999. (e) The estimated fair value of credit balances of factoring clients approximates carrying value due to their short settlement terms. Other liabilities include 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 $607.5 million in 2000 and $356.1 million in 1999. (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) CIT enters into derivative financial instruments for hedging purposes only. The 2000 and 1999 carrying values for interest rate swaps, cross-currency swaps and bond forwards represent purchase accounting adjustments associated with the instruments acquired from Newcourt and do not necessarily correlate directly with the presented fair values as CIT has other instruments that are carried only off-balance sheet. The carrying value balances will amortize as the instruments acquired mature. The carrying value for foreign exchange forwards is based on the change in spot rate from the initial contract date to the year end. The estimated 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 9--"Derivative Financial Instruments" for notional principal amounts associated with the instruments. 79 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 21--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS CIT has in the past and may in the future enter into certain transactions with affiliates of CIT. It is anticipated that such transactions will be entered into at a fair market value for the transaction. CIT's interest-bearing deposits generally represent overnight money market investments of excess cash that are maintained for liquidity purposes. From time to time, CIT may maintain such deposits with DKB. At December 31, 2000 and December 31, 1999, CIT's credit line coverage totaled $8.5 billion and $8.4 billion, respectively, of committed facilities. At December 31, 2000, DKB was committed under a five-year, $3.7 billion revolving credit facility and a 364-day, $3.7 billion revolving credit facility for $173.5 million per facility. In addition, DKB was committed under a separate $333.9 million credit facility for $17.4 million. At December 31, 1999, DKB was a committed bank under a five-year, $3.7 billion revolving credit facility and a 364-day, $1.7 billion revolving credit facility for $210.0 million and $93.0 million, respectively. Additional information regarding these credit lines can be found in Note 8--"Debt." CIT 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 $200.0 million and $220.0 million at December 31, 2000 and 1999, respectively. The notional principal amount outstanding on foreign currency swaps with DKB totaled $168.6 million at year end 2000 and 1999. CIT has entered into leveraged leasing arrangements with third party loan participants, including affiliates of DKB. Amounts owed to affiliates of DKB are $373.1 million at December 31, 2000 and $398.3 million at December 31, 1999. At December 31, 2000 and 1999, CIT has entered into credit-related commitments with DKB in the form of letters of credit totaling $19.5 million and $16.5 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. CIT 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 securitization trusts. These securitization trusts were formed for the purpose of securitizing certain recreational vehicle and recreational marine finance receivables. At December 31, 2000 and 1999, the principal amount outstanding on the cash collateral loans with DKB was $8.9 million and $15.7 million, respectively. NOTE 22--BUSINESS SEGMENT INFORMATION MANAGEMENT'S POLICY IN IDENTIFYING REPORTABLE SEGMENTS CIT'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 five reportable segments: Equipment Financing and Leasing, Vendor Technology Finance, Commercial Finance, Structured Finance and Consumer. Equipment Financing and Leasing, Vendor 80 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 22--BUSINESS SEGMENT INFORMATION (CONTINUED) Technology Finance and Structured Finance 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. For 1999, CIT's internal financial information combined Vendor Technology Finance and Structured Finance in the Vendor Technology Finance segment, due to the short period from the acquisition date to the end of the year and the business restructuring which took place as of year end. The Commercial Finance segment offers secured lending and receivables collection as well as other financial 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. CIT'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 Note 2--"Summary of Significant Accounting Policies." Since CIT generates a majority of its revenue from interest, fees, and asset gains, management relies primarily on operating revenues to assess the performance of the segment. CIT also 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 totals and the consolidated managed assets total at or for the years ended December 31, 2000, 1999 and 1998. Goodwill amortization is allocated to Corporate and Other for purposes of the table.
EQUIPMENT VENDOR CORPORATE FINANCING AND TECHNOLOGY COMMERCIAL STRUCTURED TOTAL AND CONSOLIDATED ($ IN MILLIONS) LEASING FINANCE FINANCE FINANCE(1) CONSUMER SEGMENTS OTHER(1) TOTAL - --------------- ------------- ---------- ---------- ---------- -------- --------- ----------- ------------ DECEMBER 31, 2000 Operating revenue.... $ 969.4 $ 540.0 $ 499.1 $ 175.3 $ 256.0 $ 2,439.8 $ (58.4) $ 2,381.4 Income taxes......... 147.3 96.5 109.2 49.9 43.4 446.3 (72.4) 373.9 Net income........... 287.8 148.9 161.8 89.6 73.3 761.4 (149.8) 611.6 Total managed assets............. 26,465.2 10,809.7 7,693.7 2,691.9 7,240.4 54,900.9 -- 54,900.9 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 15,879.8 7,002.1 2,071.2 7,274.1 51,433.3 -- 51,433.3 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
- -------------------------- (1) For 1998, Equity Investments is included in Corporate and Other. This unit is part of Structured Finance in 2000 and 1999. 81 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 22--BUSINESS SEGMENT INFORMATION (CONTINUED) Finance income and other revenues derived from United States based financing and leasing assets were $5,215.6 million, $2,641.0 million and $2,129.9 million for the years ending December 31, 2000, 1999 and 1998, respectively. Finance income and other revenues derived from foreign based financing and leasing assets were $944.8 million, $275.7 million and $140.6 million for the years ending December 31, 2000, 1999 and 1998, respectively. NOTE 23--SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARIES The following table presents summarized consolidated financial information for CIT Holdings LLC and its wholly owned subsidiary, Capita Corporation (formerly AT&T Capital). CIT has guaranteed on a full and unconditional basis the existing registered debt securities and certain other indebtedness of these subsidiaries. Therefore, CIT has not presented related financial statements or other information for these subsidiaries on a stand-alone basis. The following summarized consolidated financial information reflects results as of and for the year ended December 31, 2000 and also the transfer of various subsidiaries amongst other CIT entities ($ in millions).
YEAR ENDED DECEMBER 31, 2000 ------------------------------------- CIT HOLDINGS LLC CAPITA CORPORATION ---------------- ------------------ Operating revenue................................... $ 710.7 $ 442.5 Operating expenses.................................. 451.5 308.2 -------- -------- Income before provision for income taxes............ $ 259.2 $ 134.3 Net income.......................................... $ 176.0 $ 98.1
AT DECEMBER 31, 2000 ------------------------------------- CIT HOLDINGS LLC CAPITA CORPORATION ---------------- ------------------ ASSETS Cash and cash equivalents. $ 48.6 $ 129.3 Financing and leasing assets. 6,781.5 5,294.7 Receivables from affiliates and other assets........ 914.4 145.9 -------- -------- Total assets........................................ $7,744.5 $5,569.9 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Debt.............................................. $4,323.3 $3,879.6 Other............................................. 477.0 326.2 -------- -------- Total liabilities................................... 4,800.3 4,205.8 Total shareholders' equity.......................... 2,944.2 1,364.1 -------- -------- Total liabilities and shareholders' equity.......... $7,744.5 $5,569.9 ======== ========
82 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 24--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
2000 ---------------------------------------------------- FIRST SECOND THIRD FOURTH ($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS) QUARTER QUARTER QUARTER QUARTER YEAR - ----------------------------------------- -------- -------- -------- -------- -------- Net finance margin................................ $349.1 $359.2 $370.5 $390.6 $1,469.4 Other revenue..................................... 238.2 232.3 224.2 217.3 912.0 Salaries and general operating expenses........... 268.2 257.5 250.2 259.3 1,035.2 Provision for credit losses....................... 61.6 64.0 65.8 63.8 255.2 Goodwill amortization............................. 20.5 20.6 22.7 22.5 86.3 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........................ 88.3 93.2 95.0 97.4 373.9 Net income........................................ $143.9 $151.4 $156.2 $160.1 $ 611.6 Net income per diluted share...................... $ 0.55 $ 0.58 $ 0.60 $ 0.61 $ 2.33
1999 ---------------------------------------------------- FIRST SECOND THIRD FOURTH ($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS) QUARTER QUARTER QUARTER QUARTER YEAR - ----------------------------------------- -------- -------- -------- -------- -------- Net finance margin.................................. $212.1 $214.4 $218.2 $272.7 $917.4 Other revenue....................................... 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
NOTE 25--SUBSEQUENT EVENT On March 13, 2001, Tyco International Ltd. (NYSE: TYC), a diversified manufacturing and service company, and CIT announced a definitive agreement whereby Tyco will acquire CIT. As part of this transaction, Tyco has entered into a purchase agreement with DKB for their approximate 27% interest (approximately 71 million shares) at a price of $35.02, in cash, per CIT share. The remaining shareholders will receive 0.6907 Tyco shares for each share of CIT in a tax-free, stock-for-stock exchange. The transaction, which is expected to close during the third quarter of 2001, is valued at $35.02 per share to CIT shareholders, or approximately $9.2 billion, based on Tyco's March 12, 2001 closing stock price. 83 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholder of Tyco Capital Ltd. In our opinion, the accompanying balance sheet presents fairly, in all material respects, the financial position of Tyco Capital Ltd. (formerly Tyco Holdings (Bermuda) No. 9 Limited) at September 30, 2000, in conformity with accounting principles generally accepted in the United States of America. This financial statement is the responsibility of the Company's management; our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit of this statement in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit of the balance sheet provides a reasonable basis for our opinion. PRICEWATERHOUSECOOPERS Hamilton, Bermuda November 12, 2001 84 TYCO CAPITAL LTD. BALANCE SHEET (IN THOUSANDS)
SEPTEMBER 30, 2000 ------------- ASSETS Intercompany receivable from parent......................... $ 7 ---- Total assets................................................ $ 7 ==== LIABILITIES AND SHAREHOLDER'S EQUITY Total liabilities........................................... $ -- Shareholder's equity: Parent company investment................................. 12 Accumulated deficit....................................... (5) ---- Total shareholder's equity.................................. 7 ---- Total liabilities and shareholder's equity.................. $ 7 ====
See accompanying notes to financial statement. 85 TYCO CAPITAL LTD. NOTES TO FINANCIAL STATEMENT NOTE 1--THE COMPANY Tyco Capital Ltd. ("Tyco Capital"; formerly Tyco Holdings (Bermuda) No. 9 Limited) was incorporated on February 25, 2000 as a Bermuda holding company and wholly-owned subsidiary of Tyco International Ltd. ("Tyco" or "Parent"). NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION--The balance sheet has been prepared in accordance with accounting principles generally accepted in the United States of America. A separate income statement, statement of changes in shareholder's equity, and statement of cash flows have not been presented in the financial statements as activity from February 25, 2000 (inception) to September 30, 2000 was nominal (legal expenses of approximately $5,000). NOTE 3--SUBSEQUENT EVENTS On October 5, 2001, Tyco Holdings (Bermuda) No. 9 Limited changed its name to Tyco Capital Ltd. On June 1, 2001, Tyco Capital Corporation (formerly known as The CIT Group, Inc.) was acquired by a wholly-owned subsidiary of Tyco, in a purchase business combination. Tyco Capital Corporation was contributed to Tyco Capital on November 8, 2001 and accordingly, as a company under the control of Tyco Capital Ltd., Tyco Capital Corporation will be reflected as a wholly-owned subsidiary of Tyco Capital Ltd. in its consolidated financial statements for periods beginning on June 2, 2001. 86 TYCO CAPITAL LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN MILLIONS)
JUNE 30, DECEMBER 31, 2001 2000 ----------- ------------- (UNAUDITED) (SUCCESSOR) (PREDECESSOR) ASSETS Financing and leasing assets: Loans and leases: Commercial.............................................. $28,085.0 $29,304.0 Consumer................................................ 2,780.7 4,193.5 --------- --------- Finance receivables..................................... 30,865.7 33,497.5 Reserve for credit losses............................... (463.8) (468.5) --------- --------- Net finance receivables................................. 30,401.9 33,029.0 Operating lease equipment, net.......................... 7,182.4 7,190.6 Finance receivables held for sale....................... 2,073.9 2,698.4 Cash and cash equivalents................................... 900.2 812.1 Goodwill and other intangible assets, net................... 6,101.7 1,964.6 Other assets................................................ 5,234.4 2,995.1 --------- --------- Total assets................................................ $51,894.5 $48,689.8 ========= ========= LIABILITIES AND SHAREHOLDER'S EQUITY Debt: Commercial paper.......................................... $ 9,155.8 $ 9,063.5 Variable rate senior notes................................ 9,856.3 11,130.5 Fixed rate senior notes................................... 17,646.6 17,571.1 Subordinated fixed rate notes............................. 100.0 200.0 --------- --------- Total debt.................................................. 36,758.7 37,965.1 Credit balances of factoring clients........................ 1,945.3 2,179.9 Accrued liabilities and payables............................ 2,413.2 2,287.6 --------- --------- Total liabilities........................................... 41,117.2 42,432.6 Tyco Capital Corporation obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of Tyco Capital Corporation.................... 260.0 250.0 Shareholder's equity: Parent company investment................................. 10,445.6 -- Common stock.............................................. -- 2.7 Paid-in capital........................................... -- 3,527.2 Retained earnings......................................... 77.0 2,603.3 Treasury stock, at cost................................... -- (137.7) --------- --------- 10,522.6 5,995.5 Accumulated other comprehensive (loss) income............... (5.3) 11.7 --------- --------- Total shareholder's equity.................................. 10,517.3 6,007.2 --------- --------- Total liabilities and shareholder's equity.................. $51,894.5 $48,689.8 ========= =========
See accompanying notes to consolidated financial statements (unaudited). 87 TYCO CAPITAL LTD. AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS (UNAUDITED) (IN MILLIONS)
JUNE 2 THROUGH JANUARY 1 THROUGH SIX MONTHS ENDED JUNE 30, 2001 JUNE 1, 2001 JUNE 30, 2000 -------------- ----------------- ---------------- (SUCCESSOR) (PREDECESSOR) (PREDECESSOR) Finance income.................................. $417.9 $2,298.8 $2,530.6 Interest expense................................ 161.8 1,022.7 1,202.8 ------ -------- -------- Net finance income.............................. 256.1 1,276.1 1,327.8 Depreciation on operating lease equipment....... 110.0 588.1 619.5 ------ -------- -------- Net finance margin.............................. 146.1 688.0 708.3 Other revenue, net.............................. 95.9 237.5 470.5 ------ -------- -------- Operating revenue............................... 242.0 925.5 1,178.8 ------ -------- -------- Salaries and general operating expenses......... 85.4 446.0 525.7 Provision for credit losses..................... 18.6 216.4 125.6 Goodwill amortization........................... 14.4 37.8 41.1 Acquisition related costs....................... -- 54.0 -- ------ -------- -------- Operating expenses.............................. 118.4 754.2 692.4 ------ -------- -------- Income before income taxes...................... 123.6 171.3 486.4 Provision for income taxes...................... (45.7) (85.1) (184.8) Minority interest in subsidiary trust holding solely debentures of Tyco Capital Corporation, after tax..................................... (0.9) (4.9) (6.3) ------ -------- -------- Net income...................................... $ 77.0 $ 81.3 $ 295.3 ====== ======== ========
See accompanying notes to consolidated financial statements (unaudited). 88 TYCO CAPITAL LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY (UNAUDITED) (IN MILLIONS)
ACCUMULATED PARENT OTHER TOTAL COMPANY COMMON PAID-IN TREASURY RETAINED COMPREHENSIVE SHAREHOLDER'S INVESTMENT STOCK CAPITAL STOCK EARNINGS INCOME (LOSS) EQUITY ---------- -------- -------- -------- -------- -------------- ------------- Tyco Capital (predecessor) balance, December 31, 2000................... $ -- $ 2.7 $3,527.2 $(137.7) $2,603.3 $ 11.7 $ 6,007.2 --------- Net income............................ 81.3 81.3 Foreign currency translation adjustments......................... (33.7) (33.7) Cumulative effect of new accounting principle........................... (146.5) (146.5) Change in fair values of derivatives qualifying as cash flow hedges...... 0.6 0.6 --------- Total comprehensive loss.............. (98.3) --------- Cash dividends........................ (52.9) (52.9) Issuance of treasury stock............ 27.6 27.6 Restricted common stock grants........ 12.4 12.4 --------- ------ -------- ------- -------- ------ --------- Tyco Capital (predecessor), June 1, 2001................................ -- 2.7 3,539.6 (110.1) 2,631.7 (167.9) 5,896.0 Recapitalization at acquistion........ 3,539.6 -- (3,539.6) -- -- -- -- Effect of push-down accounting of Tyco's purchase price on Tyco Capital's net assets................ 5,945.1 (2.7) -- 110.1 (2,631.7) 167.9 3,588.7 --------- ------ -------- ------- -------- ------ --------- Tyco Capital (successor), June 1, 2001................................ 9,484.7 -- -- -- -- -- 9,484.7 --------- Net income............................ 77.0 77.0 Foreign currency translation adjustments......................... 13.0 13.0 Change in fair values of derivatives qualifying as cashflow hedges....... (18.3) (18.3) --------- Total comprehensive income............ 71.7 --------- Capital contribution from Parent...... 960.9 960.9 --------- ------ -------- ------- -------- ------ --------- Tyco Capital (successor), June 30, 2001................................ $10,445.6 $ -- $ -- $ -- $ 77.0 $ (5.3) $10,517.3 --------- ------ -------- ------- -------- ------ ---------
See accompanying notes to consolidated financial statements (unaudited). 89 TYCO CAPITAL LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN MILLIONS)
JANUARY 1 JUNE 2 THROUGH THROUGH SIX MONTHS JUNE 30, 2001 JUNE 1, 2001 JUNE 30, 2000 -------------- ------------- ------------- (SUCCESSOR) (PREDECESSOR) (PREDECESSOR) CASH FLOWS FROM OPERATIONS Net income......................................... $ 77.0 $ 81.3 $ 295.3 Adjustments to reconcile net income to net cash flows from operations: Provision for credit losses...................... 18.6 216.4 125.6 Depreciation and amortization.................... 127.9 642.4 686.2 Non-recurring charges............................ -- 78.1 -- Provision (benefit) for deferred federal income taxes.......................................... 23.3 (20.2) 69.8 Gains on equipment, receivable and investment sales.......................................... (47.8) (96.3) (192.8) (Increase) decrease in other assets.............. (183.9) 69.9 (64.5) (Decrease) increase in accrued liabilities and payables....................................... (155.5) 55.7 (89.0) Other............................................ (17.4) 34.9 11.7 -------- --------- --------- Net cash flows (used for) provided by operations... (157.8) 1,062.2 842.3 -------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Loans extended..................................... (4,223.1) (20,803.0) (24,203.2) Collections on loans............................... 3,457.4 18,520.2 20,395.9 Proceeds from asset and receivable sales........... 1,782.5 2,879.6 3,004.5 Purchases of assets to be leased................... (237.2) (694.0) (946.3) Net decrease (increase) in short-term factoring receivables...................................... 21.2 (131.0) (217.0) Purchase of finance receivable portfolios.......... -- -- (870.7) Other.............................................. (2.3) (24.4) (12.6) -------- --------- --------- Net cash flows provided by (used for) investing activities....................................... 798.5 (252.6) (2,849.4) -------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Repayments of variable and fixed rate notes........ (1,482.0) (6,491.5) (5,294.8) Proceeds from the issuance of variable and fixed rate notes....................................... -- 6,246.6 6,883.7 Net (decrease) increase in commercial paper........ (721.2) 813.6 382.2 Capital contribution from Parent................... 288.6 -- -- Net collection (repayments) of non-recourse leveraged lease debt............................. 17.7 (8.7) (90.5) Cash dividends paid................................ -- (52.9) (53.3) Treasury stock issued (purchased).................. -- 27.6 (48.0) -------- --------- --------- Net cash flows (used for) provided by financing activities....................................... (1,896.9) 534.7 1,779.3 -------- --------- --------- Net (decrease) increase in cash and cash equivalents...................................... (1,256.2) 1,344.3 (227.8) Cash and cash equivalents, beginning of period..... 2,156.4 812.1 1,073.4 -------- --------- --------- Cash and cash equivalents, end of period........... $ 900.2 $ 2,156.4 $ 845.6 ======== ========= ========= SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES: Push-down of purchase price by Parent (Notes 1 and 2)......................................... $ -- $ 9,484.7 $ -- ======== ========= =========
See accompanying notes to consolidated financial statements (unaudited). 90 TYCO CAPITAL LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION--The unaudited financial statements presented herein include the consolidated accounts of Tyco Capital Ltd. (formerly Tyco Holdings (Bermuda) No. 9 Limited) and its subsidiaries ("Tyco Capital" or the "Company"). Substantially all of Tyco Capital's operating activities are performed by Tyco Capital Corporation (formerly The CIT Group, Inc.), acquired on June 1, 2001 by a wholly-owned subsidiary of Tyco International Ltd. ("Tyco" or "Parent") in a purchase business combination. Tyco Capital Corporation was contributed to Tyco Capital on November 8, 2001 and accordingly, as a company under the control of Tyco Capital Ltd., Tyco Capital Corporation is reflected as a wholly-owned subsidiary of Tyco Capital in its financial statements for periods beginning on June 2, 2001. In accordance with the guidelines for accounting for business combinations, the purchase price paid by Tyco plus related purchase accounting adjustments have been "pushed-down" and recorded in Tyco Capital's financial statements for the period subsequent to June 1, 2001. This resulted in a new basis of accounting reflecting the fair market value of its assets and liabilities for the "successor" period beginning June 2, 2001. Information for all "predecessor" periods prior to the acquisition is presented using Tyco Capital Corporation's historical basis of accounting. These financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, do not include all of the information and note disclosures required by generally accepted accounting principles in the United States and should be read in conjunction with The CIT Group Inc.'s and Tyco Capital's audited financial statements, included elsewhere in this document. These financial statements are unaudited, but in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of Tyco Capital's financial position and results of operations. ACCOUNTING PRONOUNCEMENTS--During September 2000, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities-a replacement of FASB Statement No. 125." SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001, and is effective for recognition and reclassification of collateral and for disclosures for fiscal years ending after December 15, 2000. The adoption of this statement has not had a significant impact on the accounting for, or the structure of, our securitization transactions. In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. In addition, companies will be required to review goodwill and intangible assets reported in connection with prior acquisitions, possibly disaggregate and report separately previously identified intangible assets and possibly reclassify certain intangible assets into goodwill. SFAS No. 142 establishes new guidelines on accounting for goodwill and other intangible assets. Tyco Capital expects to implement SFAS No. 142 at its earliest allowable adoption date, October 1, 2001. Upon adoption, existing goodwill will no longer be amortized, but instead will be assessed for impairment at least as often as annually. Goodwill resulting from acquisitions, if any, initiated after June 30, 2001 will be immediately subject to the nonamortization provisions of SFAS No. 142. The Company is currently assessing the impact of these new standards. Goodwill amortization expense was $37.8 million and $14.4 million for the periods January 1 through June 1, 2001 and June 2 through June 30, 2001, respectively. 91 TYCO CAPITAL LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) NOTE 2--ACQUISITION BY TYCO INTERNATIONAL LTD. The purchase price paid by Tyco plus related purchase accounting adjustments was valued at approximately $9.5 billion and is presented as "Parent company investment" as of June 1, 2001 in the Consolidated Statement of Changes in Shareholder's Equity. The $9.5 billion value consisted of the following: the exchange of approximately 192.5 million outstanding CIT common shares (including exchangeable shares) for Tyco common shares at 0.6907 per share valued at $6,650.4 million; the purchase of 71 million common shares from The Dai-Ichi Kangyo Bank, Limited at $35.02 per share for $2,486.4 million in cash; the estimated fair value of stock options of $318.6 million; and $29.2 million in acquisition-related costs incurred by Tyco. As of the acquisition date, Tyco Capital Corporation recorded each asset and liability at its estimated fair value, which amount is subject to future adjustment when appraisal or other valuation data are obtained. Approximately $4.2 billion of incremental goodwill and other intangible assets were recorded, which represents the excess of the transaction purchase price over the fair value of Tyco Capital Corporation's net assets and purchase accounting liabilities. Goodwill and other intangible assets are being amortized on a straight-line basis over periods ranging from 5 to 40 years. As part of Tyco Capital Corporation's integration with Tyco, the Company has begun to formulate workforce reduction and exit plans. As of June 30, 2001, management determined that approximately 350 corporate and administrative employees would be terminated and announced the benefit arrangements to those employees. As a result, $39.1 million in severance costs and other related exit costs were accrued. At June 30, 2001, a total of $48.3 million in purchase accounting reserves remained in the Consolidated Balance Sheet. The total consists of $39.1 million related to the integration of Tyco Capital Corporation and Tyco and $9.2 million related to lease termination costs associated with Tyco Capital Corporation's acquisition of Newcourt in 1999. NOTE 3--DERIVATIVE FINANCIAL INSTRUMENTS The FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which became effective for Tyco Capital Corporation on January 1, 2001. SFAS No. 133 was amended by SFAS No. 137 and SFAS No. 138. Under SFAS No. 133, as amended, all derivative instruments are recognized in the balance sheet at their fair values and changes in fair value are recognized immediately in earnings, unless the derivatives qualify as hedges of future cash flows. For derivatives qualifying as hedges of future cash flows, the effective portion of changes in fair value is recorded temporarily in shareholder's equity, and contractual cash flows, along with the related impact of the hedged items, continue to be recognized in earnings. Any ineffective portion of a hedge is reported in earnings as it occurs. The ineffective portion of changes in fair values of hedge positions reported in earnings for the predecessor period April 1 through June 1, 2001, amounted to $0.6 million before income taxes, or $0.4 million after taxes, and was recorded as an increase to interest expense. The ineffective portion of changes in fair values of hedge positions included in earnings for the successor period June 2 through June 30, 2001 was $0.5 million before income taxes, or $0.3 million after taxes. On January 1, 2001, Tyco Capital Corporation recorded a $146.5 million, net of tax, cumulative effect adjustment to Accumulated Other Comprehensive Loss, a separate component of shareholder's equity, for derivatives qualifying as hedges of future cash flows to reflect the new accounting standard 92 TYCO CAPITAL LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) NOTE 3--DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) for derivatives. As described in Note 1, in conjunction with the Tyco acquisition, "push-down" accounting for business combinations was implemented as of the June 1 acquisition date. Accordingly, the cumulative effect adjustment, as well as all other components of the Accumulated Other Comprehensive Loss account was eliminated as of the acquisition date. The components of the adjustment to Accumulated Other Comprehensive Loss for derivatives qualifying as hedges of future cash flows at January 1, 2001 and the balance outstanding at June 1, 2001 and June 30, 2001 are presented in the following table ($ in millions):
ADJUSTMENT OF FAIR VALUE OF INCOME TAX TOTAL DERIVATIVES EFFECTS UNREALIZED LOSS ------------- ---------- --------------- Balance at January 1, 2001 (predecessor)....... $236.2 $(89.7) $146.5 Changes in values of derivatives qualifying as cash flow hedges............................. (1.0) 0.4 (0.6) ------ ------ ------ Balance at June 1, 2001 (predecessor).......... 235.2 (89.3) 145.9 Effect of push-down accounting................. (235.2) 89.3 (145.9) ------ ------ ------ Balance at June 1, 2001 (successor)............ -- -- -- Changes in values of derivatives qualifying as cash flow hedges............................. 29.5 (11.2) 18.3 ------ ------ ------ Balance at June 30, 2001 (successor)........... $ 29.5 $(11.2) $ 18.3 ====== ====== ======
The unrealized losses presented in the preceding table reflect our use of interest rate swaps to convert variable-rate debt to fixed-rate debt. These losses were caused by market interest rates that declined during the respective periods. During the period January 1 through June 1, 2001, approximately $19.3 million, net of tax, was reflected in earnings for the interest differential on our interest rate swaps and for the period June 2 through June 30, 2001 approximately $7.7 million, net of tax, was recorded. Assuming no change in interest rates, we expect approximately $13.2 million, net of tax, of Accumulated Other Comprehensive Loss to be reclassified to earnings over the next twelve months. This amount will change as interest rates change in the future. The Accumulated Other Comprehensive Loss (along with the corresponding swap liability) will be re-measured as market interest rates change over the remaining life of the swaps. Tyco Capital uses derivatives for hedging purposes only, and does not enter into derivative financial instruments for trading or speculative purposes. As part of managing the exposure to changes in market interest rates, Tyco Capital, as an end-user, enters into various interest rate swap transactions, all of which are transacted in over-the-counter markets, with other financial institutions acting as principal counterparties. To ensure both appropriate use as a hedge and hedge accounting treatment, all derivatives entered into are designated according to a hedge objective against a specified liability, including senior notes and commercial paper. Tyco Capital's primary hedge objectives include the conversion of variable-rate liabilities to fixed-rates, and the conversion of fixed-rate liabilities to variable-rates. The notional amounts, rates, indices and maturities of Tyco Capital's derivatives are required to closely match the related terms of Tyco Capital's hedged liabilities. The following table 93 TYCO CAPITAL LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) NOTE 3--DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) presents the notional amounts of interest rate swaps by class and the corresponding hedged liability position at June 30, 2001 ($ in millions):
INTEREST RATE SWAPS NOTIONAL AMOUNT DESCRIPTION - ------------------- --------------- -------------------------------------- Floating to fixed-rate swaps.......... $6,843.0 Converts the interest rate on an equivalent amount of commercial paper and variable-rate senior notes to a fixed-rate. These swaps have maturities ranging from 2001-2027. Fixed to floating-rate swaps.......... 1,344.8 Converts the interest rate on an equivalent amount of fixed-rate senior notes to a variable-rate. These swaps have maturities ranging from 2003-2008. -------- Total interest rate swaps............. $8,187.8 ========
Tyco Capital also utilizes foreign currency exchange forward contracts to hedge foreign currency risk related to its net investments in foreign operations and cross currency interest rate swaps to hedge foreign debt. At June 30, 2001, Tyco Capital was party to foreign currency exchange forward contracts with notional amounts of $3.5 billion and maturities ranging from 2001 to 2004. Tyco Capital was also party to cross currency interest rate swaps with a notional amount of $1.7 billion and maturities ranging from 2002 to 2027. These swaps hedge both foreign currency and interest rate risk. NOTE 4--BUSINESS SEGMENT INFORMATION The following table presents reportable segment information and the reconciliation of segment balances to the consolidated financial statement totals and the consolidated managed assets totals at or for the six month periods ended June 30, 2001 and 2000. The financial information included in the following table combines January 1 through June 1, 2001 (the "predecessor period") and June 2 through June 30, 2001 (the "successor period") in order to present "combined" financial results for the six months ended June 30, 2001. Goodwill and other intangible assets amortization is allocated to Corporate for purposes of the table. For the predecessor period January 1 through June 1, 2001, Corporate recorded a non-recurring charge of $221.6 million ($158.0 million after-tax) consisting of the following: provision of $89.5 million for certain non-strategic and under-performing equipment leasing and loan portfolios, primarily in the telecommunications industry, of which the Company expects to dispose; write-downs of $78.1 million for certain equity investments in the telecommunications industry and e-commerce markets of which the Company plans to dispose; and transaction costs of $54.0 million incurred by Tyco Capital Corporation prior to and in connection with its acquisition by Tyco. The transaction costs are presented separately in our Consolidated Income Statement, while the remaining charges have been included in Provision for credit losses, and Other revenue, net, respectively. During the three months ended March 31, 2001, Tyco Capital Corporation transferred financing and leasing assets from Equipment Financing to Specialty Finance. Prior year segment balances have not been restated to conform to the current year asset transfers as it is impractical to do so. In addition, Vendor Technology Finance was combined into Specialty Finance consistent with how 94 TYCO CAPITAL LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) NOTE 4--BUSINESS SEGMENT INFORMATION (CONTINUED) activities are reported internally to management effective as of June 30, 2001. We have reclassified comparative prior period information to reflect this change.
EQUIPMENT FINANCING SPECIALTY COMMERCIAL STRUCTURED TOTAL CONSOLIDATED AND LEASING FINANCE FINANCE FINANCE(1) SEGMENTS CORPORATE TOTAL ($ IN MILLIONS) ----------- --------- ---------- ---------- -------- --------- ------------ AS AT AND FOR THE COMBINED SIX MONTHS ENDED JUNE 30, 2001 Operating revenue............ $ 404.5 $ 503.2 $ 248.7 $ 61.5 $1,217.9 $(50.4) $1,167.5 Net income................... 142.4 122.7 87.8 20.8 373.7 (215.4) 158.3 Total managed assets......... 21,927.1 18,377.2 7,776.0 3,007.6 51,087.9 -- 51,087.9 AS AT AND FOR THE SIX MONTHS ENDED JUNE 30, 2000 Operating revenue............ $ 338.4 $ 516.1 $ 241.8 $ 104.5 $1,200.8 $(22.0) $1,178.8 Net income................... 133.1 100.0 74.3 54.7 362.1 (66.8) 295.3 Total managed assets......... 19,835.9 23,730.4 7,581.8 2,222.8 53,370.9 -- 53,370.9
- ------------------------ (1) The June 30, 2000 balances are conformed to include Equity Investments in Structured Finance, which had previously been reported within Corporate. NOTE 5--SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARIES The following table shows summarized consolidated financial information for Tyco Capital Holdings LLC and its wholly-owned subsidiary, Capita Corporation (formerly AT&T Capital Corporation). The financial information included in the following table combines the predecessor period and the successor period in order to present "combined" results for the six months ended June 30, 2001. Tyco Capital Corporation has guaranteed on a full and unconditional basis the existing registered debt securities and certain other indebtedness of these subsidiaries. Therefore, Tyco Capital has not presented related financial statements or other information for these subsidiaries on a stand-alone basis. The following summarized consolidated financial information reflects balance sheet and 95 TYCO CAPITAL LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) NOTE 5--SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARIES (CONTINUED) income statement results as of and for the combined six months ended June 30, 2001, including the transfer of various subsidiaries to other Tyco Capital entities ($ in millions):
COMBINED SIX MONTHS ENDED JUNE 30, 2001 --------------------------------- TYCO CAPITAL HOLDINGS LLC CAPITA CORPORATION ------------ ------------------ Operating revenue........................................... $ 302.7 $ 201.8 Operating expenses.......................................... 259.9 194.9 -------- -------- Income before income taxes.................................. $ 42.8 $ 6.9 -------- -------- Net loss.................................................... $ (12.2) $ (31.2) -------- -------- AT JUNE 30, 2001 --------------------------------- ASSETS Cash and cash equivalents................................... $ 192.3 $ 106.3 Financing and leasing assets................................ 6,331.4 4,705.2 Receivables from affiliates and other assets................ 1,083.4 192.8 -------- -------- Total assets................................................ $7,607.1 $5,004.3 ======== ======== LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities: Debt...................................................... $3,908.0 $3,354.1 Other..................................................... 398.4 317.4 -------- -------- Total liabilities........................................... 4,306.4 3,671.5 Total shareholder's equity.................................. 3,300.7 1,332.8 -------- -------- Total liabilities and shareholder's equity.................. $7,607.1 $5,004.3 ======== ========
NOTE 6--RELATED PARTY TRANSACTION In June 2001, the Company received a capital contribution consisting primarily of a $400 million note receivable from Tyco, Tyco International Ltd. common shares valued at $302 million and $275 million in cash. The note did not bear interest and has since been paid. This note receivable is included in Other assets in the Consolidated Balance Sheet at June 30, 2001. Intercompany payable to Parent was $13.1 million at June 30, 2001 and is included in accrued liabilities and payables in the Consolidated Balance Sheet. Beginning after June 1, 2001 (the date of Tyco Capital Corporation's acquisition by Tyco), Tyco began charging Tyco Capital a management fee equal to 1% of operating revenue for the estimated costs of services provided to the Company by Tyco, primarily related to the tax, audit, legal, human resource and treasury functions. The consolidated financial statements reflect this fee, which is included in salaries and general operating expenses in the Consolidated Statement of Operations. NOTE 7--SUBSEQUENT EVENT On September 28, 2001, Tyco Capital Corporation changed its reported fiscal year end from December 31 to September 30. Tyco Capital Ltd's next consolidated audited financial statements will cover the nine-month transition period from January 1, 2001 to September 30, 2001. On October 5, 2001, Tyco Holdings (Bermuda) No. 9 Limited changed its name to Tyco Capital Ltd. 96 ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Prior to Tyco's acquisition of Tyco Capital Corporation, the independent auditor for The CIT Group, Inc., a Delaware corporation and Tyco Capital Corporation's predecessor was KPMG LLP. The independent auditor for Tyco is PricewaterhouseCoopers ("PwC"). On June 1, 2001, in connection with the acquisition, Tyco and CIT jointly determined that Tyco Capital Corporation would terminate its audit engagement with KPMG and enter into an audit engagement with PwC, in order to facilitate the auditing of Tyco's consolidated financial statements. Tyco Capital Corporation's Board of Directors approved the appointment of PwC as the independent auditors for Tyco Capital Corporation. In connection with the audits of the two fiscal years ended December 31, 2000, and the subsequent interim period through June 1, 2001 there were no disagreements with KPMG LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements if not resolved to their satisfaction would have caused them to make reference in connection with their opinion to the subject matter of the disagreement. The audit reports of KPMG LLP on the consolidated financial statements of The CIT Group, Inc. and subsidiaries as of and for the years ended December 31, 2000 and 1999, did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS. (A) FINANCIAL STATEMENTS The following financial statements are filed herewith as part of Item 13. Financial Statements and Supplementary Data.
The CIT Group, Inc. (subsequently renamed Tyco Capital Corporation): Independent Auditors' Report (KPMG LLP) Consolidated Balance Sheets as of December 31, 2000 and 1999 Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements Tyco Capital Ltd.: Report of Independent Accountants (PricewaterhouseCoopers) Balance Sheet as of September 30, 2000 Notes to Financial Statement Tyco Capital Ltd. Interim Financial Statements: Unaudited Consolidated Balance Sheet as of June 30, 2001 (successor) and Consolidated Balance Sheet as of December 31, 2000 (predecessor) Unaudited Consolidated Income Statements for the period January 1, 2001 through June 1, 2001 (predecessor), June 2, 2001 through June 30, 2001 (successor), and January 1, 2000 through June 30, 2000 (predecessor) Unaudited Consolidated Statements of Changes in Shareholder's Equity for the period January 1, 2001 through June 1, 2001 (predecessor) and June 2, 2001 through June 30, 2001 (successor) Unaudited Consolidated Statements of Cash Flows for the period January 1, 2001 through June 1, 2001 (predecessor), June 2, 2001 through June 30, 2001 (successor), and January 1, 2000 through June 30, 2000 (predecessor) Notes to Consolidated Financial Statements (Unaudited)
97 (B) EXHIBITS
EXHIBIT NO. DESCRIPTION - --------------------- ------------------------------------------------------------ 3.1......... Memorandum of Association of Registrant 3.2......... Bye-laws of Registrant 4.1......... Form of Guarantee by Tyco Capital Ltd. of 5 7/8% Notes due October 15, 2008 issued by Tyco Capital Corporation
Undertaking The registrant hereby undertakes, pursuant to Regulation S-K, Item 601(b), paragraph (4)(iii), to furnish to the Securities and Exchange Commission upon request all constituent instruments defining the rights of holders of long-term debt of the registrant and its consolidated subsidiaries not filed herewith for the reason that the total amount of securities authorized under any of such instruments does not exceed 10% of the total consolidated assets of the registrant and its consolidated subsidiaries. 98 SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized. Date: November 13, 2001 TYCO CAPITAL LTD. (Registrant) By: /s/ MARK H. SWARTZ ----------------------------------------- Mark H. Swartz VICE PRESIDENT (DULY AUTHORIZED OFFICER) By: /s/ JOSEPH M. LEONE ----------------------------------------- Joseph M. Leone VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (PRINCIPAL ACCOUNTING AND FINANCIAL OFFICER)
99 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION - --------------------- ------------------------------------------------------------ 3.1 Memorandum of Association of Registrant 3.2 Bye-laws of Registrant 4.1 Form of Guarantee by Tyco Capital Ltd. of 5 7/8% Notes due October 15, 2008 issued by Tyco Capital Corporation
EX-3.1 3 a2062535zex-3_1.txt EXHIBIT 3.1 EXHIBIT 3.1 [SEAL] BERMUDA CERTIFICATE OF INCORPORATION ON CHANGE OF NAME I HEREBY CERTIFY that in accordance with section 10 of the Companies Act 1981 TYCO HOLDINGS (BERMUDA) NO. 9 LIMITED by resolution and with the approval of the Registrar of Companies has changed its name and was registered as TYCO CAPITAL LTD. on the 5TH day of OCTOBER, 2001. [SEAL] Given under my hand and the Seal of the REGISTRAR OF COMPANIES this 9TH day of OCTOBER, 2001. for Acting Registrar of Companies FORM NO. 6 REGISTRATION NO. 27864 [SEAL] BERMUDA CERTIFICATE OF INCORPORATION I hereby in accordance with section 14 of THE COMPANIES ACT 1981 issue this Certificate of Incorporation and do certify that on the 25TH day of FEBRUARY, 2000 TYCO HOLDINGS (BERMUDA) NO. 9 LIMITED was registered by me in the Register maintained by me under the provisions of the said section and that the status of the said company is that of an EXEMPTED company. [SEAL] Given under my hand and the Seal of the REGISTRAR OF COMPANIES this 28TH day of FEBRUARY, 2000. for REGISTRAR OF COMPANIES FORM NO. 2 [SEAL] BERMUDA THE COMPANIES ACT 1981 MEMORANDUM OF ASSOCIATION OF COMPANY LIMITED BY SHARES (SECTION 7(1) AND (2)) MEMORANDUM OF ASSOCIATION OF TYCO HOLDINGS (BERMUDA) NO. 9 LIMITED - -------------------------------------------------------------------------------- (hereinafter referred to as "the Company") 1. The liability of the members of the Company is limited to the amount (if any) for the time being unpaid on the shares respectively held by them. 2. We, the undersigned, namely,
NAME ADDRESS BERMUDIAN NATIONALITY NUMBER OF STATUS SHARES (YES/NO) SUBSCRIBED Michael L. Jones Cedar House, 41 Cedar Avenue Hamilton HM 12, Bermuda Yes British 1 Ruby L. Rawlins Cedar House, 41 Cedar Avenue Hamilton HM 12, Bermuda Yes British 1 Andresa L. Tucker Cedar House, 41 Cedar Avenue Hamilton HM 12, Bermuda Yes British 1 Antoinette Simmons Cedar House, 41 Cedar Avenue Hamilton HM 12, Bermuda Yes British 1
do hereby respectively agree to take such number of shares of the Company as may be allotted to us respectively by the provisional directors of the Company, not exceeding the number of shares for which we have respectively subscribed, and to satisfy such calls as may be made by the directors, provisional directors or promoters of the Company in respect of the shares allotted to us respectively. 3. The Company is to be an exempted Company as defined by the Companies Act 1981 4. The Company, with the consent of the Minister of Finance, has power to hold land situate in Bermuda not exceeding in all, including the following parcels- Not Applicable 5. The authorised share capital of the Company is $12,000.00 divided into 12,000 shares of U.S. one dollar each. The minimum subscribed share capital of the Company is $12,000.00 in United States currency. 6. The objects for which the Company is formed and incorporated are - See Attached. 7. The Company has the powers set out in the Schedule annexed hereto. 6. (i) To carry on business as a holding company and to acquire and hold shares, stocks, debenture stock, bonds, mortgages, obligations and securities of any kind issued or guaranteed by any company, corporation or undertaking of whatever nature and wherever constituted or carrying on business, and shares, stock, debentures, debenture stock, bonds, obligations and other securities issued or guaranteed by any government, sovereign ruler, commissioners, trust, local authority or other public body, whether in Bermuda or elsewhere, and to vary, transpose, dispose of or otherwise deal with from time to time as may be considered expedient any of the Company's investments for the time being; To acquire any such shares and other securities as are mentioned in the preceding paragraph by subscription, syndicate participation, tender, purchase, exchange or otherwise and to subscribe for the same, either conditionally or otherwise, and to guarantee the subscription thereof and to exercise and enforce all rights and powers conferred by or incident to the ownership thereof; (iii) To co-ordinate the administration, policies, management, supervision, control, research, planning, trading and any and all other activities of, and to act as financial advisers and consultants to, any company or companies now or hereafter incorporated or acquired which may be or may become a Group Company (which expression, in this and the next following paragraph, means a company, wherever incorporated, which is or becomes a holding company or a subsidiary of, or affiliated with, the Company within the meanings respectively assigned to those terms in The Companies Act 1981) or, with the prior written approval of the Minister of Finance, to any company or companies now or hereafter incorporated or acquired with which the Company may be or may become associated; To provide financing and financial investment, management and advisory services to any Group Company, which shall include but not be limited to granting or providing credit and financial accommodation, lending and making advances with or without interest to any Group Company and lending to or depositing with any bank funds or other assets to provide security (by way of mortgage, charge, pledge, lien or otherwise) for loans or other forms of financing granted to such Group Company by such bank; Provided that the Company shall not be deemed to have the power to act as executor or administrator, or as trustee, except in connection with the issue of bonds and debentures by the Company or any Group Company or in connection with a pension scheme for the benefit of employees or former employees of the Company or a Group Company or their respective predecessors, or the dependants or connections of such employees or former employees; (v) As set forth in paragraphs (b) to (n) and (p) to (u) inclusive of the Second Schedule to The Companies Act, 1981. THE COMPANIES ACT SECOND SCHEDULE (SECTION 11(2)) Subject to Section 4A, a company may by reference include in its memorandum any of the following objects, that is to say the business of - (a) insurance and re-insurance of all kinds; (b) packaging of goods of all kinds; (c) buying, selling and dealing in goods of all kinds; (d) designing and manufacturing of goods of all kinds; (e) mining and quarrying and exploration for metals, minerals, fossil fuels and precious stones of all kinds and their preparation for sale or use; (f) exploring for, the drilling for, the moving, transporting and refining petroleum and hydro carbon products including oil and oil products; (g) scientific research including the improvement, discovery and development of processes, inventions, patents and designs and the construction, maintenance and operation of laboratories and research centres; (h) land, sea and air undertakings including the land, ship and air carriage of passengers, mails and goods of all kinds; (i) ships and aircraft owners, managers, operators, agents, builders and repairers; (j) acquiring, owning, selling, chartering, repairing or dealing in ships and aircraft; travel agents, freight contractors and forwarding agents; (l) dock owners, wharfingers, warehousemen; ship chandlers and dealing in rope, canvas oil and ship stores of all kinds; (n) all forms of engineering; (o) developing, operating, advising or acting as technical consultants to any other enterprise or business; (p) farmers, livestock breeders and keepers, graziers, butchers, tanners and processors of and dealers in all kinds of live and dead stock, wool, hides, tallow, grain, vegetables and other produce; (q) acquiring by purchase or otherwise and holding as an investment inventions, patents, trade marks, trade names, trade secrets, designs and the like; (r) buying, selling, hiring, letting and dealing in conveyances of any sort; and (s) employing, providing, hiring out and acting as agent for artists, actors, entertainers of all sorts, authors, composers, producers, directors, engineers and experts or specialists of any kind; (t) to acquire by purchase or otherwise and hold, sell, dispose of and deal in real property situated outside Bermuda and in personal property of all kinds wheresoever situated; (u) to enter into any guarantee, contract of indemnity or suretyship and to assure, support or secure with or without consideration or benefit the performance of any obligations of any person or persons and to guarantee the fidelity of individuals filling or about to fill situations of trust or confidence; (v) to be and carry on business of a mutual fund within the meaning of section 156A. Provided that none of these objects shall enable the company to carry on restricted business activity as set out in the Ninth Schedule except with the consent of the Minister. Signed by each subscriber in the presence of at least one witness attesting the signature thereof: ____________________________________ __________________________________ ____________________________________ __________________________________ ____________________________________ __________________________________ ____________________________________ __________________________________ (Subscribers) (Witnesses) SUBSCRIBED this 17th day of Febraury, 2000 STAMP DUTY (To be affixed) Not Applicable THE SCHEDULE (REFERRED TO IN CLAUSE 7 OF THE MEMORANDUM OF ASSOCIATION) (a) to borrow and raise money in any currency or currencies and to secure or discharge any debt or obligation in any manner and in particular (without prejudice to the generality of the foregoing) by mortgages of or charges upon all or any part of the undertaking, property and assets (present and future) and uncalled capital of the company or by the creation and issue of securities; (b) to enter into any guarantee, contract of indemnity or suretyship and in particular (without prejudice to the generality of the foregoing) to guarantee, support or secure, with or without consideration, whether by personal obligation or by mortgaging or charging all or any part of the undertaking, property and assets (present and future) and uncalled capital of the company or by both such methods or in any other manner, the performance of any obligations or commitments of, and the repayment or payment of the principal amounts of and any premiums, interest, dividends and other moneys payable on or in respect of any securities or liabilities of, any person, including (without prejudice to the generality of the foregoing) any company which is for the time being a subsidiary or a holding company of the company or another subsidiary of a holding company of the company or otherwise associated with the company; (c) to accept, draw, make, create, issue, execute, discount, endorse, negotiate and deal in bills of exchange, promissory notes, and other instruments and securities, whether negotiable or otherwise; (d) to sell, exchange, mortgage, charge, let on rent, share of profit, royalty or otherwise, grant licences, easements, options, servitudes and other rights over, and in any other manner deal with or dispose of, all or any part of the undertaking, property and assets (present and future) of the company for any consideration and in particular (without prejudice to the generality of the foregoing) for any securities; (e) to issue and allot securities of the company for cash or in payment or part payment for any real or personal property purchased or otherwise acquired by the company or any services rendered to the company or as security for any obligation or amount (even if less than the nominal amount of such securities) or for any other purpose; (f) to grant pensions, annuities, or other allowances, including allowances on death, to any directors, officers or employees or former directors, officers or employees of the company or any company which at any time is or was a subsidiary or a holding company or another subsidiary of a holding company of the company or otherwise associated with the company or of any predecessor in business of any of them, and to the relations, connections or dependants of any such persons, and to other persons whose service or services have directly or indirectly been of benefit to the company or whom the company considers have any moral claim on the company or to their relations connections or dependants, and to establish or support any associations, institutions, clubs, schools, building and housing schemes, funds and trusts, and to make payment towards insurance or other arrangements likely to benefit any such persons or otherwise advance the interests of the company or of its members or for any national, charitable, benevolent, educational, social, public, general or useful object; (g) subject to the provisions of Section 42 of the Companies Act 1981, to issue preference shares which at the option of the holders thereof are to be liable to be redeemed; (h) to purchase its own shares in accordance with the provisions of Section 42A of the Companies Act 1981. THE COMPANIES ACT 1981 FIRST SCHEDULE (section 11(1)) A company limited by shares, or other company having a share capital, may exercise all or any of the following powers subject to any provision of law or its memorandum - (1) [repealed by 1992:51] (2) to acquire or undertake the whole or any part of the business, property and liabilities of any person carrying on any business that the company is authorized to carry on; (3) to apply for, register, purchase, lease, acquire, hold, use, control, licence, sell, assign or dispose of patents, patent rights, copyrights, trade marks, formulae, licences, inventions, processes, distinctive marks and similar rights; (4) to enter into partnership or into any arrangement for sharing of profits, union of interests, co-operation, joint venture, reciprocal concession or otherwise with any person carrying on or engaged in or about to carry on or engage in any business or transaction that the company is authorized to carry on or engage in or any business or transaction capable of being conducted so as to benefit the company; (5) to take or otherwise acquire and hold securities in any other body corporate having objects altogether or in part similar to those of the company or carrying on any business capable of being conducted so as to benefit the company; (6) subject to section 96 to lend money to any employee or to any person having dealings with the company or with whom the company proposes to have dealings or to any other body corporate any of whose shares are held by the company; (7) to apply for, secure or acquire by grant, legislative enactment, assignment, transfer, purchase or otherwise and to exercise, carry out and enjoy any charter, licence, power, authority, franchise, concession, right or privilege, that any government or authority or any body corporate or other public body may be empowered to grant, and to pay for, aid in and contribute toward carrying it into effect and to assume any liabilities or obligations incidental thereto; (8) to establish and support or aid in the establishment and support of associations, institutions, funds or trusts for the benefit of employees or former employees of the company or its predecessors, or the dependants or connections of such employees or former employees, and grant pensions and allowances, and make payments towards insurance or for any object similar to those set forth in this paragraph, and to subscribe or guarantee money for charitable, benevolent, educational or religious objects or for any exhibition or for any public, general or useful objects; (9) to promote any company for the purpose of acquiring or taking over any of the property and liabilities of the company or for any other purpose that may benefit the company; to purchase, lease, take in exchange, hire or otherwise acquire any personal property and any rights or privileges that the company considers necessary or convenient for the purposes of its business; (11) to construct, maintain, alter, renovate and demolish any buildings or works necessary or convenient for its objects; to take land in Bermuda by way of lease or letting agreement for a term not exceeding twenty-one years, being land bona fide required for the purposes of the business of the company and with the consent of the Minister granted in his discretion to take land in Bermuda by way of lease or letting agreement for a similar period in order to provide accommodation or recreational facilities for its officers and employees and when no longer necessary for any of the above purposes to terminate or transfer the lease or letting agreement; except to the extent, if any, as may be otherwise expressly provided in its incorporating Act or memorandum and subject to this Act every company shall have power to invest the moneys of the Company by way of mortgage of real or personal property of every description in Bermuda or elsewhere and to sell, exchange, vary, or dispose of such mortgage as the company shall from time to time determine; 14) to construct, improve, maintain, work, manage, carry out or control any roads, ways, tramways, branches or sidings, bridges, reservoirs, watercourses, wharves, factories, warehouses, electric works, shops, stores and other works and conveniences that may advance the interests of the company and contribute to, subsidize or otherwise assist or take part in the construction, improvement, maintenance, working, management, carrying out of control thereof; to raise and assist in raising money for, and aid by way of bonus, loan, promise, endorsement, guarantee or otherwise, any person and guarantee the performance or fulfillment of any contracts or obligations of any person, and in particular guarantee the payment of the principal of and interest on the debt obligations of any such person; to borrow or raise or secure the payment of money in such manner as the company may think fit; to draw, make, accept, endorse, discount, execute and issue bills of exchange, promissory notes, bills of lading, warrants and other negotiable or transferable instruments; when properly authorized to do so, to sell, lease, exchange or otherwise dispose of the undertaking of the company or any part thereof as an entirety or substantially as an entirety for such consideration as the company thinks fit; to sell, improve, manage, develop, exchange, lease, dispose of, turn to account or otherwise deal with the property of the company in the ordinary course of its business; to adopt such means of making known the products of the company as may seem expedient, and in particular by advertising, by purchase and exhibition of works of art or interest, by publication of books and periodicals and by granting prizes and rewards and making donations; to cause the company to be registered and recognized in any foreign jurisdiction, and designate persons therein according to the laws of that foreign jurisdiction or to represent the company and to accept service for and on behalf of the company of any process or suit; to allot and issue fully-paid shares of the company in payment or part payment of any property purchased or otherwise acquired by the company or for any past services performed for the company; to distribute among the members of the company in cash, kind, specie or otherwise as may be resolved, by way of dividend; bonus or in any other manner considered advisable, any property of the company, but not so as to decrease the capital of the company unless the distribution is made for the purpose of enabling the company to be dissolved or the distribution, apart from this paragraph, would be otherwise lawful; to establish agencies and branches; to take or hold mortgages; hypothecs, liens and charges to secure payment of the purchase price, or of any unpaid balance of the purchase price, of any part of the property of the company of whatsoever kind sold by the company, or for any money due to the company from purchasers and others and to sell or otherwise dispose of any such mortgage, hypothec, lien or charge; to pay all costs and expenses of or incidental to the incorporation and organization of the company; to invest and deal with the moneys of the company not immediately required for the objects of the company in such manner as may be determined; to do any of the things authorized by this Schedule and all things authorized by its memorandum as principals, agents, contractors, trustees or otherwise, and either alone or in conjunction with others; to do all such other things as are incidental or conducive to the attainment of the objects and the exercise of the powers of the company. Every company may exercise its powers beyond the boundaries of Bermuda to the extent to which the laws in force where the powers are sought to be exercised permit. FORM NO. la [SEAL] BERMUDA THE COMPANIES ACT 1981 CONSENT PURSUANT TO SECTION 4A In exercise of the powers conferred upon him by section 4A of the Companies Act 1981, the Minister of Finance hereby gives his consent to:- TYCO HOLDINGS (BERMUDA) NO. 9 LIMITED to carry on restricted business activities in accordance with the Companies Act 1981 Dated this 25th day of February 2000 MINISTER OF FINANCE FORM NO. 13 [SEAL] BERMUDA THE COMPANIES ACT NOTICE OF ADDRESS OF REGISTERED OFFICE PURSUANT TO SECTION 62 Name of Company TYCO HOLDINGS (BERMUDA) NO. 9 LIMITED --------------------------------------------------------------- In accordance with section 62(2) of the Companies Act, 1981, I hereby give notice that the address of the registered office of the above-mentioned Company is The Zurich Centre, Second Floor - ------------------------------------------------------------------------------ 90 Pitts Bay Road - ------------------------------------------------------------------------------ Pembroke HM 08, Bermuda - ------------------------------------------------------------------------------ Signed ----------------- State whether Director or Secretary Secretary ------------------- Date 6 March 2000 -------------------------- EX-3.2 4 a2062535zex-3_2.txt EXHIBIT 3.2 EXHIBIT 3.2 B Y E - L A W S of TYCO CAPITAL LTD. (FORMERLY TYCO HOLDINGS (BERMUDA) NO. 9 LIMITED) I HEREBY CERTIFY that the within written Bye-Laws are a true copy of the Bye-Laws of TYCO CAPITAL LTD. (FORMERLY TYCO HOLDINGS (BERMUDA) NO. 9 LIMITED) as subscribed by the subscribers to the Memorandum of Association and approved at the Statutory meeting of the above Company on the 25th day of February 2000. Director Prepared by Messrs Appleby Spurling & Kempe Cedar House 41 Cedar Avenue Hamilton, Bermuda I N D E X
BYE-LAW SUBJECT PAGE - ------- ------- ---- 1 Interpretation 1-3 2 Registered Office 3 3,4 Share Rights 3,4 5,6 Modification of Rights 4 7-9 Shares 5 10-12 Certificates 5,6 13-15 Lien 6,7 16-21 Calls on Shares 7,8 22-28 Forfeiture of Shares 9,10 29 Register of Shareholders 11 30 Register of Directors and Officers 11 31-34 Transfer of Shares 11,12 35-38 Transmission of Shares 13,14 39-41 Increase of Capital 14,15 42,43 Alteration of Capital 15,16 44,45 Reduction of Capital 16 46 General Meetings and Written Resolutions 16,17 47,48 Notice of General Meetings 17,18 49-55 Proceedings at General Meetings 18-20 56-67 Voting 21-23 68-73 Proxies and Corporate Representatives 24-26 74-76 Appointment and Removal of Directors 26,27
BYE-LAW SUBJECT PAGE - ------- ------- ---- 77 Resignation and Disqualification of Directors 27 78-80 Alternate Directors 27,28 81 Directors' Fees and Additional Remuneration and Expenses 28,29 82 Directors' Interests 29,30 83-87 Powers and Duties of the Board 30-32 88-90 Delegation of the Board's Powers 32,33 91-99 Proceedings of the Board 33-36 100 Officers 36 101 Minutes 36,37 102,103 Secretary and Resident Representative 37 104 The Seal 37,38 105-111 Dividends and Other Payments 38-40 112 Reserves 41 113,114 Capitalization of Profits 41,42 115 Record Dates 42 116-118 Accounting Records 42,43 119 Audit 43 120-122 Service of Notices and Other Documents 43,44 123 Winding Up 45 124-128 Indemnity 45-47 129 Amalgamation 47 130 Continuation 48 131 Alteration of Bye-Laws 48
B Y E - L A W S of TYCO CAPITAL LTD. (formerly Tyco Holdings (Bermuda) No. 9 Limited) INTERPRETATION 1. (1) In these Bye-Laws unless the context otherwise requires - "BERMUDA" means the Islands of Bermuda; "BOARD" means the Board of Directors of the Company or the Directors present at a meeting of Directors at which there is a quorum; "THE COMPANIES ACTS" means every Bermuda statute from time to time in force concerning companies insofar as the same applies to the Company; "COMPANY" means the company incorporated in Bermuda under the name of TYCO HOLDINGS (BERMUDA) NO. 9 LIMITED on 25 February, 2000; change of name to TYCO CAPITAL LTD. effective 5 October, 2001; "DIRECTOR" means such person or persons as shall be appointed to the Board from time to time pursuant to Bye-Law 74. "OFFICER" means a person appointed by the Board pursuant to Bye-Law 100 of these Bye-Laws and shall not include an auditor of the Company; "PAID UP" means paid up or credited as paid up; "REGISTER" means the Register of Shareholders of the Company; "REGISTERED OFFICE" means the registered office for the time being of the Company; "RESIDENT REPRESENTATIVE" means the individual (or, if permitted in accordance with the Companies Acts, the company) appointed to perform the duties of resident representative set out in the Companies Acts and includes any assistant or deputy Resident Representative appointed by the Board to perform any of the duties of the Resident Representative; "RESOLUTION" means a resolution of the Shareholders or, where required, of a separate class or separate classes of Shareholders, adopted either in general meeting or by written resolution, in accordance with the provisions of these Bye-Laws; "SEAL" means the common seal of the Company and includes any duplicate thereof; "SECRETARY" includes a temporary or assistant or deputy Secretary and any person appointed by the Board to perform any of the duties of the Secretary; "SHAREHOLDER" means a shareholder or member of the Company; "THESE BYE-LAWS" means these Bye-Laws in their present form or as from time to time amended; (2) For the purposes of these Bye-Laws a corporation shall be deemed to be present in person if its representative duly authorised pursuant to the Companies Acts is present; (3) Words importing only the singular number include the plural number and vice versa; (4) Words importing only the masculine gender include the feminine and neuter genders respectively; (5) Words importing persons include companies or associations or bodies of persons, whether corporate or un-incorporate; (6) Reference to writing shall include typewriting, printing, lithography, photography and other modes of representing or reproducing words in a legible and non-transitory form; (7) Any words or expressions defined in the Companies Acts in force at the date when these Bye-Laws or any part thereof are adopted shall bear the same meaning in these Bye-Laws or such part (as the case may be). REGISTERED OFFICE 2. The Registered Office shall be at such place in Bermuda as the Board shall from time to time appoint. SHARE RIGHTS 3. Subject to any special rights conferred on the holders of any share or class of shares, any share in the Company may be issued with or have attached thereto such preferred, deferred, qualified or other special rights or such restrictions, whether in regard to dividend, voting, return of capital or otherwise, as the Company may by Resolution determine or, if there has not been any such determination or so far as the same shall not make specific provision, as the Board may determine. 4. (1) Subject to the Companies Acts, any preference shares may, with the sanction of a resolution of the Board, be issued on terms: (a) that they are to be redeemed on the happening of a specified event or on a given date; and/or, (b) that they are liable to be redeemed at the option of the Company; and/or, (c) if authorised by the memorandum/incorporating act of the Company, that they are liable to be redeemed at the option of the holder. The terms and manner of redemption shall be provided for in such resolution of the Board and shall be attached to but shall not form part of these Bye-Laws. (2) The Board may, at its discretion and without the sanction of a Resolution authorise the purchase by the Company of its own shares upon such terms as the Board may in its discretion determine PROVIDED ALWAYS that such purchase is effected in accordance with the provisions of the Companies Acts. MODIFICATION OF RIGHTS 5. Subject to the Companies Acts, all or any of the special rights for the time being attached to any class of shares for the time being issued may from time to time (whether or not the Company is being wound up) be altered or abrogated with the consent in writing of the holders of not less than seventy five percent of the issued shares of that class or with the sanction of a resolution passed at a separate general meeting of the holders of such shares voting in person or by proxy. To any such separate general meeting, all the provisions of these Bye-Laws as to general meetings of the Company shall MUTATIS MUTANDIS apply, but so that the necessary quorum shall be two or more persons holding or representing by proxy any of the shares of the relevant class, that every holder of shares of the relevant class shall be entitled on a poll to one vote for every such share held by him and that any holder of shares of the relevant class present in person or by proxy may demand a poll; provided, however, that if the Company or a class of Shareholders shall have only one Shareholder, one Shareholder present in person or by proxy shall constitute the necessary quorum. 6. The special rights conferred upon the holders of any shares or class of shares shall not, unless otherwise expressly provided in the rights attaching to or the terms of issue of such shares, be deemed to be altered by the creation or issue of further shares ranking pari passu therewith. SHARES 7. Subject to the provisions of these Bye-Laws, the unissued shares of the Company (whether forming part of the original capital or any increased capital) shall be at the disposal of the Board, which may offer, allot, grant options over or otherwise dispose of them to such persons, at such times and for such consideration and upon such terms and conditions as the Board may determine. 8. The Board may in connection with the issue of any shares exercise all powers of paying commission and brokerage conferred or permitted by law. 9. Except as ordered by a court of competent jurisdiction or as required by law, no person shall be recognised by the Company as holding any share upon trust and the Company shall not be bound by or required in any way to recognise (even when having notice thereof) any equitable, contingent, future or partial interest in any share or any interest in any fractional part of a share or (except only as otherwise provided in these Bye-Laws, or by law) any other right in respect of any share except an absolute right to the entirety thereof in the registered holder. CERTIFICATES 10. The preparation, issue and delivery of certificates shall be governed by the Companies Acts. In the case of a share held jointly by several persons, delivery of a certificate to one of several joint holders shall be sufficient delivery to all. 11. If a share certificate is defaced, lost or destroyed it may be replaced without fee but on such terms (if any) as to evidence and indemnity and to payment of the costs and out of pocket expenses of the Company in investigating such evidence and preparing such indemnity as the Board may think fit and, in case of defacement, on delivery of the old certificate to the Company. 12. All certificates for share or loan capital or other securities of the Company (other than letters of allotment, scrip certificates and other like documents) shall, except to the extent that the terms and conditions for the time being relating thereto otherwise provide, be issued under the Seal. The Board may by resolution determine, either generally or in any particular case, that any signatures on any such certificates need not be autographic but may be affixed to such certificates by some mechanical means or may be printed thereon or that such certificates need not be signed by any persons. LIEN 13. The Company shall have a first and paramount lien on every share (not being a fully paid share) for all moneys, whether presently payable or not, called or payable, at a date fixed by or in accordance with the terms of issue of such share in respect of such share, and the Company shall also have a first and paramount lien on every share (other than a fully paid share) standing registered in the name of a Shareholder, whether singly or jointly with any other person, for all the debts and liabilities of such Shareholder or his estate to the Company, whether the same shall have been incurred before or after notice to the Company of any interest of any person other than such Shareholder, and whether the time for the payment or discharge of the same shall have actually arrived or not, and notwithstanding that the same are joint debts or liabilities of such Shareholder or his estate and any other person, whether a Shareholder or not. The Company's lien on a share shall extend to all dividends payable thereon. The Board may at any time, either generally or in any particular case, waive any lien that has arisen or declare any share to be wholly or in part exempt from the provisions of this Bye-Law. 14. The Company may sell, in such manner as the Board may think fit, any share on which the Company has a lien but no sale shall be made unless some sum in respect of which the lien exists is presently payable nor until the expiration of fourteen days after a notice in writing, stating and demanding payment of the sum presently payable and giving notice of the intention to sell in default of such payment, has been served on the holder for the time being of the share. 15. The net proceeds of sale by the Company of any shares on which it has a lien shall be applied in or towards payment or discharge of the debt or liability in respect of which the lien exists so far as the same is presently payable, and any residue shall (subject to a like lien for debts or liabilities not presently payable as existed upon the share prior to the sale) be paid to the person who was the holder of the share immediately before such sale. For giving effect to any such sale the Board may authorise some person to transfer the share sold to the purchaser thereof. The purchaser shall be registered as the holder of the share and he shall not be bound to see to the application of the purchase money, nor shall his title to the share be affected by any irregularity or invalidity in the proceedings relating to the sale. CALLS ON SHARES 16. The Board may from time to time make calls upon the Shareholders in respect of any moneys unpaid on their shares (whether on account of the par value of the shares or by way of premium) and not by the terms of issue thereof made payable at a date fixed by or in accordance with such terms of issue, and each Shareholder shall (subject to the Company serving upon him at least fourteen days notice specifying the time or times and place of payment) pay to the Company at the time or times and place so specified the amount called on his shares. A call may be revoked or postponed as the Board may determine. 17. A call may be made payable by instalments and shall be deemed to have been made at the time when the resolution of the Board authorising the call was passed. 18. The joint holders of a share shall be jointly and severally liable to pay all calls in respect thereof. 19. If a sum called in respect of the share shall not be paid before or on the day appointed for payment thereof the person from whom the sum is due shall pay interest on the sum from the day appointed for the payment thereof to the time of actual payment at such rate as the Board may determine, but the Board shall be at liberty to waive payment of such interest wholly or in part. 20. Any sum which, by the terms of issue of a share, becomes payable on allotment or at any date fixed by or in accordance with such terms of issue, whether on account of the nominal amount of the share or by way of premium, shall for all the purposes of these Bye-Laws be deemed to be a call duly made, notified and payable on the date on which, by the terms of issue, the same becomes payable and, in case of non-payment, all the relevant provisions of these Bye-Laws as to payment of interest, forfeiture or otherwise shall apply as if such sum had become payable by virtue of a call duly made and notified. 21. The Board may on the issue of shares differentiate between the allottees or holders as to the amount of calls to be paid and the times of payment. FORFEITURE OF SHARES 22. If a Shareholder fails to pay any call or instalment of a call on the day appointed for payment thereof, the Board may at any time thereafter during such time as any part of such call or instalment remains unpaid serve a notice on him requiring payment of so much of the call or instalment as is unpaid, together with any interest which may have accrued. 23. The notice shall name a further day (not being less than 14 days from the date of the notice) on or before which, and the place where, the payment required by the notice is to be made and shall state that, in the event of non-payment on or before the day and at the place appointed, the shares in respect of which such call is made or instalment is payable will be liable to be forfeited. The Board may accept the surrender of any share liable to be forfeited hereunder and, in such case, references in these Bye-Laws to forfeiture shall include surrender. 24. If the requirements of any such notice as aforesaid are not complied with, any share in respect of which such notice has been given may at any time thereafter, before payment of all calls or instalments and interest due in respect thereof has been made, be forfeited by a resolution of the Board to that effect. Such forfeiture shall include all dividends declared in respect of the forfeited shares and not actually paid before the forfeiture. 25. When any share has been forfeited, notice of the forfeiture shall be served upon the person who was before forfeiture the holder of the share; but no forfeiture shall be in any manner invalidated by any omission or neglect to give such notice as aforesaid. 26. A forfeited share shall be deemed to be the property of the Company and may be sold, re-offered or otherwise disposed of either to the person who was, before forfeiture, the holder thereof or entitled thereto or to any other person upon such terms and in such manner as the Board shall think fit, and at any time before a sale, re-allotment or disposition the forfeiture may be cancelled on such terms as the Board may think fit. 27. A person whose shares have been forfeited shall thereupon cease to be a Shareholder in respect of the forfeited shares but shall, notwithstanding the forfeiture, remain liable to pay to the Company all moneys which at the date of forfeiture were presently payable by him to the Company in respect of the shares with interest thereon at such rate as the Board may determine from the date of forfeiture until payment, and the Company may enforce payment without being under any obligation to make any allowance for the value of the shares forfeited. 28. An affidavit in writing that the deponent is a Director of the Company or the Secretary and that a share has been duly forfeited on the date stated in the affidavit shall be conclusive evidence of the facts therein stated as against all persons claiming to be entitled to the share. The Company may receive the consideration (if any) given for the share on the sale, re-allotment or disposition thereof and the Board may authorise some person to transfer the share to the person to whom the same is sold, re-allotted or disposed of, and he shall thereupon be registered as the holder of the share and shall not be bound to see to the application of the purchase money (if any) nor shall his title to the share be affected by any irregularity or invalidity in the proceedings relating to the forfeiture, sale, re-allotment or disposal of the share. REGISTER OF SHAREHOLDERS 29. The Secretary shall establish and maintain the Register at the Registered Office in the manner prescribed by the Companies Acts. Unless the Board otherwise determines, the Register shall be open to inspection in the manner prescribed by the Companies Acts between 10.00 a.m. and 12.00 noon on every working day. Unless the Board so determines, no Shareholder or intending Shareholder shall be entitled to have entered in the Register any indication of any trust or any equitable, contingent, future or partial interest in any share or any interest in any fractional part of a share and if any such entry exists or is permitted by the Board it shall not be deemed to abrogate any of the provisions of Bye-Law 9. REGISTER OF DIRECTORS AND OFFICERS 30. The Secretary shall establish and maintain a register of the Directors and Officers of the Company as required by the Companies Acts. The register of Directors and Officers shall be open to inspection in the manner prescribed by the Companies Acts between 10:00 a.m. and 12:00 noon on every working day. TRANSFER OF SHARES 31. Subject to the Companies Acts and to such of the restrictions contained in these Bye-Laws as may be applicable, any Shareholder may transfer all or any of his shares by an instrument of transfer in the usual common form or in any other form which the Board may approve. 32. The instrument of transfer of a share shall be signed by or on behalf of the transferor and where any share is not fully-paid, the transferee and the transferor shall be deemed to remain the holder of the share until the name of the transferee is entered in the Register in respect thereof. All instruments of transfer when registered may be retained by the Company. The Board may, in its absolute discretion and without assigning any reason therefor, decline to register any transfer of any share which is not a fully-paid share. The Board may also decline to register any transfer unless:- (1) the instrument of transfer is duly stamped and lodged with the Company, accompanied by the certificate for the shares to which it relates, and such other evidence as the Board may reasonably require to show the right of the transferor to make the transfer, (2) the instrument of transfer is in respect of only one class of share, (3) where applicable, the permission of the Bermuda Monetary Authority with respect thereto has been obtained. Subject to any directions of the Board from time to time in force, the Secretary may exercise the powers and discretions of the Board under this Bye-Law and Bye-Laws 31 and 33. 33. If the Board declines to register a transfer it shall, within three months after the date on which the instrument of transfer was lodged, send to the transferee notice of such refusal. 34. No fee shall be charged by the Company for registering any transfer, probate, letters of administration, certificate of death or marriage, power of attorney, distringas or stop notice, order of court or other instrument relating to or affecting the title to any share, or otherwise making an entry in the Register relating to any share. TRANSMISSION OF SHARES 35. In the case of the death of a Shareholder, the survivor or survivors, where the deceased was a joint holder, and the estate representative, where he was sole holder, shall be the only person recognised by the Company as having any title to his shares; but nothing herein contained shall release the estate of a deceased holder (whether the sole or joint) from any liability in respect of any share held by him solely or jointly with other persons. For the purpose of this Bye-Law, estate representative means the person to whom probate or letters of administration has or have been granted in Bermuda or, failing any such person, such other person as the Board may in its absolute discretion determine to be the person recognised by the Company for the purpose of this Bye-Law. 36. Any person becoming entitled to a share in consequence of the death of a Shareholder or otherwise by operation of applicable law may, subject as hereafter provided and upon such evidence being produced as may from time to time be required by the Board as to his entitlement, either be registered himself as the holder of the share or elect to have some person nominated by him registered as the transferee thereof. If the person so becoming entitled elects to be registered himself, he shall deliver or send to the Company a notice in writing signed by him stating that he so elects. If he shall elect to have his nominee registered, he shall signify his election by signing an instrument of transfer of such share in favour of his nominee. All the limitations, restrictions and provisions of these Bye-Laws relating to the right to transfer and the registration of transfer of shares shall be applicable to any such notice or instrument of transfer as aforesaid as if the death of the Shareholder or other event giving rise to the transmission had not occurred and the notice or instrument of transfer was an instrument of transfer signed by such Shareholder. 37. A person becoming entitled to a share in consequence of the death of a Shareholder or otherwise by operation of applicable law shall (upon such evidence being produced as may from time to time be required by the Board as to his entitlement) be entitled to receive and may give a discharge for any dividends or other moneys payable in respect of the share, but he shall not be entitled in respect of the share to receive notices of or to attend or vote at general meetings of the Company or, save as aforesaid, to exercise in respect of the share any of the rights or privileges of a Shareholder until he shall have become registered as the holder thereof. The Board may at any time give notice requiring such person to elect either to be registered himself or to transfer the share and, if the notice is not complied with within sixty days, the Board may thereafter withhold payment of all dividends and other moneys payable in respect of the shares until the requirements of the notice have been complied with. 38. Subject to any directions of the Board from time to time in force, the Secretary may exercise the powers and discretions of the Board under Bye-Laws 35, 36 and 37. INCREASE OF CAPITAL 39. The Company may from time to time increase its capital by such sum to be divided into shares of such par value as the Company by Resolution shall prescribe. 40. The Company may, by the Resolution increasing the capital, direct that the new shares or any of them shall be offered in the first instance either at par or at a premium or (subject to the provisions of the Companies Acts) at a discount to all the holders for the time being of shares of any class or classes in proportion to the number of such shares held by them respectively or make any other provision as to the issue of the new shares. 41. The new shares shall be subject to all the provisions of these Bye-Laws with reference to lien, the payment of calls, forfeiture, transfer, transmission and otherwise. ALTERATION OF CAPITAL 42. The Company may from time to time by Resolution:- (1) divide its shares into several classes and attach thereto respectively any preferential, deferred, qualified or special rights, privileges or conditions; (2) consolidate and divide all or any of its share capital into shares of larger par value than its existing shares; (3) sub-divide its shares or any of them into shares of smaller par value than is fixed by its memorandum, so, however, that in the sub-division the proportion between the amount paid and the amount, if any, unpaid on each reduced share shall be the same as it was in the case of the share from which the reduced share is derived; (4) make provision for the issue and allotment of shares which do not carry any voting rights; (5) cancel shares which, at the date of the passing of the Resolution in that behalf, have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so cancelled; and (6) change the currency denomination of its share capital. Where any difficulty arises in regard to any division, consolidation, or sub-division under this Bye-Law, the Board may settle the same as it thinks expedient and, in particular, may arrange for the sale of the shares representing fractions and the distribution of the net proceeds of sale in due proportion amongst the Shareholders who would have been entitled to the fractions, and for this purpose the Board may authorise some person to transfer the shares representing fractions to the purchaser thereof, who shall not be bound to see to the application of the purchase money nor shall his title to the shares be affected by any irregularity or invalidity in the proceedings relating to the sale. 43. Subject to the Companies Acts and to any confirmation or consent required by law or these Bye-Laws, the Company may by Resolution from time to time convert any preference shares into redeemable preference shares. REDUCTION OF CAPITAL 44. Subject to the Companies Acts, its memorandum and any confirmation or consent required by law or these Bye-Laws, the Company may from time to time by Resolution authorise the reduction of its issued share capital or any share premium or contributed surplus account in any manner. 45. In relation to any such reduction, the Company may by Resolution determine the terms upon which such reduction is to be effected including, in the case of a reduction of part only of a class of shares, those shares to be affected. GENERAL MEETINGS AND WRITTEN RESOLUTIONS 46. (1) The Board shall convene and the Company shall hold general meetings as Annual General Meetings in accordance with the requirements of the Companies Acts at such times and places as the Board shall appoint. The Board may, whenever it thinks fit, and shall, when required by the Companies Acts, convene general meetings other than Annual General Meetings which shall be called Special General Meetings. (2) Except in the case of the removal of auditors or Directors, anything which may be done by resolution in general meeting may, without a meeting and without any previous notice being required, be done by resolution in writing, signed by all of the Shareholders or any class thereof or their proxies, or in the case of a Shareholder that is a corporation (whether or not a company within the meaning of the Companies Acts) on behalf of such Shareholder, being all of the Shareholders of the Company or any class thereof who at the date of the resolution in writing would be entitled to attend a meeting and vote on the resolution. Such resolution in writing may be signed in as many counterparts as may be necessary. (3) For the purposes of this Bye-Law, the date of the resolution in writing is the date when the resolution is signed by, or on behalf of, the last Shareholder to sign and any reference in any enactment to the date of passing of a resolution is, in relation to a resolution in writing made in accordance with this section, a reference to such date. (4) A resolution in writing made in accordance with this Bye-Law is as valid as if it had been passed by the Company in general meeting or, if applicable, by a meeting of the relevant class of Shareholders of the Company, as the case may be. A resolution in writing made in accordance with this section shall constitute minutes for the purposes of the Companies Acts and these Bye-Laws. NOTICE OF GENERAL MEETINGS 47. An Annual General Meeting shall be called by not less than 5 days notice in writing and a Special General Meeting shall be called by not less than 5 days notice in writing. The notice shall be exclusive of the day on which it is served or deemed to be served and of the day for which it is given, and shall specify the place, day and time of the meeting, and, the nature of the business to be considered. Notice of every general meeting shall be given in any manner permitted by Bye-Laws 120 and 121 to all Shareholders other than such as, under the provisions of these Bye-Laws or the terms of issue of the shares they hold, are not entitled to receive such notice from the Company and to any Director or Resident Representative who or which has delivered a written notice upon the Registered Office requiring that such notice be sent to him or it. Notwithstanding that a meeting of the Company is called by shorter notice than that specified in this Bye-Law, it shall be deemed to have been duly called if it is so agreed:- (1) in the case of a meeting called as an Annual General Meeting, by all the Shareholders entitled to attend and vote thereat; (2) in the case of any other meeting, by a majority in number of the Shareholders having the right to attend and vote at the meeting, being a majority together holding not less than 95 percent in nominal value of the shares giving that right. 48. The accidental omission to give notice of a meeting or (in cases where instruments of proxy are sent out with the notice) the accidental omission to send such instrument of proxy to, or the non-receipt of notice of a meeting or such instrument of proxy by, any person entitled to receive such notice shall not invalidate the proceedings at that meeting. PROCEEDINGS AT GENERAL MEETINGS 49. No business shall be transacted at any general meeting unless a quorum is present when the meeting proceeds to business, but the absence of a quorum shall not preclude the appointment, choice or election of a chairman which shall not be treated as part of the business of the meeting. Save as otherwise provided by these Bye-Laws, at least two Shareholders present in person or by proxy and entitled to vote shall be a quorum for all purposes; provided, however, that if the Company or a class of Shareholders shall have only one Shareholder, one Shareholder present in person or by proxy shall constitute the necessary quorum. 50. If within five minutes (or such longer time as the chairman of the meeting may determine to wait) after the time appointed for the meeting, a quorum is not present, the meeting, if convened on the requisition of Shareholders, shall be dissolved. In any other case, it shall stand adjourned to such other day and such other time and place as the chairman of the meeting may determine and at such adjourned meeting two Shareholders present in person or by proxy shall be a quorum provided that if the Company or a class of Shareholders shall have only one Shareholder, one Shareholder present in person or by proxy shall constitute the necessary quorum. The Company shall give not less than 5 days notice of any meeting adjourned through want of a quorum and such notice shall state that the sole Shareholder or, if more than one, two Shareholders present in person or by proxy (whatever the number of shares held by them) shall be a quorum. 51. A meeting of the Shareholders or any class thereof may be held by means of such telephone, electronic or other communication facilities as permit all persons participating in the meeting to communicate with each other simultaneously and instantaneously and participation in such a meeting shall constitute presence in person at such meeting. 52. Each Director upon giving the notice referred to in Bye-Law 47 above, and the Resident Representative, if any, shall be entitled to attend and speak at any general meeting of the Company. 53. The Chairman (if any) of the Board or, in his absence, the President shall preside as chairman at every general meeting. If there is no such Chairman or President, or if at any meeting neither the Chairman nor the President is present within five minutes after the time appointed for holding the meeting, or if neither of them is willing to act as chairman, the Directors present shall choose one of their number to act or if one Director only is present he shall preside as chairman if willing to act. If no Director is present, or if each of the Directors present declines to take the chair, the persons present and entitled to vote on a poll shall elect one of their number to be chairman. 54. The chairman of the meeting may, with the consent of any meeting at which a quorum is present (and shall if so directed by the meeting), adjourn the meeting from time to time and from place to place but no business shall be transacted at any adjourned meeting except business which might lawfully have been transacted at the meeting from which the adjournment took place. When a meeting is adjourned for three months or more, notice of the adjourned meeting shall be given as in the case of an original meeting. 55. Save as expressly provided by these Bye-Laws, it shall not be necessary to give any notice of an adjournment or of the business to be transacted at an adjourned meeting. VOTING 56. Save where a greater majority is required by the Companies Acts or these Bye-Laws, any question proposed for consideration at any general meeting shall be decided on by a simple majority of votes cast. 57. At any general meeting, a resolution put to the vote of the meeting shall be decided on a show of hands unless (before or on the declaration of the result of the show of hands or on the withdrawal of any other demand for a poll) a poll is demanded by:- (1) the chairman of the meeting; or (2) at least three Shareholders present in person or represented by proxy; or (3) any Shareholder or Shareholders present in person or represented by proxy and holding between them not less than one tenth of the total voting rights of all the Shareholders having the right to vote at such meeting; or (4) a Shareholder or Shareholders present in person or represented by proxy holding shares conferring the right to vote at such meeting, being shares on which an aggregate sum has been paid up equal to not less than one tenth of the total sum paid up on all such shares conferring such right. The demand for a poll may be withdrawn by the person or any of the persons making it at any time prior to the declaration of the result. Unless a poll is so demanded and the demand is not withdrawn, a declaration by the chairman that a resolution has, on a show of hands, been carried or carried unanimously or by a particular majority or not carried by a particular majority or lost shall be final and conclusive, and an entry to that effect in the minute book of the Company shall be conclusive evidence of the fact without proof of the number or proportion of votes recorded for or against such resolution. 58. If a poll is duly demanded, the result of the poll shall be deemed to be the resolution of the meeting at which the poll is demanded. 59. A poll demanded on the election of a chairman, or on a question of adjournment, shall be taken forthwith. A poll demanded on any other question shall be taken in such manner and either forthwith or at such time (being not later than three months after the date of the demand) and place as the chairman shall direct. It shall not be necessary (unless the chairman otherwise directs) for notice to be given of a poll. 60. The demand for a poll shall not prevent the continuance of a meeting for the transaction of any business other than the question on which the poll has been demanded and it may be withdrawn at any time before the close of the meeting or the taking of the poll, whichever is the earlier. 61. On a poll, votes may be cast either personally or by proxy. 62. A person entitled to more than one vote on a poll need not use all his votes or cast all the votes he uses in the same way. 63. In the case of an equality of votes at a general meeting, whether on a show of hands or on a poll, the chairman of such meeting shall not be entitled to a second or casting vote and the resolution shall fail. 64. In the case of joint holders of a share, the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders, and for this purpose seniority shall be determined by the order in which the names stand in the Register in respect of the joint holding. 65. A Shareholder who is a patient for any purpose of any statute or applicable law relating to mental health or in respect of whom an order has been made by any Court having jurisdiction for the protection or management of the affairs of persons incapable of managing their own affairs may vote, whether on a show of hands or on a poll, by his receiver, committee, CURATOR BONIS or other person in the nature of a receiver, committee or CURATOR BONIS appointed by such Court and such receiver, committee, CURATOR BONIS or other person may vote on a poll by proxy, and may otherwise act and be treated as such Shareholder for the purpose of general meetings. 66. No Shareholder shall, unless the Board otherwise determines, be entitled to vote at any general meeting unless all calls or other sums presently payable by him in respect of shares in the Company have been paid. 67. If; (1) any objection shall be raised to the qualification of any voter; or, (2) any votes have been counted which ought not to have been counted or which might have been rejected; or, (3) any votes are not counted which ought to have been counted, the objection or error shall not vitiate the decision of the meeting or adjourned meeting on any resolution unless the same is raised or pointed out at the meeting or, as the case may be, the adjourned meeting at which the vote objected to is given or tendered or at which the error occurs. Any objection or error shall be referred to the chairman of the meeting and shall only vitiate the decision of the meeting on any resolution if the chairman decides that the same may have affected the decision of the meeting. The decision of the chairman on such matters shall be final and conclusive. PROXIES AND CORPORATE REPRESENTATIVES 68. The instrument appointing a proxy shall be in writing under the hand of the appointor or of his attorney authorised by him in writing or, if the appointor is a corporation, either under its seal or under the hand of an officer, attorney or other person authorised to sign the same. 69. Any Shareholder may appoint a standing proxy or (if a corporation) representative by depositing at the Registered Office a proxy or (if a corporation) an authorisation and such proxy or authorisation shall be valid for all general meetings and adjournments thereof or, resolutions in writing, as the case may be, until notice of revocation is received at the Registered Office. Where a standing proxy or authorisation exists, its operation shall be deemed to have been suspended at any general meeting or adjournment thereof at which the Shareholder is present or in respect to which the Shareholder has specially appointed a proxy or representative. The Board may from time to time require such evidence as it shall deem necessary as to the due execution and continuing validity of any such standing proxy or authorisation and the operation of any such standing proxy or authorisation shall be deemed to be suspended until such time as the Board determines that it has received the requested evidence or other evidence satisfactory to it. 70. Subject to Bye-Law 69, the instrument appointing a proxy together with such other evidence as to its due execution as the Board may from time to time require, shall be delivered at the Registered Office (or at such place as may be specified in the notice convening the meeting or in any notice of any adjournment or, in either case or the case of a written resolution, in any document sent therewith) prior to the holding of the relevant meeting or adjourned meeting at which the person named in the instrument proposes to vote or, in the case of a poll taken subsequently to the date of a meeting or adjourned meeting, before the time appointed for the taking of the poll, or, in the case of a written resolution, prior to the effective date of the written resolution and in default the instrument of proxy shall not be treated as valid. 71. Instruments of proxy shall be in any common form or in such other form as the Board may approve and the Board may, if it thinks fit, send out with the notice of any meeting or any written resolution forms of instruments of proxy for use at that meeting or in connection with that written resolution. The instrument of proxy shall be deemed to confer authority to demand or join in demanding a poll and to vote on any amendment of a written resolution or amendment of a resolution put to the meeting for which it is given as the proxy thinks fit. The instrument of proxy shall unless the contrary is stated therein be valid as well for any adjournment of the meeting as for the meeting to which it relates. 72. A vote given in accordance with the terms of an instrument of proxy shall be valid notwithstanding the previous death or unsoundness of mind of the principal, or revocation of the instrument of proxy or of the authority under which it was executed, provided that no intimation in writing of such death, unsoundness of mind or revocation shall have been received by the Company at the Registered Office (or such other place as may be specified for the delivery of instruments of proxy in the notice convening the meeting or other documents sent therewith) one hour at least before the commencement of the meeting or adjourned meeting, or the taking of the poll, or the day before the effective date of any written resolution at which the instrument of proxy is used. 73. Subject to the Companies Acts, the Board may at its discretion waive any of the provisions of these Bye-Laws related to proxies or authorisations and, in particular, may accept such verbal or other assurances as it thinks fit as to the right of any person to attend and vote on behalf of any Shareholder at general meetings or to sign written resolutions. APPOINTMENT AND REMOVAL OF DIRECTORS 74. The number of Directors shall be such number not less than two as the Company by Resolution may from time to time determine and, subject to the Companies Acts and these Bye-Laws, the Directors shall serve until the termination of the next Annual General Meeting following their appointment. All Directors, upon election or appointment (except upon election at an Annual General Meeting), must provide written acceptance of their appointment, in such form as the Board may think fit, by notice in writing to the Registered Office within thirty days of their appointment. 75. The Company shall at the Annual General Meeting and may by Resolution determine the minimum and the maximum number of Directors and may by Resolution determine that one or more vacancies in the Board shall be deemed casual vacancies for the purposes of these Bye-Laws. Without prejudice to the power of the Company by Resolution in pursuance of any of the provisions of these Bye-Laws to appoint any person to be a Director, the Board, so long as a quorum of Directors remains in office, shall have power at any time and from time to time to appoint any individual to be a Director so as to fill a casual vacancy. 76. The Company may in a Special General Meeting called for that purpose remove a Director provided notice of any such meeting shall be served upon the Director concerned not less than 14 days before the meeting and he shall be entitled to be heard at that meeting. Any vacancy created by the removal of a Director at a Special General Meeting may be filled at the Meeting by the election of another Director in his place or, in the absence of any such election, by the Board. RESIGNATION AND DISQUALIFICATION OF DIRECTORS 77. The office of a Director shall be vacated upon the happening of any of the following events: (1) if he resigns his office by notice in writing delivered to the Registered Office or tendered at a meeting of the Board; (2) if he becomes of unsound mind or a patient for any purpose of any statute or applicable law relating to mental health and the Board resolves that his office is vacated; (3) if he becomes bankrupt under the laws of any country or compounds with his creditors; (4) if he is prohibited by law from being a Director; (5) if he ceases to be a Director by virtue of the Companies Acts or is removed from office pursuant to these Bye-Laws. ALTERNATE DIRECTORS 78. A Director may appoint and remove his own Alternate Director. Any appointment or removal of an Alternate Director by a Director shall be effected by depositing a notice of appointment or removal with the Secretary at the Registered Office, signed by such Director, and such appointment or removal shall become effective on the date of receipt by the Secretary. Any Alternate Director may be removed by resolution of the Board. Subject as aforesaid, the office of Alternate Director shall continue until the next annual election of Directors or, if earlier, the date on which the relevant Director ceases to be a Director. An Alternate Director may also be a Director in his own right and may act as alternate to more than one Director. 79. An Alternate Director shall be entitled to receive notices of all meetings of Directors, to attend, be counted in the quorum and vote at any such meeting at which any Director to whom he is alternate is not personally present, and generally to perform all the functions of any Director to whom he is alternate in his absence. 80. Every person acting as an Alternate Director shall (except as regards powers to appoint an alternate and remuneration) be subject in all respects to the provisions of these Bye-Laws relating to Directors and shall alone be responsible to the Company for his acts and defaults and shall not be deemed to be the agent of or for any Director for whom he is alternate. An Alternate Director may be paid expenses and shall be entitled to be indemnified by the Company to the same extent mutatis mutandis as if he were a Director. Every person acting as an Alternate Director shall have one vote for each Director for whom he acts as alternate (in addition to his own vote if he is also a Director). The signature of an Alternate Director to any resolution in writing of the Board or a committee of the Board shall, unless the terms of his appointment provides to the contrary, be as effective as the signature of the Director or Directors to whom he is alternate. DIRECTORS' FEES AND ADDITIONAL REMUNERATION AND EXPENSES 81. The amount, if any, of Directors' fees shall from time to time be determined by the Company by Resolution and in the absence of a determination to the contrary such fees shall be deemed to accrue from day to day. Each Director may be paid his reasonable travel, hotel and incidental expenses in attending and returning from meetings of the Board or committees constituted pursuant to these Bye-Laws or general meetings and shall be paid all expenses properly and reasonably incurred by him in the conduct of the Company's business or in the discharge of his duties as a Director. Any Director who, by request, goes or resides abroad for any purposes of the Company or who performs services which in the opinion of the Board go beyond the ordinary duties of a Director may be paid such extra remuneration (whether by way of salary, commission, participation in profits or otherwise) as the Board may determine, and such extra remuneration shall be in addition to any remuneration provided for by or pursuant to any other Bye-Law. DIRECTORS' INTERESTS 82. (1) A Director may hold any other office or place of profit with the Company (except that of auditor) in conjunction with his office of Director for such period and upon such terms as the Board may determine, and may be paid such extra remuneration therefor (whether by way of salary, commission, participation in profits or otherwise) as the Board may determine, and such extra remuneration shall be in addition to any remuneration provided for by or pursuant to any other Bye-Law. (2) A Director may act by himself or his firm in a professional capacity for the Company (otherwise than as auditor) and he or his firm shall be entitled to remuneration for professional services as if he were not a Director. (3) Subject to the provisions of the Companies Acts, a Director may notwithstanding his office be a party to, or otherwise interested in, any transaction or arrangement with the Company or in which the Company is otherwise interested; and be a director or other officer of, or employed by, or a party to any transaction or arrangement with, or otherwise interested in, any body corporate promoted by the Company or in which the Company is interested. The Board may also cause the voting power conferred by the shares in any other company held or owned by the Company to be exercised in such manner in all respects as it thinks fit, including the exercise thereof in favour of any resolution appointing the Directors or any of them to be directors or officers of such other company, or voting or providing for the payment of remuneration to the directors or officers of such other company. (4) So long as, where it is necessary, he declares the nature of his interest at the first opportunity at a meeting of the Board or by writing to the Directors as required by the Companies Acts, a Director shall not by reason of his office be accountable to the Company for any benefit which he derives from any office or employment to which these Bye-Laws allow him to be appointed or from any transaction or arrangement in which these Bye-Laws allow him to be interested, and no such transaction or arrangement shall be liable to be avoided on the ground of any interest or benefit. (5) Subject to the Companies Acts and any further disclosure required thereby, a general notice to the Directors by a Director or Officer declaring that he is a director or officer or has an interest in a person and is to be regarded as interested in any transaction or arrangement made with that person, shall be a sufficient declaration of interest in relation to any transaction or arrangement so made. POWERS AND DUTIES OF THE BOARD 83. Subject to the provisions of the Companies Acts and these Bye-Laws and to any directions given by the Company by Resolution, the Board shall manage the business of the Company and may pay all expenses incurred in promoting and incorporating the Company and may exercise all the powers of the Company. No alteration of these Bye-Laws and no such direction shall invalidate any prior act of the Board which would have been valid if that alteration had not been made or that direction had not been given. The powers given by this Bye-Law shall not be limited by any special power given to the Board by these Bye-Laws and a meeting of the Board at which a quorum is present shall be competent to exercise all the powers, authorities and discretions for the time being vested in or exercisable by the Board. 84. The Board may exercise all the powers of the Company to borrow money and to mortgage or charge all or any part of the undertaking, property and assets (present and future) and uncalled capital of the Company and to issue debentures and other securities, whether outright or as collateral security for any debt, liability or obligation of the Company or of any other persons. 85. All cheques, promissory notes, drafts, bills of exchange and other instruments, whether negotiable or transferable or not, and all receipts for money paid to the Company shall be signed, drawn, accepted, endorsed or otherwise executed, as the case may be, in such manner as the Board shall from time to time by resolution determine. 86. The Board on behalf of the Company may provide benefits, whether by the payment of gratuities or pensions or otherwise, for any person including any Director or former Director who has held any executive office or employment with the Company or with any body corporate which is or has been a subsidiary or affiliate of the Company or a predecessor in the business of the Company or of any such subsidiary or affiliate, and to any member of his family or any person who is or was dependent on him, and may contribute to any fund and pay premiums for the purchase or provision of any such gratuity, pension or other benefit, or for the insurance of any such person. 87. The Board may from time to time appoint one or more of its body to be a managing director, joint managing director or an assistant managing director or to hold any other employment or executive office with the Company for such period and upon such terms as the Board may determine and may revoke or terminate any such appointments. Any such revocation or termination as aforesaid shall be without prejudice to any claim for damages that such Director may have against the Company or the Company may have against such Director for any breach of any contract of service between him and the Company which may be involved in such revocation or termination. Any person so appointed shall receive such remuneration (if any) (whether by way of salary, commission, participation in profits or otherwise) as the Board may determine, and either in addition to or in lieu of his remuneration as a Director. DELEGATION OF THE BOARD'S POWERS 88. The Board may by power of attorney appoint any company, firm or person or any fluctuating body of persons, whether nominated directly or indirectly by the Board, to be the attorney or attorneys of the Company for such purposes and with such powers, authorities and discretions (not exceeding those vested in or exercisable by the Board under these Bye-Laws) and for such period and subject to such conditions as it may think fit, and any such power of attorney may contain such provisions for the protection and convenience of persons dealing with any such attorney and of such attorney as the Board may think fit, and may also authorise any such attorney to sub-delegate all or any of the powers, authorities and discretions vested in him. 89. The Board may entrust to and confer upon any Director, Officer or, without prejudice to the provisions of Bye-Law 90, other individual any of the powers exercisable by it upon such terms and conditions with such restrictions as it thinks fit, and either collaterally with, or to the exclusion of, its own powers, and may from time to time revoke or vary all or any of such powers but no person dealing in good faith and without notice of such revocation or variation shall be affected thereby. 90. The Board may delegate any of its powers, authorities and discretions to committees, consisting of such person or persons (whether a member or members of its body or not) as it thinks fit. Any committee so formed shall, in the exercise of the powers, authorities and discretions so delegated, and in conducting its proceedings conform to any regulations which may be imposed upon it by the Board. If no regulations are imposed by the Board the proceedings of a committee with two or more members shall be, as far as is practicable, governed by the Bye-Laws regulating the proceedings of the Board. PROCEEDINGS OF THE BOARD 91. The Board may meet for the despatch of business, adjourn and otherwise regulate its meetings as it thinks fit. Questions arising at any meeting shall be determined by a majority of votes. In the case of an equality of votes the motion shall be deemed to have been lost. A Director may, and the Secretary on the requisition of a Director shall, at any time summon a meeting of the Board. 92. Notice of a meeting of the Board shall be deemed to be duly given to a Director if it is given to him personally or by word of mouth or sent to him by post, cable, telex, telecopier or other mode of representing or reproducing words in a legible and non-transitory form at his last known address or any other address given by him to the Company for this purpose. A Director may retrospectively waive the requirement for notice of any meeting by consenting in writing to the business conducted at the meeting. 93. (1) The quorum necessary for the transaction of the business of the Board may be fixed by the Board and, unless so fixed at any other number, shall be two individuals. Any Director who ceases to be a Director at a meeting of the Board may continue to be present and to act as a Director and be counted in the quorum until the termination of the meeting if no other Director objects and if otherwise a quorum of Directors would not be present. (2) A Director who to his knowledge is in any way, whether directly or indirectly, interested in a contract or proposed contract, transaction or arrangement with the Company and has complied with the provisions of the Companies Acts and these Bye-Laws with regard to disclosure of his interest shall be entitled to vote in respect of any contract, transaction or arrangement in which he is so interested and if he shall do so his vote shall be counted, and he shall be taken into account in ascertaining whether a quorum is present. (3) The Resident Representative shall, upon delivering written notice of an address for the purposes of receipt of notice, to the Registered Office, be entitled to receive notice of, attend and be heard at, and to receive minutes of all meetings of the Board. 94. So long as a quorum of Directors remains in office, the continuing Directors may act notwithstanding any vacancy in the Board but, if no such quorum remains, the continuing Directors or a sole continuing Director may act only for the purpose of calling a general meeting. 95. The Chairman (or President) or, in his absence, the Deputy Chairman (or Vice-President), shall preside as chairman at every meeting of the Board. If at any meeting the Chairman or Deputy Chairman (or the President or Vice-President) is not present within five minutes after the time appointed for holding the meeting, or is not willing to act as chairman, the Directors present may choose one of their number to be chairman of the meeting. 96. The meetings and proceedings of any committee consisting of two or more members shall be governed by the provisions contained in these Bye-Laws for regulating the meetings and proceedings of the Board so far as the same are applicable and are not superseded by any regulations imposed by the Board. 97. A resolution in writing signed by all the Directors for the time being entitled to receive notice of a meeting of the Board or by all the members of a committee for the time being shall be as valid and effectual as a resolution passed at a meeting of the Board or, as the case may be, of such committee duly called and constituted. Such resolution may be contained in one document or in several documents in the like form each signed by one or more of the Directors or members of the committee concerned. 98. A meeting of the Board or a committee appointed by the Board may be held by means of such telephone, electronic or other communication facilities as permit all persons participating in the meeting to communicate with each other simultaneously and instantaneously and participation in such a meeting shall constitute presence in person at such meeting. 99. All acts done by the Board or by any committee or by any person acting as a Director or member of a committee or any person duly authorised by the Board or any committee, shall, notwithstanding that it is afterwards discovered that there was some defect in the appointment of any member of the Board or such committee or person acting as aforesaid or that they or any of them were disqualified or had vacated their office, be as valid as if every such person had been duly appointed and was qualified and had continued to be a Director, member of such committee or person so authorised. OFFICERS 100. The Officers of the Company shall include a President and a Vice-President or a Chairman and a Deputy Chairman who shall be Directors and shall be elected by the Board as soon as possible after the statutory meeting and each Annual General Meeting. In addition, the Board may appoint any person whether or not he is a Director to hold such office as the Board may from time to time determine. Any person elected or appointed pursuant to this Bye-Law shall hold office for such period and upon such terms as the Board may determine and the Board may revoke or terminate any such election or appointment. Any such revocation or termination shall be without prejudice to any claim for damages that such Officer may have against the Company or the Company may have against such Officer for any breach of any contract of service between him and the Company which may be involved in such revocation or termination. Save as provided in the Companies Acts or these Bye-Laws, the powers and duties of the Officers of the Company shall be such (if any) as are determined from time to time by the Board. MINUTES 101. The Board shall cause minutes to be made and books kept for the purpose of recording - (1) all appointments of Officers made by the Board; (2) the names of the Directors and other persons (if any) present at each meeting of the Board and of any committee; (3) of all proceedings at meetings of the Company, of the holders of any class of shares in the Company, of the Board and of committees appointed by the Board or the Shareholders; (4) of all proceedings of its managers (if any). Shareholders shall only be entitled to see the Register of Directors and Officers, the Register, the financial information provided for in Bye-Law 118 and the minutes of meetings of the Shareholders of the Company. SECRETARY AND RESIDENT REPRESENTATIVE 102. The Secretary (including one or more deputy or assistant secretaries) and, if required, the Resident Representative, shall be appointed by the Board at such remuneration (if any) and upon such terms as it may think fit and any Secretary and Resident Representative so appointed may be removed by the Board. The duties of the Secretary and the duties of the Resident Representative shall be those prescribed by the Companies Acts together with such other duties as shall from time to time be prescribed by the Board. 103. A provision of the Companies Acts or these Bye-Laws requiring or authorising a thing to be done by or to a Director and the Secretary shall not be satisfied by its being done by or to the same person acting both as Director and as, or in the place of, the Secretary. THE SEAL 104. (1) The Seal shall consist of a circular metal device with the name of the Company around the outer margin thereof and the country and year of incorporation across the centre thereof. Should the Seal not have been received at the Registered Office in such form at the date of adoption of this Bye-Law then, pending such receipt, any document requiring to be sealed with the Seal shall be sealed by affixing a red wafer seal to the document with the name of the Company, and the country and year of incorporation type written across the centre thereof. (2) The Board shall provide for the custody of every Seal. A Seal shall only be used by authority of the Board or of a committee constituted by the Board. Subject to these Bye-laws, any instrument to which a Seal is affixed shall be signed by either two Directors, or by the Secretary and one Director, or by the Secretary or by any one person whether or not a Director or Officer, who has been authorised either generally or specifically to affirm the use of a Seal; provided that the Secretary or a Director may affix a Seal over his signature alone to authenticate copies of these Bye-Laws, the minutes of any meeting or any other documents requiring authentication DIVIDENDS AND OTHER PAYMENTS 105. The Board may from time to time declare dividends or distributions out of contributed surplus to be paid to the Shareholders according to their rights and interests including such interim dividends as appear to the Board to be justified by the position of the Company. The Board, in its discretion, may determine that any dividend shall be paid in cash or shall be satisfied, subject to Bye-Law 113, in paying up in full shares in the Company to be issued to the Shareholders credited as fully paid or partly paid or partly in one way and partly the other. The Board may also pay any fixed cash dividend which is payable on any shares of the Company half yearly or on such other dates, whenever the position of the Company, in the opinion of the Board, justifies such payment. 106. Except insofar as the rights attaching to, or the terms of issue of, any share otherwise provide:- (1) all dividends or distributions out of contributed surplus may be declared and paid according to the amounts paid up on the shares in respect of which the dividend or distribution is paid, and an amount paid up on a share in advance of calls may be treated for the purpose of this Bye-Law as paid-up on the share; (2) dividends or distributions out of contributed surplus may be apportioned and paid pro rata according to the amounts paid-up on the shares during any portion or portions of the period in respect of which the dividend or distribution is paid. 107. The Board may deduct from any dividend, distribution or other moneys payable to a Shareholder by the Company on or in respect of any shares all sums of money (if any) presently payable by him to the Company on account of calls or otherwise in respect of shares of the Company. 108. No dividend, distribution or other moneys payable by the Company on or in respect of any share shall bear interest against the Company. 109. Any dividend, distribution or interest, or part thereof payable in cash, or any other sum payable in cash to the holder of shares may be paid by cheque or warrant sent through the post addressed to the holder at his address in the Register or, in the case of joint holders, addressed to the holder whose name stands first in the Register in respect of the shares at his registered address as appearing in the Register or addressed to such person at such address as the holder or joint holders may in writing direct. Every such cheque or warrant shall, unless the holder or joint holders otherwise direct, be made payable to the order of the holder or, in the case of joint holders, to the order of the holder whose name stands first in the Register in respect of such shares, and shall be sent at his or their risk and payment of the cheque or warrant by the bank on which it is drawn shall constitute a good discharge to the Company. Any one of two or more joint holders may give effectual receipts for any dividends, distributions or other moneys payable or property distributable in respect of the shares held by such joint holders. 110. Any dividend or distribution out of contributed surplus unclaimed for a period of six years from the date of declaration of such dividend or distribution shall be forfeited and shall revert to the Company and the payment by the Board of any unclaimed dividend, distribution, interest or other sum payable on or in respect of the share into a separate account shall not constitute the Company a trustee in respect thereof. 111. The Board may also, in addition to its other powers, direct payment or satisfaction of any dividend or distribution out of contributed surplus wholly or in part by the distribution of specific assets, and in particular of paid-up shares or debentures of any other company, and where any difficulty arises in regard to such distribution or dividend the Board may settle it as it thinks expedient, and in particular, may authorise any person to sell and transfer any fractions or may ignore fractions altogether, and may fix the value for distribution or dividend purposes of any such specific assets and may determine that cash payments shall be made to any Shareholders upon the footing of the values so fixed in order to secure equality of distribution and may vest any such specific assets in trustees as may seem expedient to the Board provided that such dividend or distribution may not be satisfied by the distribution of any partly paid shares or debentures of any company without the sanction of a Resolution. RESERVES 112. The Board may, before recommending or declaring any dividend or distribution out of contributed surplus, set aside such sums as it thinks proper as reserves which shall, at the discretion of the Board, be applicable for any purpose of the Company and pending such application may, also at such discretion, either be employed in the business of the Company or be invested in such investments as the Board may from time to time think fit. The Board may also without placing the same to reserve carry forward any sums which it may think it prudent not to distribute. CAPITALIZATION OF PROFITS 113. The Board may, from time to time resolve to capitalise all or any part of any amount for the time being standing to the credit of any reserve or fund which is available for distribution or to the credit of any share premium account and accordingly that such amount be set free for distribution amongst the Shareholders or any class of Shareholders who would be entitled thereto if distributed by way of dividend and in the same proportions, on the footing that the same be not paid in cash but be applied either in or towards paying up amounts for the time being unpaid on any shares in the Company held by such Shareholders respectively or in payment up in full of unissued shares, debentures or other obligations of the Company, to be allotted and distributed credited as fully paid amongst such Shareholders, or partly in one way and partly in the other, provided that for the purpose of this Bye-Law, a share premium account may be applied only in paying up of unissued shares to be issued to such Shareholders credited as fully paid and provided further that any sum standing to the credit of a share premium account may only be applied in crediting as fully paid shares of the same class as that from which the relevant share premium was derived. 114. Where any difficulty arises in regard to any distribution under the last preceding Bye-Law, the Board may settle the same as it thinks expedient and, in particular, may authorise any person to sell and transfer any fractions or may resolve that the distribution should be as nearly as may be practicable in the correct proportion but not exactly so or may ignore fractions altogether, and may determine that cash payments should be made to any Shareholders in order to adjust the rights of all parties, as may seem expedient to the Board. The Board may appoint any person to sign on behalf of the persons entitled to participate in the distribution any contract necessary or desirable for giving effect thereto and such appointment shall be effective and binding upon the Shareholders. RECORD DATES 115. Notwithstanding any other provisions of these Bye-Laws, the Company may by Resolution or the Board may fix any date as the record date for any dividend, distribution, allotment or issue and for the purpose of identifying the persons entitled to receive notices of general meetings. Any such record date may be on or at any time before or after any date on which such dividend, distribution, allotment or issue is declared, paid or made or such notice is despatched. ACCOUNTING RECORDS 116. The Board shall cause to be kept accounting records sufficient to give a true and fair view of the state of the Company's affairs and to show and explain its transactions, in accordance with the Companies Acts. 117. The records of account shall be kept at the Registered Office or at such other place or places as the Board thinks fit, and shall at all times be open to inspection by the Directors: PROVIDED that if the records of account are kept at some place outside Bermuda, there shall be kept at an office of the Company in Bermuda such records as will enable the Directors to ascertain with reasonable accuracy the financial position of the Company at the end of each three month period. No Shareholder (other than an Officer of the Company) shall have any right to inspect any accounting record or book or document of the Company except as conferred by law or authorised by the Board or by Resolution. 118. A copy of every balance sheet and statement of income and expenditure, including every document required by law to be annexed thereto, which is to be laid before the Company in general meeting, together with a copy of the auditors' report, shall be sent to each person entitled thereto in accordance with the requirements of the Companies Acts. AUDIT 119. Save and to the extent that an audit is waived in the manner permitted by the Companies Acts, auditors shall be appointed and their duties regulated in accordance with the Companies Acts, any other applicable law and such requirements not inconsistent with the Companies Acts as the Board may from time to time determine. SERVICE OF NOTICES AND OTHER DOCUMENTS 120. Any notice or other document (including a share certificate) may be served on or delivered to any Shareholder by the Company either personally or by sending it through the post (by airmail where applicable) in a pre-paid letter addressed to such Shareholder at his address as appearing in the Register or by delivering it to or leaving it at such registered address. In the case of joint holders of a share, service or delivery of any notice or other document on or to one of the joint holders shall for all purposes be deemed as sufficient service on or delivery to all the joint holders. Any notice or other document if sent by post shall be deemed to have been served or delivered seven days after it was put in the post, and in proving such service or delivery, it shall be sufficient to prove that the notice or document was properly addressed, stamped and put in the post. 121. Any notice of a general meeting of the Company shall be deemed to be duly given to a Shareholder, or other person entitled to it, if it is sent to him by cable, telex, telecopier or other mode of representing or reproducing words in a legible and non-transitory form at his address as appearing in the Register or any other address given by him to the Company for this purpose. Any such notice shall be deemed to have been served twenty-four hours after its despatch. 122. Any notice or other document delivered, sent or given to a Shareholder in any manner permitted by these Bye-Laws shall, notwithstanding that such Shareholder is then dead or bankrupt or that any other event has occurred, and whether or not the Company has notice of the death or bankruptcy or other event, be deemed to have been duly served or delivered in respect of any share registered in the name of such Shareholder as sole or joint holder unless his name shall, at the time of the service or delivery of the notice or document, have been removed from the Register as the holder of the share, and such service or delivery shall for all purposes be deemed as sufficient service or delivery of such notice or document on all persons interested (whether jointly with or as claiming through or under him) in the share. WINDING UP 123. If the Company shall be wound up, the liquidator may, with the sanction of a Resolution of the Company and any other sanction required by the Companies Acts, divide amongst the Shareholders in specie or kind the whole or any part of the assets of the Company (whether they shall consist of property of the same kind or not) and may for such purposes set such values as he deems fair upon any property to be divided as aforesaid and may determine how such division shall be carried out as between the Shareholders or different classes of Shareholders. The liquidator may, with the like sanction, vest the whole or any part of such assets in trustees upon such trust for the benefit of the contributories as the liquidator, with the like sanction, shall think fit, but so that no Shareholder shall be compelled to accept any shares or other assets upon which there is any liability. INDEMNITY 124. Subject to the proviso below, every Director, Officer of the Company and member of a committee constituted under Bye-Law 90 and any Resident Representative shall be indemnified out of the funds of the Company against all liabilities, loss, damage or expense (including but not limited to liabilities under contract, tort and statute or any applicable foreign law or regulation and all reasonable legal and other costs and expenses properly payable) incurred or suffered by him as such Director, Officer, committee member or Resident Representative and the indemnity contained in this Bye-Law shall extend to any person acting as a Director, Officer, committee member or Resident Representative in the reasonable belief that he has been so appointed or elected notwithstanding any defect in such appointment or election PROVIDED ALWAYS that the indemnity contained in this Bye-Law shall not extend to any matter which would render it void pursuant to the Companies Acts. 125. Every Director, Officer, member of a committee duly constituted under Bye-Law 90 or Resident Representative of the Company shall be indemnified out of the funds of the Company against all liabilities incurred by him as such Director, Officer, committee member or Resident Representative in defending any proceedings, whether civil or criminal, in which judgement is given in his favour, or in which he is acquitted, or in connection with any application under the Companies Acts in which relief from liability is granted to him by the court. 126. To the extent that any Director, Officer, member of a committee duly constituted under Bye-Law 90 or Resident Representative is entitled to claim an indemnity pursuant to these Bye-Laws in respect of amounts paid or discharged by him, the relative indemnity shall take effect as an obligation of the Company to reimburse the person making such payment or effecting such discharge. 127. Each Shareholder and the Company agree to waive any claim or right of action he or it may at any time have, whether individually or by or in the right of the Company, against any Director, Officer, or member of a committee duly constituted under Bye-Law 90 on account of any action taken by such Director, Officer, or member of a committee or the failure of such Director, Officer, or member of a committee to take any action in the performance of his duties with or for the Company PROVIDED HOWEVER that such waiver shall not apply to any claims or rights of action arising out of the fraud of such Director, Officer, or member of a committee duly constituted under Bye-Law 90 or to recover any gain, personal profit or advantage to which such Director, Officer, or member of a committee duly constituted under Bye-Law 90 is not legally entitled. 128. Subject to the Companies Acts, expenses incurred in defending any civil or criminal action or proceeding for which indemnification is required pursuant to Bye-Laws 124 and 125 shall be paid by the Company in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay such amount if it shall ultimately be determined that the indemnified party is not entitled to be indemnified pursuant to Bye-Laws 124 and 125. Each Shareholder of the Company, by virtue of its acquisition and continued holding of a share, shall be deemed to have acknowledged and agreed that the advances of funds may be made by the Company as aforesaid, and when made by the Company under this Bye-Law 128 are made to meet expenditures incurred for the purpose of enabling such Director, Officer, or member of a committee duly constituted under Bye-Law 90 to properly perform his or her duties as an officer of the Company. AMALGAMATION 129. Any resolution proposed for consideration at any general meeting to approve the amalgamation of the Company with any other company, wherever incorporated, shall require the approval of a simple majority of votes cast at such meeting and the quorum for such meeting shall be that required in Bye-Law 49 and a poll may be demanded in respect of such resolution in accordance with the provisions of Bye-Law 57. CONTINUATION 130. Subject to the Companies Acts, the Board may approve the discontinuation of the Company in Bermuda and the continuation of the Company in a jurisdiction outside Bermuda. The Board, having resolved to approve the discontinuation of the Company, may further resolve not to proceed with any application to discontinue the Company in Bermuda or may vary such application as it sees fit. ALTERATION OF BYE-LAWS 131. These Bye-Laws may be amended from time to time in the manner provided for in the Companies Acts. EX-4.1 5 a2062535zex-4_1.txt EXHIBIT 4.1 EXHIBIT 4.1 Form of Guaranty 1. GUARANTY. Except as otherwise provided herein, Tyco Capital Ltd. (the "Guarantor") hereby fully and unconditionally guarantees to each registered holder (a "Holder") of a 5 7/8% Note due October 15, 2008 (each a "Security") authenticated and delivered by the Trustee (as defined below), and to the Trustee on behalf of such Holder, the due and punctual payment of the principal of and interest on such Security and all other obligations of Tyco Capital Corporation (the "Issuer") under the Indenture dated as of September 24, 1998 (the "Indenture") between the Issuer and [_______] as trustee (the "Trustee") when and as the same shall become due and in accordance with the terms of such Security and of the Indenture. The Guarantor hereby fully and unconditionally also guarantees to the Trustee the due and punctual payment of all obligations of the Issuer to the Trustee under this Indenture. In case of the failure of the Issuer punctually to make any such payment, the Guarantor hereby agrees to cause such payment to be made punctually when and as the same shall become due and payable, whether at the stated maturity or by acceleration, call for redemption or otherwise, and as if such payment were made by the Issuer. The Guarantor hereby agrees that its obligations hereunder shall be absolute and unconditional, irrespective of, and shall be unaffected by, the validity, regularity or enforceability of such Security or the Indenture, the absence of any action to enforce the same or any release, amendment, waiver or indulgence granted to the Issuer or the Guarantor or any consent to departure from any requirement of any other guarantee of all or any of the Securities or any other circumstances which might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor. The Guarantor hereby waives the benefits of diligence, presentment, demand for payment, any requirement that the Trustee or any of the Holders protect, secure, perfect or insure any security interest in or other lien on any property subject thereto or exhaust any right or take any action against the Issuer or any other Person (as defined in the Indenture) or any collateral, filing of claims with a court in the event of insolvency or bankruptcy of the Issuer, any right to require a proceeding first against the Issuer, protest or notice with respect to such Security or the indebtedness evidenced thereby and all demands whatsoever, and covenants that this Guaranty will not be discharged in respect of such Security except by complete performance of the obligations contained in such Security and in this Guaranty. The Guarantor agrees that the Holders are prevented by applicable law from exercising their respective rights to accelerate any other right or remedy with respect to the Securities, the Guarantor agrees to pay to the Trustee for the account of the Holders, upon demand therefor, the amount that would otherwise have been due and payable had such rights and remedies been permitted to be exercised by the Trustee or any of the Holders. The Guarantor shall be subrogated to all rights of the Holders of the Securities upon which this Guaranty is endorsed as set forth below against the Issuer in respect of any amounts paid by the Guarantor on account of such Security pursuant to the provisions of this Guaranty or the Indenture; provided, however, that the Guarantor shall not be entitled to enforce or to receive any payment arising out of, or based upon, such right of subrogation until the principal of and interest on all Securities issued hereunder shall have been paid in full. This Guaranty shall remain in full force and effect and continue to be effective should any petition be filed by or against the Issuer for liquidation or reorganization, should the Issuer become insolvent or make any assignment for the benefit of creditors or should a receiver or trustee be appointed for all or any part of the Issuer's assets, and shall, to the fullest extent permitted by law, continue to be effective or by reinstated, as the case may be, if at any time payment and performance of the Securities, is, pursuant to applicable law, rescinded or reduced in amount, or must otherwise be restored or returned by any Holder of the Securities, whether as a "voidable preference," "fraudulent transfer," or otherwise, all as though such payment or performance had not been made. In the event that any payment, or any part thereof, is rescinded, reduced, restored or returned, the Securities shall, to the fullest extent permitted by law, be reinstated and deemed reduced only by such amount paid and not so rescinded, reduced, restored or returned. Any term or provision of this Guaranty to the contrary notwithstanding, the aggregate amount of the obligations guaranteed hereunder shall be reduced to the extent necessary to prevent this Guaranty from violating or becoming voidable under applicable law relating to fraudulent conveyance or fraudulent transfer or similar laws affecting the rights of creditors generally. 2. EXECUTION AND DELIVERY OF NOTE GUARANTEES. The Guaranty to be endorsed on the Securities (collectively, the "Note Guarantees") shall include the terms of this Guaranty set forth in Section 1 and shall be substantially in the form attached hereto as Annex A. The Guarantor hereby agrees to execute a Note Guaranty, in a form established pursuant to Annex A to be endorsed on each Security authenticated and delivered by the Trustee after the date hereof. Each Note Guaranty shall be executed on behalf of the Guarantor by any one of the Guarantor's chairman of the Board of Directors, president, vice presidents or other person duly authorized by the Board of Directors of the Guarantor. The signature of any or all of these persons on each Note Guaranty may be manual or facsimile. A Note Guaranty bearing the manual or facsimile signature of individuals who were at any time the proper officers of the Guarantor shall bind the Guarantor, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of the Security on which the Note Guaranty is endorsed or did not hold such offices at the date of such Note Guaranty. The delivery of any Security by the Trustee, after the authentication thereof under the Indenture, shall constitute due delivery of the Note Guaranty endorsed thereon on behalf of the Guarantor and shall bind the Guarantor notwithstanding the fact that the Note Guaranty does not bear the signature of the Guarantor. The Guarantor hereby agrees that its Guaranty set forth in Section 1 and in the form of Note Guarantee established pursuant to Annex A shall remain in full force and effect notwithstanding any failure to endorse a Note Guaranty on any Security. 3. RELEASE OF GUARANTY. Notwithstanding anything in this Guaranty to the contrary, concurrently with the payment in full of the principal of, premium, if any, and interest on the Securities, the Guarantor shall be released from and relieved of its obligations under this Guaranty. Upon the delivery by the Issuer to the Trustee of any Officers' Certificate (as defined in the Indenture) and an Opinion of Counsel (as defined in the Indenture) to the effect that the transaction giving rise to the release of this Guaranty was made by the Issuer in accordance with the provisions of the Indenture and the Securities, the Trustee shall execute any documents reasonably required in order to evidence the release of the Guarantor from its obligations under this Guaranty. If any of the obligations to pay the principal of, premium, if any, and interest on the Securities and all other obligations of the Issuer are revived and reinstated after the termination of this Guaranty, then all of the obligations of the Guarantor under this Guaranty shall be revived and reinstated as if this Guaranty had not been terminated until such time as the principal of, premium, if any, and interest on the Securities are paid in full, and the Guarantor shall enter into an amendment to this Guaranty, reasonably satisfactory to the Trustee, evidencing such revival and reinstatement. 4. GOVERNING LAW. This Guarantee shall be governed by, and construed in accordance with, the laws of New York TYCO CAPITAL LTD. By: ______________________ Name: Title: Annex A GUARANTEE For value received, Tyco Capital Ltd. hereby absolutely, unconditionally and irrevocably guarantees to the holder of this Security the payment of principal of, premium if any, and interest on the Security upon which this Guarantee is endorsed in the amounts and at the time when due and payable whether by declaration thereof, or otherwise, and interest on the overdue principal and interest, if any, of such Security, if lawful, and the payment or performance of all other obligations of the issuer under the Indenture or the Securities, to the holder of such Security and the Trustee, all in accordance with and subject to the terms and limitations of such Security and the Indenture. This Guarantee will not become effective until the Trustee duly executes the certificate of authentication on this Security. This Guarantee shall be governed by and construed in accordance with the laws of the State of New York, without regard to conflict of law principles thereof. Dated: -----END PRIVACY-ENHANCED MESSAGE-----