-----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, WERBZmSRi9Hd1X/d5/MiNzt2krxz9vl3TJDaqVOXTIgya2Wt6aQbGewXvWgcnkSy N0ItEWfXQefXJoggLnvlQQ== 0000891092-04-005477.txt : 20041110 0000891092-04-005477.hdr.sgml : 20041110 20041109162415 ACCESSION NUMBER: 0000891092-04-005477 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041109 DATE AS OF CHANGE: 20041109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CIT GROUP INC CENTRAL INDEX KEY: 0001171825 STANDARD INDUSTRIAL CLASSIFICATION: FINANCE LESSORS [6172] IRS NUMBER: 651051192 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-31369 FILM NUMBER: 041129940 BUSINESS ADDRESS: STREET 1: 1 CIT DRIVE CITY: LIVINGSTON STATE: NJ ZIP: 07039 BUSINESS PHONE: 9737405000 MAIL ADDRESS: STREET 1: 1 CIT DRIVE CITY: LIVINGSTON STATE: NJ ZIP: 07039 FORMER COMPANY: FORMER CONFORMED NAME: CIT GROUP INC DEL DATE OF NAME CHANGE: 20020422 10-Q 1 e19537_10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- Form 10-Q ---------- [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 001-31369 ---------- CIT Group Inc. (Exact name of Registrant as specified in its charter) Delaware 65-1051192 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 1 CIT Drive, Livingston, New Jersey, 07039 (Address of Registrant's principal executive offices) (973) 740-5000 (Registrant's telephone number) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of 1934. Yes [X] No [ ] As of October 29, 2004, there were 210,181,847 shares of the Registrant's common stock outstanding. ================================================================================ CIT GROUP INC. AND SUBSIDIARIES TABLE OF CONTENTS Page ---- Part I--Financial Information: Item 1. Consolidated Financial Statements ............................. 1 Consolidated Balance Sheets (Unaudited) ....................... 1 Consolidated Statements of Income (Unaudited) ................. 2 Consolidated Statements of Stockholders' Equity (Unaudited) ... 3 Consolidated Statements of Cash Flows (Unaudited) ............. 4 Notes to Consolidated Financial Statements (Unaudited) ........ 5-19 Item 2. Management's Discussion and Analysis of Financial Condition and and Results of Operations and Quantitative and Qualitative Item 3. Disclosure about Market Risk .................................. 20-48 Item 4. Controls and Procedures ....................................... 49 Part II--Other Information: Item 1. Legal Proceedings ............................................. 50 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ......................................... 51 Item 6. Exhibits and Reports on Form 8-K .............................. 51 Signatures ............................................................. 53 i PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements CIT GROUP INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) ($ in millions -- except share data) September 30, December 31, 2004 2003 ------------ ----------- ASSETS Financing and leasing assets: Finance receivables .............................. $34,542.8 $31,300.2 Reserve for credit losses ........................ (637.9) (643.7) --------- --------- Net finance receivables .......................... 33,904.9 30,656.5 Operating lease equipment, net ................... 7,932.9 7,615.5 Finance receivables held for sale ................ 1,757.3 918.3 Cash and cash equivalents ........................... 2,160.1 1,973.7 Retained interest in securitizations and other investments ................................ 1,188.4 1,380.8 Goodwill and intangible assets ...................... 594.4 487.7 Other assets ........................................ 2,475.7 3,310.3 --------- --------- Total Assets ........................................ $50,013.7 $46,342.8 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Debt: Commercial paper ................................. $ 4,496.5 $ 4,173.9 Variable-rate senior notes ....................... 11,507.7 9,408.4 Fixed-rate senior notes .......................... 21,022.2 19,830.8 Preferred capital securities ..................... 254.2 255.5 --------- --------- Total debt .......................................... 37,280.6 33,668.6 Credit balances of factoring clients ................ 3,929.9 3,894.6 Accrued liabilities and payables .................... 2,925.5 3,346.4 --------- --------- Total Liabilities ................................ 44,136.0 40,909.6 Commitments and Contingencies (Note 10) Minority interest ................................... 40.7 39.0 Stockholders' Equity: Preferred stock: $0.01 par value, 100,000,000 authorized, none issued ........................ -- -- Common stock: $0.01 par value, 600,000,000 authorized, 212,092,592 issued, 209,870,336 outstanding .................................... 2.1 2.1 Paid-in capital, net of deferred compensation of $44.8 and $30.6 ............................. 10,672.2 10,677.0 Accumulated deficit .............................. (4,675.6) (5,141.8) Accumulated other comprehensive loss ............. (81.1) (141.6) Less: Treasury stock, 2,222,256 and 43,529 shares, at cost ........................................ (80.6) (1.5) --------- --------- Total Stockholders' Equity ....................... 5,837.0 5,394.2 --------- --------- Total Liabilities and Stockholders' Equity ....... $50,013.7 $46,342.8 ========= ========= See Notes to Consolidated Financial Statements. 1 CIT GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) ($ in millions -- except per share data)
Quarters Ended Nine Months Ended September 30, September 30, -------------------------------------------------------- 2004 2003 2004 2003 ----------- ----------- ------------- ----------- Finance income ........................................... $ 963.1 $ 921.2 $ 2,781.2 $ 2,803.6 Interest expense ......................................... 315.4 333.7 913.4 1,026.2 ----------- ----------- ----------- ----------- Net finance income ....................................... 647.7 587.5 1,867.8 1,777.4 Depreciation on operating lease equipment ................ 245.7 252.4 716.5 804.1 ----------- ----------- ----------- ----------- Net finance margin ....................................... 402.0 335.1 1,151.3 973.3 Provision for credit losses .............................. 60.2 82.9 211.5 286.5 ----------- ----------- ----------- ----------- Net finance margin after provision for credit losses ......................................... 341.8 252.2 939.8 686.8 Other revenue ............................................ 212.5 232.0 676.4 701.6 Gain (loss) on venture capital investments ............... 4.2 (11.3) 7.9 (27.8) ----------- ----------- ----------- ----------- Operating margin ......................................... 558.5 472.9 1,624.1 1,360.6 Salaries and general operating expenses .................. 256.7 230.3 764.3 676.4 Gain on redemption of debt ............................... -- -- 41.8 -- ----------- ----------- ----------- ----------- Income before provision for income taxes ................. 301.8 242.6 901.6 684.2 Provision for income taxes ............................... (117.7) (94.6) (351.6) (266.8) Minority interest, after tax ............................. (0.2) (0.2) (0.2) (0.3) Dividends on preferred capital securities, after tax ............................................. -- -- -- (5.4) ----------- ----------- ----------- ----------- Net income ............................................... $ 183.9 $ 147.8 $ 549.8 $ 411.7 =========== =========== =========== =========== Earnings per share Basic earnings per share ................................. $ 0.87 $ 0.70 $ 2.60 $ 1.95 =========== =========== =========== =========== Diluted earnings per share ............................... $ 0.86 $ 0.69 $ 2.56 $ 1.94 =========== =========== =========== =========== Number of shares - basic (thousands) ..................... 210,489 211,735 211,286 211,633 =========== =========== =========== =========== Number of shares - diluted (thousands) ................... 214,179 213,529 215,116 212,498 =========== =========== =========== =========== Dividends per common share ............................... $ 0.13 $ 0.12 $ 0.39 $ 0.36 =========== =========== =========== ===========
See Notes to Consolidated Financial Statements. 2 CIT GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) ($ in millions)
Accumulated Total Total Common Paid-in Treasury Earnings/ Comprehensive Stockholders' Stock Capital Stock (Deficit) Income/(Loss) Equity --------- ------------- ----------- ------------ -------------- -------------- Balance December 31, 2003 .............. $ 2.1 $ 10,677.0 $ (1.5) $ (5,141.8) $ (141.6) $ 5,394.2 Net income ............................. -- -- -- 549.8 -- 549.8 Foreign currency translation adjustments .......................... -- -- -- -- 72.8 72.8 Change in fair values of derivatives qualifying as cash flow hedges ..................... -- -- -- -- (11.2) (11.2) Unrealized losses on equity and securitization investments, net ..................... -- -- -- -- (1.1) (1.1) ---------- Total comprehensive income ............. -- -- -- -- -- 610.3 ---------- Cash dividends ......................... -- -- -- (83.6) -- (83.6) Restricted common stock grants ......... -- 17.8 -- -- -- 17.8 Treasury stock purchased, at cost .............................. -- -- (137.9) -- -- (137.9) Exercise of stock option awards ........ -- (22.6) 58.8 -- -- 36.2 ------ ----------- -------- ---------- -------- ---------- Balance September 30, 2004 ............. $ 2.1 $ 10,672.2 $ (80.6) $ (4,675.6) $ (81.1) $ 5,837.0 ====== =========== ======== ========== ======== ==========
See Notes to Consolidated Financial Statements. 3 CIT GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) ($ in millions)
Nine Months Ended September 30, ---------------------------------- 2004 2003 ---------------------------------- Cash Flows From Operations Net income (loss) .................................................................... $ 549.8 $ 411.7 Adjustments to reconcile net income to net cash flows from operations: Depreciation and amortization ..................................................... 747.5 831.4 Provision for credit losses ....................................................... 211.5 286.5 Provision for deferred federal income taxes ....................................... 274.2 229.6 Gains on equipment, receivable and investment sales ............................... (174.3) (158.9) Gain on debt redemption ........................................................... (41.8) -- Decrease/(increase) in other assets ............................................... 133.5 (161.6) (Decrease) increase in accrued liabilities and payables ........................... (258.1) 162.4 Other ............................................................................. (74.7) (55.2) ----------- ----------- Net cash flows provided by operations ................................................ 1,367.6 1,545.9 ----------- ----------- Cash Flows From Investing Activities Loans extended ....................................................................... (41,984.7) (38,740.8) Collections on loans ................................................................. 35,665.6 32,794.5 Proceeds from asset and receivable sales ............................................. 5,587.0 5,693.7 Purchase of finance receivable portfolios ............................................ (2,027.4) (961.9) Purchases of assets to be leased ..................................................... (874.3) (1,672.1) Acquisitions, net of cash acquired ................................................... (724.8) -- Net decrease in short-term factoring receivables ..................................... (416.1) (529.4) Goodwill and intangibles acquired .................................................... (114.1) -- Other ................................................................................ 69.2 23.0 ----------- ----------- Net cash flows (used for) investing activities ....................................... (4,819.6) (3,393.0) ----------- ----------- Cash Flows From Financing Activities Proceeds from the issuance of variable and fixed-rate notes .......................... 10,071.7 8,608.9 Repayments of variable and fixed-rate notes .......................................... (6,549.8) (6,316.3) Net increase (decrease) in commercial paper .......................................... 322.6 (38.8) Net repayments of non-recourse leveraged lease debt .................................. (38.6) (96.8) Cash dividends paid .................................................................. (83.6) (76.3) Other ................................................................................ (83.9) (1.2) ----------- ----------- Net cash flows provided by financing activities ...................................... 3,638.4 2,079.5 ----------- ----------- Net increase in cash and cash equivalents ............................................ 186.4 232.4 Cash and cash equivalents, beginning of period ....................................... 1,973.7 2,036.6 ----------- ----------- Cash and cash equivalents, end of period ............................................. $ 2,160.1 $ 2,269.0 =========== =========== Supplementary Cash Flow Disclosure Interest paid ........................................................................ $ 911.7 $ 1,110.3 Federal, foreign, state and local income taxes paid, net .................................................................... $ 74.4 $ 53.1
See Notes to Consolidated Financial Statements. 4 CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 -- Summary of Significant Accounting Policies CIT Group Inc., a Delaware corporation ("we," "CIT" or the "Company"), is a global commercial and consumer finance company that was founded in 1908. CIT provides financing and leasing capital for companies in a wide variety of industries, offering vendor, equipment, commercial, factoring, consumer, and structured financing products. CIT operates primarily in North America, with locations in Europe, Latin America, Australia and the Asia-Pacific region. These financial statements, which have been prepared in accordance with the instructions to Form 10-Q, do not include all of the information and note disclosures required by accounting principles generally accepted in the United States ("GAAP") and should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2003. Financial statements in this Form 10-Q have not been audited by independent registered public accountants in accordance with the standards of the Public Company Accounting Oversight Board (U.S.), but in the opinion of management include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of CIT's financial position and results of operations. Certain prior period amounts have been reclassified to conform to the current presentation. Stock Based Compensation CIT has elected to apply Accounting Principles Board Opinion 25 ("APB 25") rather than the optional provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), as amended by SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure" 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. The following table presents the pro forma information required by SFAS 123 as if CIT had accounted for stock options granted under the fair value method of SFAS 123, as amended ($ in millions, except per share data):
Quarters Ended Nine Months Ended September 30, September 30, ------------------------------------------------- 2004 2003 2004 2003 --------- --------- --------- --------- Net income as reported ................................................. $ 183.9 $ 147.8 $ 549.8 $ 411.7 Stock-based compensation expense -- fair value method, after tax ....... 5.1 6.8 15.6 18.5 --------- --------- --------- --------- Pro forma net income ................................................... $ 178.8 $ 141.0 $ 534.2 $ 393.2 ========= ========= ========= ========= Basic earnings per share as reported ................................... $ 0.87 $ 0.70 $ 2.60 $ 1.95 ========= ========= ========= ========= Basic earnings per share pro forma ..................................... $ 0.85 $ 0.67 $ 2.53 $ 1.86 ========= ========= ========= ========= Diluted earnings per share as reported ................................. $ 0.86 $ 0.69 $ 2.56 $ 1.94 ========= ========= ========= ========= Diluted earnings per share pro forma ................................... $ 0.83 $ 0.66 $ 2.48 $ 1.85 ========= ========= ========= =========
For the quarters ended September 30, 2004 and 2003, net income includes $3.4 million and $2.1 million of after-tax compensation cost related to restricted stock awards. These costs for the nine months ended September 30, 2004 and 2003 totaled $10.9 million and $3.3 million, after tax. Recent Accounting Pronouncements In March 2004, the SEC issued Staff Accounting Bulletin 105, "Application of Accounting Principles to Loan Commitments" ("SAB 105"). SAB 105 requires that certain mortgage loan commitments issued after March 31, 2004 be accounted for as derivatives until the loan is made or they expire unexercised. The adoption of SAB 105 did not have a material financial statement impact on the Company. 5 CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) In January 2004, the FASB issued FASB Staff Position No. FAS 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug Improvement and Modernization Act of 2003" ("FSP 106-1"). For the third quarter of 2004, the Company accounted for the effects of the Medicare Prescription Drug and Modernization Act of 2003 by recognizing the impact of the Medicare prescription drug subsidy prospectively from July 1, 2004. The subsidy reduced the July 1, 2004 Accumulated Post Retirement Benefit Obligation and 2004 annual related expense by $3.5 million and $0.3 million, respectively. In December 2003, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position No. 03-3, "Accounting for Certain Loans or Debt Securities Acquired in a Transfer" ("SOP 03-3"). SOP 03-3, which is effective for fiscal years beginning after December 15, 2003, requires acquired loans to be carried at fair value and prohibits the establishment of credit loss valuation reserves at acquisition for loans that have evidence of credit deterioration since origination. In December 2003, the FASB revised SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This revision requires interim disclosures regarding certain components of net periodic pension costs and the employer's contribution paid, or expected to be paid during the current fiscal year, if significantly different from amounts previously disclosed for interim periods beginning after December 15, 2003. The additional required disclosures are included in Note 9 -- Post Retirement and Other Benefit Plans. In December 2003, the SEC issued Staff Accounting Bulletin 104, "Revenue Recognition" ("SAB 104"), which revises or rescinds portions of related interpretive guidance in order to be consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The adoption of SAB 104 as of January 1, 2004 did not have a material financial statement impact on the Company. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This pronouncement establishes standards for classifying and measuring certain financial instruments as a liability (or an asset in some circumstances). This pronouncement requires CIT to display the Preferred Capital Securities (previously described as "Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the Company") within the debt section on the face of the Consolidated Balance Sheets and show the related expense with interest expense on a pre-tax basis. There was no impact to net income upon adoption. This pronouncement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Prior period restatement is not permitted. On November 7, 2003, certain measurement and classification provisions of SFAS 150, relating to certain mandatorily redeemable non-controlling interests, were deferred indefinitely. The adoption of these delayed provisions, which relate primarily to minority interests associated with finite-lived entities, is not expected to have a material financial statement impact on the Company. Note 2 -- Earnings Per Share Basic earnings per share ("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 do not have a dilutive effect (because the exercise price is above the market price) are not included in the denominator and averaged approximately 18.2 million shares and 17.6 million shares for the quarters ended September 30, 2004 and 2003, and 18.1 million shares and 18.0 million shares for the nine months ended September 30, 2004 and 2003, respectively. 6 CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) The reconciliation of the numerator and denominator of basic EPS with that of diluted EPS is presented ($ in millions, except per share amounts, which are in whole dollars; weighted-average share balances in thousands):
Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- -------- ----------- ------------- ---------- Quarter Ended September 30, 2004 Quarter Ended September 30, 2003 ------------------------------------ ------------------------------------- Basic EPS: Income available to common stockholders ..... $ 183.9 210,489 $ 0.87 $ 147.8 211,735 $ 0.70 Effect of Dilutive Securities: Restricted shares ........................... -- 649 -- -- 284 -- Stock options ............................... -- 3,041 $ 0.01 -- 1,510 $ 0.01 -------- ------- -------- ------- Diluted EPS .................................... $ 183.9 214,179 $ 0.86 $ 147.8 213,529 $ 0.69 ======== ======= ======== =======
Nine Months Ended September 30, 2004 Nine Months Ended September 30, 2003 ------------------------------------ ------------------------------------- Basic EPS: Income available to common stockholders .............................. $ 549.8 211,286 $ 2.60 $ 411.7 211,633 $ 1.95 Effect of Dilutive Securities: Restricted shares ........................... -- 650 -- -- 355 -- Stock options ............................... -- 3,180 $ 0.04 -- 510 $ 0.01 -------- ------- -------- ------- Diluted EPS .................................... $ 549.8 215,116 $ 2.56 $ 411.7 212,498 $ 1.94 ======== ======= ======== =======
Note 3 -- Business Segment Information The selected financial information by business segment presented below is based upon a fixed leverage ratio across business units and the allocation of most corporate expenses. ($ in millions).
Total Specialty Commercial Equipment Capital Business Corporate Finance Finance Finance Finance Segments and Other Consolidated --------- --------- --------- -------- --------- ------- --------- Quarter Ended September 30, 2004 Operating margin ......................... $ 238.7 $ 173.4 $ 54.6 $ 71.1 $ 537.8 $ 20.7 $ 558.5 Income taxes ............................. 52.0 47.8 12.2 13.5 125.5 (7.8) 117.7 Net income (loss) ........................ 84.1 78.3 19.1 25.8 207.3 (23.4) 183.9 Quarter Ended September 30, 2003 Operating margin ......................... $ 218.7 $ 142.0 $ 35.8 $ 63.0 $ 459.5 $ 13.4 $ 472.9 Income taxes ............................. 45.7 37.5 5.8 15.8 104.8 (10.2) 94.6 Net income (loss) ........................ 71.6 58.8 9.0 24.4 163.8 (16.0) 147.8 At or for the Nine Months Ended September 30, 2004 Operating margin ......................... $ 697.1 $ 494.9 $ 154.6 $ 211.3 $ 1,557.9 $ 66.2 $ 1,624.1 Income taxes ............................. 139.6 132.6 33.7 44.4 350.3 1.3 351.6 Net income (loss) ........................ 244.0 217.6 52.6 78.6 592.8 (43.0) 549.8 Total financing and leasing assets ....... 15,716.8 12,463.6 6,844.6 9,394.2 44,419.2 -- 44,419.2 Total managed assets ..................... 20,787.0 12,463.6 9,769.3 9,394.2 52,414.1 -- 52,414.1 At or for the Nine Months Ended September 30, 2003 Operating margin ......................... $ 613.6 $ 429.1 $ 111.8 $ 158.1 $ 1,312.6 $ 48.0 $ 1,360.6 Income taxes ............................. 119.3 115.8 17.7 35.4 288.2 (21.4) 266.8 Net income (loss) ........................ 186.8 181.3 27.6 55.3 451.0 (39.3) 411.7 Total financing and leasing assets ....... 12,126.9 11,192.1 6,732.6 9,108.1 39,159.7 -- 39,159.7 Total managed assets ..................... 18,763.4 11,192.1 10,237.1 9,108.1 49,300.7 -- 49,300.7
7 CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) Note 4 -- Concentrations The following table summarizes the geographic and industry compositions (by obligor) of financing and leasing portfolio assets ($ in millions):
September 30, 2004 December 31, 2003 -------------------- ------------------------ Geographic North America: Northeast ............................................... $ 8,749.9 19.7% $ 8,319.8 20.8% West .................................................... 8,386.0 18.9% 7,485.5 18.7% Midwest ................................................. 6,749.3 15.2% 5,996.2 14.9% Southeast ............................................... 6,232.1 14.0% 5,558.6 13.9% Southwest ............................................... 4,976.3 11.2% 4,423.1 11.0% Canada .................................................. 2,189.3 4.9% 2,055.5 5.1% --------- ----- --------- ----- Total North America ........................................ 37,282.9 83.9% 33,838.7 84.4% Other foreign .............................................. 7,136.3 16.1% 6,245.2 15.6% --------- ----- --------- ----- Total ................................................... $44,419.2 100.0% $40,083.9 100.0% ========= ===== ========= ===== Industry Manufacturing(1) ........................................... $ 7,279.7 16.4% $ 7,340.6 18.3% Retail(2) .................................................. 6,363.4 14.3% 5,630.9 14.0% Commercial airlines (including regional airlines) .......... 5,317.9 12.0% 5,039.3 12.6% Consumer based lending -- home mortgage .................... 4,186.4 9.4% 2,679.6 6.7% Service industries ......................................... 3,116.1 7.0% 2,608.3 6.5% Transportation(3) .......................................... 2,833.6 6.4% 2,934.9 7.3% Consumer based lending -- non-real estate(4) ............... 2,206.1 5.0% 1,862.1 4.7% Wholesaling ................................................ 1,760.1 3.9% 1,374.7 3.4% Construction equipment ..................................... 1,587.8 3.6% 1,571.2 3.9% Communications(5) .......................................... 1,312.1 2.9% 1,386.5 3.5% Automotive Services ........................................ 1,184.6 2.7% 1,152.3 2.9% Other (no industry greater than 3.0%)(6) ................... 7,271.4 16.4% 6,503.5 16.2% --------- ----- --------- ----- Total ................................................... $44,419.2 100.0% $40,083.9 100.0% ========= ===== ========= =====
- ---------- (1) Includes manufacturers of apparel (3.2%), followed by food and kindred products, textiles, transportation equipment, chemical and allied products, rubber and plastics, industrial machinery and equipment, and other industries. (2) Includes retailers of apparel (6.6%) and general merchandise (4.1%). (3) Includes rail, bus, over-the-road trucking industries and business aircraft. (4) Includes receivables from consumers for products in various industries such as manufactured housing, recreational vehicles, marine and computers and related equipment. (5) Includes $347.6 million and $556.3 million of equipment financed for the telecommunications industry at September 30, 2004 and December 31, 2003, respectively, but excludes telecommunications equipment financed for other industries. (6) Included in "Other" above are financing and leasing assets in the energy, power and utilities sectors, which totaled $1.0 billion, or 2.3% of total financing and leasing assets at September 30, 2004. This amount includes approximately $659.3 million in project financing and $258.5 million in rail cars on lease. 8 CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) Note 5 -- Retained Interests in Securitizations and Other Investments The following table details the components of retained interests in securitizations and other investments ($ in millions):
September 30, December 31, 2004 2003 ------------- ------------ Retained interests in commercial loans: Retained subordinated securities.......................................... $ 405.7 $ 536.6 Interest-only strips...................................................... 301.4 366.8 Cash reserve accounts..................................................... 293.7 226.3 -------- -------- Total retained interests in commercial loans.............................. 1,000.8 1,129.7 -------- -------- Retained interests in consumer loans: Retained subordinated securities.......................................... 78.3 86.7 Interest-only strips...................................................... 29.6 58.9 Cash reserve accounts..................................................... 16.2 34.0 -------- -------- Total retained interests in consumer loans................................ 124.1 179.6 -------- -------- Total retained interests in securitizations.................................. 1,124.9 1,309.3 Aerospace equipment trust certificates....................................... 63.5 71.5 -------- -------- Total..................................................................... $1,188.4 $1,380.8 ======== ========
Note 6 -- Accumulated Other Comprehensive Loss The following table details the components of accumulated other comprehensive loss, net of tax ($ in millions):
September 30, December 31, 2004 2003 ------------- ------------ Foreign currency translation adjustments..................................... $(33.0) $(105.8) Changes in fair values of derivatives qualifying as cash flow hedges......... (52.5) (41.3) Unrealized gain on equity and securitization investments..................... 5.2 6.3 Minimum pension liability adjustments........................................ (0.8) (0.8) -------- -------- Total accumulated other comprehensive loss................................ $(81.1) $(141.6) ======== ========
Note 7 -- Derivative Financial Instruments As part of managing exposure to interest rate, foreign currency, and, in limited instances, credit risk, CIT, as an end-user, enters into various derivative transactions, all of which are transacted in over-the-counter markets with other financial institutions acting as principal counterparties. Derivatives are utilized for hedging purposes only, and our policy prohibits entering into derivative financial instruments for trading or speculative purposes. To ensure both appropriate use as a hedge and to achieve hedge accounting treatment, whenever possible, substantially all derivatives entered into are designated according to a hedge objective against a specific or forecasted liability or, in limited instances, assets. The notional amounts, rates, indices, and maturities of our derivatives closely match the related terms of the underlying hedged items. CIT utilizes interest rate swaps to exchange variable-rate interest underlying forecasted issuances of commercial paper, specific variable-rate debt instruments, and, in limited instances, variable-rate assets for fixed-rate amounts. These interest rate swaps are designated as cash flow hedges and changes in fair value of these swaps, to the extent they are effective as a hedge, are recorded in other comprehensive income. Ineffective amounts are recorded in interest expense. Interest rate swaps are also utilized to convert fixed-rate interest on specific debt instruments to variable-rate amounts. These interest rate swaps are designated as fair value hedges and changes in fair value of the swaps are effectively recorded as an adjustment to the carrying value of the hedged item, as the offsetting changes in fair value of the swaps and the hedged items are recorded in earnings. 9 CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) The following table presents the notional principal amounts of interest rate swaps by class and the corresponding hedge designation ($ in millions):
Notional Amount -------------------------------------- September 30, December 31, 2004 2003 -------------------------------------- Effectively converts the interest rate on an equivalent amount of Floating to fixed-rate swaps -- commercial paper, variable-rate notes cash flow hedges................... $ 5,637.5 $2,615.0 and selected assets to a fixed rate. Effectively converts the interest rate on an equivalent amount of Fixed to floating-rate swaps -- fixed-rate notes and selected assets fair value hedges.................. 8,363.1 6,758.2 to a variable rate. --------- -------- Total interest rate swaps............ $14,000.6 $9,373.2 ========= ========
In addition to the swaps in the table above, in conjunction with securitizations, CIT has $2.3 billion in notional amount of interest rate swaps outstanding with the related trusts to protect the trusts against interest rate risk. CIT entered into offsetting swap transactions with third parties totaling $2.3 billion in notional amount at September 30, 2004 to insulate the related interest rate risk. CIT utilizes foreign currency exchange forward contracts to hedge currency risk underlying foreign currency loans to subsidiaries and the net investments in foreign operations. These contracts are designated as foreign currency cash flow hedges or net investment hedges and changes in fair value of these contracts are recorded in other comprehensive income along with the translation gains and losses on the underlying hedged items. CIT utilizes cross currency swaps to hedge currency risk underlying foreign currency debt and selected foreign currency assets. These swaps are designated as foreign currency cash flow hedges or foreign currency fair value hedges and changes in fair value of these contracts are recorded in other comprehensive income (for cash flow hedges), or effectively as a basis adjustment (including the impact of the offsetting adjustment to the carrying value of the adjusted item) to the hedged item (for fair value hedges) along with the translation gains and losses on the underlying hedged items. CIT also utilizes Treasury locks (bond forwards) to hedge interest rate risk associated with planned debt issuances. These derivatives are designated as cash flow hedges of a forecasted transaction, with changes in fair value of these contracts recorded in other comprehensive income. Gains and losses recorded in other comprehensive income are reclassified to earnings in the same period that the forecasted debt issuance impacts earnings. The components of the adjustment to Accumulated Other Comprehensive Loss for derivatives qualifying as cash flow hedges are presented in the following table ($ in millions):
Fair Value Total Adjustments Income Tax Unrealized of Derivatives Effects Loss ---------------- ----------- ----------- Balance at December 31, 2003 -- unrealized loss..................... $64.6 $(23.3) $41.3 Changes in values of derivatives qualifying as cash flow hedges.... 18.4 (7.2) 11.2 ----- ------ ----- Balance at September 30, 2004 -- unrealized loss.................... $83.0 $(30.5) $52.5 ===== ====== =====
The unrealized loss as of September 30, 2004, presented in the preceding table, primarily reflects our use of interest rate swaps to convert variable-rate debt to fixed-rate debt, followed by lower market interest rates. For the quarter ended September 30, 2004, the ineffective portion of changes in the fair value of cash flow hedges amounted to $0.2 million and has been recorded as an increase to interest expense and for the nine months ended September 30, 2004, the ineffective portion amounted to $0.5 million and has been recorded as a decrease to interest expense. Assuming no change in interest rates, approximately $12.8 million, net of tax, of Accumulated 10 CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) Other Comprehensive Loss is expected to be reclassified to earnings over the next twelve months as contractual cash payments are made. The Accumulated Other Comprehensive Loss (along with the corresponding swap liability) will be adjusted as market interest rates change over the remaining life of the swaps. During 2004, CIT entered into credit default swaps, with a combined notional value of $98.0 million and terms of 5 years, to economically hedge certain CIT credit exposures. These swaps do not meet the requirements for hedge accounting treatment and therefore are recorded at fair value, with both realized and unrealized gains or losses recorded in other revenue in the consolidated statement of income. The cumulative fair value adjustment as of September 30, 2004 amounted to a $2.4 million pretax loss. Note 8 -- Certain Relationships and Related Transactions CIT is a partner with Dell Inc. ("Dell") in Dell Financial Services L.P. ("DFS"), a joint venture that offers financing to Dell's customers. The joint venture provides Dell with financing and leasing capabilities that are complementary to its product offerings and provides CIT with a steady source of new financings. On September 8, 2004, CIT and Dell agreed to extend the current agreement beyond October 2005 and to modify certain contractual terms of the relationship. The new agreements provide CIT with the right to purchase a minimum percentage of DFS's finance receivables on a declining scale through January 2010. Dell also has the option to purchase CIT's 30% interest in DFS in February 2008 based on a formula tied to DFS profitability, within a range of $100 million to $345 million. CIT regularly purchases finance receivables from DFS at a premium, portions of which are typically securitized within 90 days of purchase from DFS. CIT has limited recourse to DFS on defaulted contracts. In accordance with the joint venture agreement, net income and losses generated by DFS as determined under GAAP are allocated 70% to Dell and 30% to CIT. The DFS board of directors voting representation is equally weighted between designees of CIT and Dell, with one independent director. DFS is not consolidated in CIT's financial statements and is accounted for under the equity method. At September 30, 2004 and December 31, 2003, financing and leasing assets related to the DFS program (included in the CIT Consolidated Balance Sheet) were $2.4 billion and $1.4 billion, and securitized assets included in managed assets were $2.0 billion and $2.5 billion. In addition to the owned and securitized assets acquired from DFS, CIT's investment in and loans to the joint venture were approximately $192 million and $205 million at September 30, 2004 and December 31, 2003. CIT also has a joint venture arrangement with Snap-on Incorporated ("Snap-on") that has a similar business purpose and model to the DFS arrangement described above, including credit recourse on defaulted receivables. The agreement with Snap-on extends until January 2006. CIT and Snap-on have 50% ownership interests, 50% board of directors' representation, and share income and losses equally. The Snap-on joint venture is accounted for under the equity method and is not consolidated in CIT's financial statements. At September 30, 2004 and December 31, 2003, the related financing and leasing assets and securitized assets were $1.1 billion and $0.1 billion, respectively. In addition to the owned and securitized assets purchased from the Snap-on joint venture, CIT's investment in and loans to the joint venture were approximately $17 million at both September 30, 2004 and December 31, 2003. Both the Snap-on and the Dell joint venture arrangements were acquired in a 1999 acquisition. Since December 2000, CIT has been a joint venture partner with Canadian Imperial Bank of Commerce ("CIBC") in an entity that is engaged in asset-based lending in Canada. Both CIT and CIBC have a 50% ownership interest in the joint venture, and share income and losses equally. This entity is not consolidated in CIT's financial statements and is accounted for under the equity method. As of September 30, 2004 and December 31, 2003, CIT's investment in and loans to the joint venture were $175 million and $119 million. CIT invests in various trusts, partnerships, and limited liability corporations established in conjunction with structured financing transactions of equipment, power and infrastructure projects. CIT's interests in certain of these entities were acquired by CIT in November 1999, and others were subsequently entered into in the normal course of business. At September 30, 2004 and December 31, 2003, other assets included $18 million and $21 million of investments in non-consolidated entities relating to such transactions that are accounted for under the equity or cost methods. 11 CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) Certain shareholders of CIT provide investment management services in the normal course of business in conjunction with CIT's employee benefit plans. Note 9 -- Post retirement and Other Benefit Plans The following table discloses various components of pension expense ($ in millions):
For the Quarters For the Nine Months Ended September 30, Ended September 30, ------------------- -------------------- Retirement Plans 2004 2003 2004 2003 ------- ------ ------- ------- Service cost.............................................. $ 4.4 $ 3.9 $ 13.3 $ 11.7 Interest cost............................................. 3.9 3.6 11.7 10.8 Expected return on plan assets............................ (4.0) (2.4) (12.1) (7.0) Amortization of net loss.................................. 0.7 0.9 2.1 2.6 ----- ----- ----- ----- Net periodic benefit cost................................. $ 5.0 $ 6.0 $ 15.0 $ 18.1 ===== ===== ===== ===== Postretirement Plans Service cost.............................................. $ 0.5 $ 0.3 $ 1.4 $ 1.1 Interest cost............................................. 0.8 0.8 2.5 2.3 Amortization of net loss.................................. -- -- 0.5 0.1 ----- ----- ----- ----- Net periodic benefit cost................................. $ 1.3 $ 1.1 $ 4.4 $ 3.5 ===== ===== ===== =====
Note 10 -- Commitments and Contingencies In the normal course of meeting the financing needs of its customers, CIT enters into various credit-related commitments, including commitments to provide financing and leasing capital, letters of credit and guarantees. Standby letters of credit obligate CIT to pay the beneficiary of the letter of credit in the event that a CIT client to which the letter of credit was issued does not meet its related obligation to the beneficiary. 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 conditions from the customer. At the time credit-related commitments are granted, the fair value of the underlying collateral and guarantees typically approximates or exceeds the contractual amount of the commitment. In the event a customer defaults on the underlying transaction, the maximum potential loss will generally be limited to the contractual amount outstanding less the value of all underlying collateral and guarantees. Guarantees are issued primarily in conjunction with CIT's factoring product, whereby CIT provides the client with credit protection for its trade receivables without actually purchasing the receivables. The trade terms are generally sixty days or less. In the event that the customer is unable to pay according to the contractual terms, then the receivables would be purchased. As of September 30, 2004, there were no outstanding liabilities relating to these credit-related commitments or guarantees, as amounts are generally billed and collected on a monthly basis. The accompanying table summarizes the contractual amounts of credit-related commitments ($ in millions):
December 31, September 30, 2004 2003 ------------------------------------ ------------ Due to Expire -------------------- Within After Total Total One Year One Year Outstanding Outstanding -------- -------- ----------- ----------- Financing and leasing assets............................ $1,010.4 $6,403.6 $7,414.0 $5,934.3 Letters of credit and acceptances: Standby letters of credit............................. 422.7 189.4 612.1 508.7 Other letters of credit............................... 614.4 46.7 661.1 694.0 Acceptances........................................... 25.0 -- 25.0 9.3 Guarantees.............................................. 112.9 12.3 125.2 133.2 Venture capital fund commitments........................ 3.4 93.6 97.0 124.2
12 CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) Commitments to purchase commercial aircraft from both Airbus Industrie and The Boeing Company are detailed below ($ in millions):
September 30, 2004 December 31, 2003 -------------------- ------------------- Calendar Year Amount Units Amount Units - ------------- ------ ----- ------ ----- 2004 (Remaining)........................................ $ 279.0 7 $ 634.0 15 2005.................................................... 906.0 18 952.0 20 2006.................................................... 1,002.0 20 1,088.0 21 2007.................................................... 260.0 5 260.0 5 -------- -- -------- -- Total................................................... $2,447.0 50 $2,934.0 61 ======== == ======== ==
The commitment amounts above are based on appraised values. Actual amounts will vary based upon market factors at the time of delivery. Outstanding commitments to purchase equipment, other than the aircraft detailed above, totaled $280.9 million at September 30, 2004 and $197.2 million at December 31, 2003. CIT is party to a railcar sale-leaseback transaction under which it is obligated to pay a remaining total of $457.8 million, comprised of approximately $28.5 million per year through 2010 and declining thereafter through 2024, which is more than offset by scheduled payments from CIT's re-lease of the assets, contingent on our ability to maintain railcar usage. In conjunction with this sale-leaseback transaction, CIT has guaranteed all obligations of the related consolidated lessee entity. CIT has guaranteed the public and private debt securities of a number of its wholly owned, consolidated subsidiaries, including those disclosed in Note 14 -- Summarized Financial Information of Subsidiaries. In the normal course of business, various consolidated CIT subsidiaries have entered into other credit agreements and certain derivative transactions with financial institutions that are guaranteed by CIT. These transactions are generally used by CIT's subsidiaries outside of the U.S. to allow the local subsidiary to borrow funds in local currencies. In addition, CIT has guaranteed, on behalf of certain non-consolidated subsidiaries, $11.9 million of third party debt, which is not reflected in the consolidated balance sheet at September 30, 2004. Note 11 -- Legal Proceedings On April 10, 2003, a putative class action lawsuit, asserting claims under the Securities Act of 1933, was filed in the United States District Court for the Southern District of New York against CIT, its former Chief Executive Officer and its Chief Financial Officer. The lawsuit contained allegations that the registration statement and prospectus prepared and filed in connection with CIT's 2002 initial public offering ("IPO") were materially false and misleading, principally with respect to the adequacy of CIT's telecommunications-related loan loss reserves at the time. The lawsuit purported to have been brought on behalf of all those who purchased CIT common stock in or traceable to the IPO, and sought, among other relief, unspecified damages or rescission for those alleged class members who still hold CIT stock and unspecified damages for other alleged class members. On June 25, 2003, by order of the United States District Court, the lawsuit was consolidated with five other substantially similar suits, all of which had been filed after April 10, 2003 and one of which named as defendants some of the underwriters in the IPO and certain former directors of CIT. Glickenhaus & Co., a privately held investment firm, has been named lead plaintiff in the consolidated action. On September 16, 2003, an amended and consolidated complaint was filed. That complaint contains substantially the same allegations as the original complaints. In addition to the foregoing, two similar suits were brought by certain shareholders on behalf of CIT against CIT and some of its present and former directors under Delaware corporate law. On September 9, 2004, Exquisite Caterers v. Popular Leasing et al. ("Exquisite Caterers"), a putative class action, was filed against 13 financial institutions, including CIT, who had acquired equipment leases ("NorVergence Leases") from NorVergence, Inc., a reseller of telecommunications and Internet services to 13 CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) businesses. The Exquisite Caterers lawsuit is pending in the U.S. District Court for the District of New Jersey. Exquisite Caterers based its complaint on allegations that NorVergence misrepresented the capabilities of the equipment leased to its customers and overcharged for the equipment. The complaint asserts that the NorVergence Leases are unenforceable and seeks rescission, punitive damages, treble damages and attorneys' fees. In addition, putative class action suits in Florida and Texas and several individual suits, all based upon the same core allegations and seeking the same relief, have been filed by NorVergence customers against CIT and the other financial institutions. On July 14, 2004, the U.S. Bankruptcy Court ordered the liquidation of NorVergence under Chapter 7 of the Bankruptcy Code. Since then, the Attorneys General of Florida, New Jersey, New York, Illinois and Texas commenced investigations of NorVergence and the financial institutions, including CIT, who purchased NorVergence Leases. CIT has cooperated with the Attorneys General and agreed to refrain from collection activities related to the NorVergence Leases in each of these States pending the outcome of the investigations. In addition, there are various proceedings against CIT, which have arisen in the ordinary course of business. While the outcomes of the above mentioned and ordinary course legal proceedings and the related activities are not certain, based on present assessments, management does not believe that they will have a material adverse effect on the financial condition of CIT. Note 12 -- Severance and Facility Restructuring Reserves The following table summarizes previously established purchase accounting liabilities (pre-tax) related to severance of employees and closing facilities, as well as 2004 restructuring activities during 2004 ($ in millions):
Severance Facilities -------------------- --------------------- Number of Number of Total Employees Reserve Facilities Reserve Reserves --------- ------- ---------- ------- -------- Balance December 31, 2003......................... 43 $ 2.3 12 $ 7.2 $ 9.5 Additions......................................... 217 14.7 4 4.5 19.2 Utilization....................................... (82) (4.2) (2) (5.1) (9.3) --- ----- -- ----- ----- Balance at September 30, 2004..................... 178 $12.8 14 $ 6.6 $19.4 === ===== == ===== =====
The beginning reserves relate largely to the restructuring of the European operations and include amounts payable within the next year to individuals who chose to receive payments on a periodic basis. The facility reserves relate primarily to shortfalls in sublease transactions and will be utilized over the remaining lease terms, generally 6 years. The additions to restructuring reserves in 2004 relate to two initiatives: (1) the second quarter combination of the former Structured Finance with Capital Finance and the transfer of the communications and media portfolio to Commercial Finance ($3.6 million) and (2) the third quarter acquisition of a Western European vendor finance and leasing business ($15.6 million). Costs related to the Capital Finance combination were included in current period earnings, while restructuring liabilities related to the vendor finance and leasing acquisition were established under purchase accounting in conjunction with fair value adjustments to purchased assets and liabilities. Note 13 -- Goodwill and Intangible Assets Goodwill and intangible assets totaled $594.4 million and $487.7 million at September 30, 2004 and December 31, 2003, respectively. The Company periodically reviews and evaluates its goodwill and other intangible assets for potential impairment. Effective October 1, 2001, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), under which goodwill is no longer amortized but instead is assessed for impairment at least annually. As part of the adoption, the Company allocated its existing goodwill to each of its reporting units as of October 1, 2001. Under the transition provisions of SFAS 142, there was no goodwill impairment as of October 1, 2001. 14 CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) The most recent goodwill impairment analysis was performed during the fourth quarter of 2003, which indicated that the fair value of goodwill was in excess of the carrying value. During the September 2004 quarter, goodwill increased in Specialty Finance due to the Western European vendor finance and leasing business acquisition. The following table summarizes the goodwill balance by segment ($ in millions): Specialty Commercial Finance Finance Total ------- ------- ----- Balance at December 31, 2003............... $12.7 $370.4 $383.1 Additions.................................. 49.2 -- 49.2 ----- ------ ------ Balance at September 30, 2004.............. $61.9 $370.4 $432.3 ===== ====== ====== The Western European vendor finance and leasing acquisition increased goodwill and intangibles by approximately $80 million. Management is in the process of finalizing additional integration plans relating to this acquisition. Accordingly, additional purchase accounting refinements may result in an adjustment to goodwill and acquired intangibles. Other intangible assets, net, are comprised primarily of acquired customer relationships (Specialty Finance and Commercial Finance balances), as well as proprietary computer software and related transaction processes (Commercial Finance). The following table summarizes the intangible asset, net balances by segment ($ in millions): Specialty Commercial Finance Finance Total ------- ------- ----- Balance at December 31, 2003............... $ -- $104.6 $104.6 Additions.................................. 64.9 0.4 65.3 Amortization............................... (1.0) (6.8) (7.8) ----- ------ ------ Balance at September 30, 2004.............. $63.9 $98.2 $162.1 ===== ====== ====== The increase was primarily related to two acquisitions, the Western European vendor finance and leasing business in the third quarter of 2004 and a technology business in the second quarter of 2004. Other intangible assets are being amortized over their corresponding respective lives ranging from five to twenty years in relation to the related revenue streams, where applicable. Amortization expense totaled $3.3 million and $7.8 million for the quarter and nine months ended September 30, 2004 versus $1.1 million and $3.3 million for the respective prior year periods. Accumulated amortization totaled $18.2 million and $10.4 million at September 30, 2004 and December 31, 2003. The projected amortization for the years ended December 31, 2004 through December 31, 2008 is: $12.2 million for 2004; $17.2 million for 2005; $16.1 million for 2006; and $12.8 million for 2007 and 2008. 15 CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) Note 14 -- Summarized Financial Information of Subsidiaries The following presents condensed consolidating financial information for CIT Holdings LLC and Capita Corporation (formerly AT&T Capital Corporation). CIT has guaranteed on a full and unconditional basis the existing debt securities that were registered under the Securities Act of 1933 and certain other indebtedness of these subsidiaries. CIT has not presented related financial statements or other information for these subsidiaries on a stand-alone basis. ($ in millions)
CIT CONSOLIDATING CIT Capita Holdings Other BALANCE SHEETS Group Inc. Corporation LLC Subsidiaries Eliminations Total -------------- ----------- ----------- ---------- ------------ ------------ ----------- September 30, 2004 ASSETS Net finance receivables ................... $ 1,118.5 $ 3,268.6 $ 1,439.9 $ 28,077.9 $ -- $ 33,904.9 Operating lease equipment, net ............ -- 512.3 127.4 7,293.2 -- 7,932.9 Finance receivables held for sale ......... -- 85.2 77.7 1,594.4 -- 1,757.3 Cash and cash equivalents ................. 1,465.3 550.9 252.6 (108.7) -- 2,160.1 Other assets .............................. 7,930.9 (298.7) 448.6 2,014.7 (5,837.0) 4,258.5 ----------- ---------- ---------- ----------- ---------- ----------- Total Assets ........................... $ 10,514.7 $ 4,118.3 $ 2,346.2 $ 38,871.5 $ (5,837.0) $ 50,013.7 =========== ========== ========== =========== ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Debt ...................................... $ 34,771.6 $ 476.9 $ 1,364.1 $ 668.0 $ -- $ 37,280.6 Credit balances of factoring clients ...................... -- -- -- 3,929.9 -- 3,929.9 Accrued liabilities and payables .......... (30,093.9) 3,135.7 (311.3) 30,195.0 -- 2,925.5 ----------- ---------- ---------- ----------- ---------- ----------- Total Liabilities ...................... 4,677.7 3,612.6 1,052.8 34,792.9 -- 44,136.0 Minority interest ......................... -- -- -- 40.7 -- 40.7 Total Stockholders' Equity ................ 5,837.0 505.7 1,293.4 4,037.9 (5,837.0) 5,837.0 ----------- ---------- ---------- ----------- ---------- ----------- Total Liabilities and Stockholders' Equity ................... $ 10,514.7 $ 4,118.3 $ 2,346.2 $ 38,871.5 $ (5,837.0) $ 50,013.7 =========== ========== ========== =========== ========== =========== December 31, 2003 ASSETS Net finance receivables ................... $ 1,581.3 $ 3,755.4 $ 1,208.8 $ 24,111.0 $ -- $ 30,656.5 Operating lease equipment, net ............ -- 580.3 146.4 6,888.8 -- 7,615.5 Finance receivables held for sale ......... -- 80.0 163.8 674.5 -- 918.3 Cash and cash equivalents ................. 1,479.9 410.6 227.5 (144.3) -- 1,973.7 Other assets .............................. 8,308.2 198.1 174.1 1,892.6 (5,394.2) 5,178.8 ----------- ---------- ---------- ----------- ---------- ----------- Total Assets ........................... $ 11,369.4 $ 5,024.4 $ 1,920.6 $ 33,422.6 $ (5,394.2) $ 46,342.8 =========== ========== ========== =========== ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Debt ...................................... $ 30,656.7 $ 1,003.5 $ 1,407.7 $ 600.7 $ -- $ 33,668.6 Credit balances of factoring clients ...................... -- -- -- 3,894.6 -- 3,894.6 Accrued liabilities and payables .......... (24,681.5) 3,412.0 (701.2) 25,317.1 -- 3,346.4 ----------- ---------- ---------- ----------- ---------- ----------- Total Liabilities ......................... 5,975.2 4,415.5 706.5 29,812.4 -- 40,909.6 Minority interest ......................... -- -- -- 39.0 -- 39.0 Total Stockholders' Equity ................ 5,394.2 608.9 1,214.1 3,571.2 (5,394.2) 5,394.2 ----------- ---------- ---------- ----------- ---------- ----------- Total Liabilities and Stockholders' Equity ................... $ 11,369.4 $ 5,024.4 $ 1,920.6 $ 33,422.6 $ (5,394.2) $ 46,342.8 =========== ========== ========== =========== ========== ===========
16 CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
CIT CONSOLIDATING CIT Capita Holdings Other STATEMENTS OF INCOME Group Inc. Corporation LLC Subsidiaries Eliminations Total -------------------- ----------- ----------- ---------- ------------ ------------ ----------- Nine Months Ended September 30, 2004 Finance income ............................ $ 24.5 $ 534.6 $ 143.8 $ 2,078.3 $ -- $ 2,781.2 Interest expense .......................... (62.5) 157.1 10.9 807.9 -- 913.4 ----------- ---------- ---------- ----------- ---------- ----------- Net finance income ........................ 87.0 377.5 132.9 1,270.4 -- 1,867.8 Depreciation on operating lease equipment ........................ -- 236.3 32.5 447.7 -- 716.5 ----------- ---------- ---------- ----------- ---------- ----------- Net finance margin ........................ 87.0 141.2 100.4 822.7 -- 1,151.3 Provision for credit losses ............... 13.9 36.2 8.5 152.9 -- 211.5 ----------- ---------- ---------- ----------- ---------- ----------- Net finance margin, after provision for credit losses ...................... 73.1 105.0 91.9 669.8 -- 939.8 Equity in net income of subsidiaries ........................... 533.5 -- -- -- (533.5) -- Other revenue ............................. (3.0) 109.6 70.3 499.5 -- 676.4 Gain on venture capital investments ............................ -- -- -- 7.9 -- 7.9 ----------- ---------- ---------- ----------- ---------- ----------- Operating margin .......................... 603.6 214.6 162.2 1,177.2 (533.5) 1,624.1 Operating expenses ........................ 94.5 109.9 69.7 490.2 -- 764.3 Gain on redemption of debt ................ 41.8 -- -- -- -- 41.8 ----------- ---------- ---------- ----------- ---------- ----------- Income (loss) before provision for income taxes ........................... 550.9 104.7 92.5 687.0 (533.5) 901.6 Provision for income taxes ................ (1.1) (40.8) (36.1) (273.6) -- (351.6) Minority interest, after tax .............. -- -- -- (0.2) -- (0.2) ----------- ---------- ---------- ----------- ---------- ----------- Net income ................................ $ 549.8 $ 63.9 $ 56.4 $ 413.2 $ (533.5) $ 549.8 =========== ========== ========== =========== ========== =========== Nine Months Ended September 30, 2003 Finance income ............................ $ 73.4 $ 592.1 $ 142.0 $ 1,996.1 $ -- $ 2,803.6 Interest expense .......................... (37.2) 244.5 12.2 806.7 -- 1,026.2 ----------- ---------- ---------- ----------- ---------- ----------- Net finance income ........................ 110.6 347.6 129.8 1,189.4 -- 1,777.4 Depreciation on operating lease equipment ........................ -- 287.2 53.6 463.3 -- 804.1 ----------- ---------- ---------- ----------- ---------- ----------- Net finance margin ........................ 110.6 60.4 76.2 726.1 -- 973.3 Provision for credit losses ............... 30.6 33.9 12.2 209.8 -- 286.5 ----------- ---------- ---------- ----------- ---------- ----------- Net finance margin, after provision for credit losses ...................... 80.0 26.5 64.0 516.3 -- 686.8 Equity in net income of subsidiaries ........................... 363.0 -- -- -- (363.0) -- Other revenue ............................. 4.2 86.8 74.2 536.4 -- 701.6 Gain on venture capital investments ............................ -- -- -- (27.8) -- (27.8) ----------- ---------- ---------- ----------- ---------- ----------- Operating margin .......................... 447.2 113.3 138.2 1,024.9 (363.0) 1,360.6 Operating expenses ........................ 30.0 134.4 73.3 438.7 -- 676.4 Gain on redemption of debt ................ -- -- -- -- -- -- ----------- ---------- ---------- ----------- ---------- ----------- Income (loss) before provision for income taxes ........................... 417.2 (21.1) 64.9 586.2 (363.0) 684.2 Provision for income taxes ................ (5.5) 8.2 (25.3) (244.2) -- (266.8) Minority interest, after tax .............. -- -- -- (0.3) -- (0.3) Dividends on preferred capital securities, after tax .................. -- -- -- (5.4) -- (5.4) ----------- ---------- ---------- ----------- ---------- ----------- Net income ................................ $ 411.7 $ (12.9) $ 39.6 $ 336.3 $ (363.0) $ 411.7 =========== ========== ========== =========== ========== ===========
17 CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
CIT CONSOLIDATING STATEMENT CIT Capita Holdings Other OF CASH FLOWS Group Inc. Corporation LLC Subsidiaries Eliminations Total ----------------------- ----------- ----------- ---------- ------------ ------------ ---------- Nine Months Ended September 30, 2004 Cash Flows From Operating Activities: Net cash flows provided by (used for) operations ............... $ (177.8) $ 975.7 $ (91.9) $ 661.6 $ -- $ 1,367.6 ----------- ---------- ---------- ----------- ---------- ----------- Cash Flows From Investing Activities: Net (increase) decrease in financing and leasing assets ..................... 490.9 333.0 (147.0) (5,565.7) -- (4,888.8) Decrease in inter-company loans and investments ........................ (4,359.0) -- -- -- 4,359.0 -- Other ..................................... -- -- -- 69.2 -- 69.2 ----------- ---------- ---------- ----------- ---------- ----------- Net cash flows (used for) provided by investing activities ................ (3,868.1) 333.0 (147.0) (5,496.5) 4,359.0 (4,819.6) ----------- ---------- ---------- ----------- ---------- ----------- Cash Flows From Financing Activities: Net increase (decrease) in debt ........... 4,114.9 (526.6) (43.6) 261.2 -- 3,805.9 Inter-company financing ................... -- (641.8) 307.6 4,693.2 (4,359.0) -- Cash dividends paid ....................... (83.6) -- -- -- -- (83.6) Other ..................................... -- -- -- (83.9) -- (83.9) ----------- ---------- ---------- ----------- ---------- ----------- Net cash flows provided by (used for) financing activities ........ 4,031.3 (1,168.4) 264.0 4,870.5 (4,359.0) 3,638.4 ----------- ---------- ---------- ----------- ---------- ----------- Net increase (decrease) in cash and cash equivalents ....................... (14.6) 140.3 25.1 35.6 -- 186.4 Cash and cash equivalents, beginning of period .................... 1,479.9 410.6 227.5 (144.3) -- 1,973.7 ----------- ---------- ---------- ----------- ---------- ----------- Cash and cash equivalents, end of period .......................... $ 1,465.3 $ 550.9 $ 252.6 $ (108.7) $ -- $ 2,160.1 =========== ========== ========== =========== ========== ===========
18 CIT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
CIT CONSOLIDATING STATEMENT CIT Capita Holdings Other OF CASH FLOWS Group Inc. Corporation LLC Subsidiaries Eliminations Total ----------------------- ----------- ----------- ---------- ------------ ------------ ---------- Nine Months Ended September 30, 2003 Cash Flows From Operating Activities: Net cash flows provided by (used for) operations ............... $ (949.9) $ 648.9 $ 186.4 $ 1,660.5 $ -- $ 1,545.9 ----------- ---------- ---------- ----------- ---------- ----------- Cash Flows From Investing Activities: Net increase in financing and leasing assets ......................... (904.6) (174.7) (254.8) (2,081.9) -- (3,416.0) Increase in inter-company loans and investments ........................ (235.8) -- -- -- 235.8 -- Other ..................................... -- -- -- 23.0 -- 23.0 ----------- ---------- ---------- ----------- ---------- ----------- Net cash flows (used for) provided by investing activities ................ (1,140.4) (174.7) (254.8) (2,058.9) 235.8 (3,393.0) ----------- ---------- ---------- ----------- ---------- ----------- Cash Flows From Financing Activities: Net increase (decrease) in debt ........... 2,540.0 (63.3) (573.1) 253.4 -- 2,157.0 Inter-company financing ................... -- (242.7) 533.2 (54.7) (235.8) -- Cash dividends paid ....................... (76.3) -- -- -- -- (76.3) Other ..................................... -- -- -- (1.2) -- (1.2) ----------- ---------- ---------- ----------- ---------- ----------- Net cash flows provided by (used for) financing activities ........ 2,463.7 (306.0) (39.9) 197.5 (235.8) 2,079.5 ----------- ---------- ---------- ----------- ---------- ----------- Net increase (decrease) in cash and cash equivalents ....................... 373.4 168.2 (108.3) (200.9) -- 232.4 Cash and cash equivalents, beginning of period .................... 1,310.9 231.1 293.7 200.9 -- 2,036.6 ----------- ---------- ---------- ----------- ---------- ----------- Cash and cash equivalents, end of period .......................... $ 1,684.3 $ 399.3 $ 185.4 $ -- $ -- $ 2,269.0 =========== ========== ========== =========== ========== ===========
19 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosure about Market Risk The following discussion uses financial terms that we believe to be relevant to our business. A glossary of other key terms used in our business can be found following the "Introduction" section. Introduction CIT is a global commercial and consumer finance company that was founded in 1908. We provide financing and leasing capital for companies in a wide variety of industries, offering vendor, equipment, commercial, factoring, consumer, and structured financing products. Our primary sources of revenue are interest and rental income related to collateralized lending and equipment leasing. Finance receivables (loans and capital leases) and operating lease equipment (operating leases) are the two major asset types that generate this revenue. In the case of finance receivables (which are financial assets), the substantive risks and rewards of equipment and other collateralized asset ownership belong to the customer and we retain predominantly the borrower credit risk. With operating lease equipment, we retain the substantive risks and rewards of equipment ownership, including the right to take depreciation and the risk of damage or obsolescence. We fund our leasing and lending activity via the global capital markets, using commercial paper, unsecured term debt, and securitizations. We refer to the excess of our interest and rental income over our interest expense as "net finance margin." This revenue is supplemented by other "non-spread" sources of revenue such as syndication fees, gains from dispositions of equipment, factoring commissions, servicing of loans and other fees. We measure our overall level of profitability with the following metrics: o Net income as a percentage of average earning assets (AEA); o Net income per common share (EPS); o Net income as a percentage of average tangible equity (ROTE); and o Net income as a percentage of average equity (ROE). We believe that the keys to enhancing profitability in our business are as follows: Net Interest Margin -- Our ability to lend money at rates in excess of our cost of borrowing. We measure this with the following ratios: o Finance income as a percentage of AEA; and o Net finance income as a percentage of AEA. Funding and Market Rate Risk Management -- Our ability to access funding sources at competitive rates, which depends on maintaining high quality assets, strong capital ratios and high credit ratings. This profitability key is also a function of interest rate and currency rate risk management, where the goal is to substantially insulate our interest margins and profits from movements in market interest rates and foreign currency exchange rates. We gauge our funding and interest rate risk management activities with various measurements, including the following: o Interest expense as a percentage of AEA; o Net finance margin as a percentage of AEA; and o Various interest sensitivity and liquidity measurements that are discussed in Risk Management. Credit Risk Management -- Our ability to evaluate the creditworthiness of our customers, both during the credit granting process and periodically after the advancement of funds, and to maintain high quality assets. We assess our credit risk management activities with the following measurements: o Delinquent assets as a percentage of finance receivables; o Non-performing assets as a percentage of finance receivables; and o Net charge-offs as a percentage of average finance receivables. 20 Expense Management -- Our ability to maintain efficient operating platforms and infrastructure in order to run our business at competitive cost levels. We track our efficiency with the following measurements: o Efficiency ratio, which is the ratio of salaries and general operating expenses to operating margin excluding the provision for credit losses; and o Operating expenses as a percentage of average managed assets (AMA). Equipment and Residual Risk Management -- Our ability to evaluate collateral risk in leasing and lending transactions and to remarket equipment at lease termination. We measure these activities with the following: o Operating lease margin as a percentage of average leased equipment; o Gains and losses on equipment sales; and o Equipment utilization/value of equipment off lease. Asset Generation and Growth -- Our ability to originate new business and build our earning assets in a focused and prudent manner. We measure our performance in these areas with the following: o Origination volumes; o Levels of financing and leasing assets, and managed assets (including securitized finance receivables that we continue to manage); and o Levels of non-spread and other revenue. Capital Management -- Our ability to maintain a strong capital base and adequate credit loss reserve levels. We measure our performance in these areas with the following: o Tangible equity to managed assets ratio; o Reserve for credit losses as a percentage of finance receivables, of delinquent assets, and of non-performing assets; and o Debt to tangible equity ratio. Glossary of Key Terms
Term Description - ----- ---------- Average Earning Assets (AEA)................ "AEA" is the average during the reporting period of finance receivables, operating lease equipment, finance receivables held for sale and certain investments, less credit balances of factoring clients. The average is used for certain key profitability ratios, including return on AEA and margins as a percentage of AEA. Average Finance Receivables (AFR)........... "AFR" is the average during the reporting period of finance receivables and includes loans and finance leases. It excludes operating lease equipment. The average is used to measure the rate of charge-offs for the period. Average Managed Assets (AMA)................ "AMA" is the average earning assets plus the average of finance receivables previously securitized and still managed by us. The average is used to measure the rate of charge-offs on a managed basis for the period to monitor overall credit performance, and to monitor expense control. Derivative Contracts........................ Derivatives are entered into to reduce interest rate or foreign currency risks and more recently to hedge credit risk. Derivative contracts used by CIT include interest rate swaps, cross currency swaps, foreign exchange forward contracts and credit default swaps.
21
Term Description - ----- ---------- Efficiency Ratio............................ The efficiency ratio measures the level of expenses in relation to revenue earned, and is calculated as the percentage of salaries and general operating expenses to operating margin, excluding the provision for credit losses. Finance Income.............................. Finance income includes both interest income on finance receivables and rental income on operating leases. Financing and Leasing Assets................ Financing and leasing assets include loans, capital and finance leases, leveraged leases, operating leases, assets held for sale and certain investments. Leases -- capital and finance............... Lease designation describing financing structures whereby substantially all of the economic benefits and risks of ownership are passed to the lessee. Leases -- leveraged......................... Similar to capital leases except a third party, long-term creditor is involved and provides debt financing. CIT is party to these lease types as creditor or as lessor, depending on the transaction. Leases -- tax-optimized leveraged........... Leveraged leases where we are the lessor and have increased risk in comparison to other leveraged lease structures, as the creditor in these structures has a priority recourse to the leased equipment. Leases -- operating......................... Lease designation where CIT maintains ownership of the asset, collects rental payments, recognizes depreciation on the asset, and assumes the risks of ownership, including obsolescence. Managed Assets.............................. Managed assets are comprised of finance receivables, operating lease equipment, finance receivables held for sale, certain investments, and receivables securitized and still managed by us. The change in managed assets during a reporting period is one of our measurements of asset growth. Non-GAAP Financial Measures................. Non-GAAP financial measures are balances that do not readily agree to balances disclosed in financial statements presented in accordance with accounting principles generally accepted in the U.S. These measures are disclosed to provide additional information and insight relative to historical operating results and financial position of the business. Non-performing Assets....................... Non-performing assets include loans placed on non-accrual status, due to doubt of collectibility of principal and interest, and repossessed assets. Non-spread Revenue.......................... Non-spread revenues include syndication fees, gains from dispositions of equipment, factoring commissions, loan servicing and other fees and are reported in Other Revenue. Operating Margin............................ The total of net finance margin after provision for credit losses (risk adjusted margin) and other revenue. Retained Interest........................... The portion of the interest in assets sold in a securitization transaction that is retained by CIT. Residual Values............................. Residual values represent the estimated value of equipment at the end of the lease term. For operating leases, it is the value to which the asset is depreciated at the end of its useful economic life (i.e., "salvage" or "scrap value").
22
Term Description - ----- ---------- Return on Equity or Tangible Equity......... Net income expressed as a percentage of average equity or average tangible equity. These are key measurements of profitability. Risk Adjusted Margin........................ Net finance margin after provision for credit losses. Special Purpose Entity (SPE)................ Distinct legal entities created for a specific purpose in order to isolate the risks and rewards of owning its assets and incurring its liabilities. SPEs are typically used in securitization transactions, joint venture relationships and certain structured leasing transactions. Tangible Equity............................. Tangible stockholders' equity excludes goodwill and other intangible assets, and certain other comprehensive income items and includes preferred capital securities. Tangible equity is utilized in leverage ratios and return ratios. Yield-related Fees.......................... In certain transactions, in addition to interest income, yield-related fees are collected for the assumption of underwriting risk. Yield-related fees are reported in Finance Income and are recognized over the life of the lending transaction.
Profitability and Key Business Trends Net income for the nine months ended September 30, 2004 increased to $549.8 million from $411.7 million for the same 2003 period. The current year results included a $25.5 million after-tax gain recognized in the first quarter on the early redemption of debt. Our improved profitability reflected higher asset levels, lower charge-offs and lower borrowing costs, which were partially offset by higher operating expenses. Our profitability measurements for the respective periods are presented in the table below: Quarters Ended September 30, ---------------------------- 2004 2003 ----- ----- Net income per diluted share................. $0.86 $0.69 Net income as a percentage of AEA............ 1.88% 1.64% Return on average tangible equity............ 14.1% 12.2% Return on equity............................. 12.8% 11.3% Nine Months Ended September 30, ------------------------------ 2004 2003 ----- ----- Net income per diluted share................. $2.56 $1.94 Net income as a percentage of AEA............ 1.92% 1.54% Return on average tangible equity............ 14.3% 11.7% Return on equity............................. 13.0% 10.7% - -------------------------------------------------------------------------------- For the nine months ended September 30, 2004, net income per diluted share, net income as a percentage of AEA, return on average tangible equity and return on average equity excluding gain on redemption of debt were $2.44, 1.83%, 13.6% and 12.4%, respectively. Total financing and leasing portfolio assets grew to $44.4 billion at September 30, 2004 from $40.1 billion and $39.2 billion at December 31, 2003 and September 30, 2003. Managed assets were $52.4 billion at September 30, 2004, versus $49.7 billion and $49.3 billion at December 31, 2003 and September 30, 2003. New business volumes for the quarter and the nine months, increased 10% and 11% from 2003, with strength across most business lines. Increased asset levels included seasonal factoring and home equity portfolio growth for the quarter. We also acquired a European vendor leasing business with approximately $700 million in financing and leasing assets during the quarter. 23 This "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Quantitative and Qualitative Disclosure about Market Risk" contain certain non-GAAP financial measures. See "Non-GAAP Financial Measurements" for additional information. The sections that follow analyze our results by financial statement caption and are referenced back to the profitability keys that are discussed in "Introduction." Net Finance Margin An analysis of net finance margin is set forth below ($ in millions):
Quarters Ended September 30, Nine Months Ended September 30, ---------------------------- ------------------------------- 2004 2003 2004 2003 --------- --------- --------- --------- Finance income.................................. $ 963.1 $ 921.2 $ 2,781.2 $ 2,803.6 Interest expense................................ 315.4 333.7 913.4 1,026.2 --------- --------- --------- --------- Net finance income............................ 647.7 587.5 1,867.8 1,777.4 Depreciation on operating lease equipment....... 245.7 252.4 716.5 804.1 --------- --------- --------- --------- Net finance margin............................ $ 402.0 $ 335.1 $ 1,151.3 $ 973.3 ========= ========= ========= ========= Average Earnings Asset ("AEA").................. $39,195.6 $36,072.4 $38,119.0 $35,559.0 ========= ========= ========= ========= As a % of AEA: Finance income.................................. 9.83% 10.22% 9.73% 10.51% Interest expense................................ 3.22% 3.70% 3.20% 3.84% ---- ----- ---- ----- Net finance income............................ 6.61% 6.52% 6.53% 6.67% Depreciation on operating lease equipment....... 2.51% 2.80% 2.50% 3.02% ---- ----- ---- ----- Net finance margin............................ 4.10% 3.72% 4.03% 3.65% ==== ===== ==== =====
For the quarter ended September 30, 2004, net finance margin improved by $66.9 million or 38 basis points (as a percentage of AEA) from 2003, while the improvement for the nine months ended September 30, 2004 totaled $178.0 million or 38 basis points over the prior year period due primarily to reduced borrowing costs. Year over year growth in financing and leasing assets was offset by lower finance income, as the portfolio continued to reprice in the relatively low rate environment. Lower operating lease rentals reduced nine-month finance income by $72.7 million or 25 basis points from the prior year period. See "Operating Leases" for additional information regarding operating lease margin. The trend in net finance margin as a percentage of AEA, excluding the impact of operating lease rentals, reflects a greater decline in interest expense than in finance income yield, primarily due to the narrowing (improvement) of our credit spreads and the refinancing of higher-cost debt. The increase in AEA reflects growth in the latter part of 2003 and in 2004. 24 Additional information regarding our borrowing costs is shown in the following table. Debt balances represent the average outstanding for the applicable period. ($ in millions):
Before Swaps After Swaps --------------------- ------------------------ Quarter Ended September 30, 2004 Commercial paper, variable-rate senior notes and bank credit facilities........................ $15,855.5 1.78% $17,661.7 2.54% Fixed-rate senior and subordinated notes.................. $19,357.5 5.76% 17,551.3 4.96% --------- --------- Composite................................................. $35,213.0 3.97% $35,213.0 3.75% ========= ========= Quarter Ended September 30, 2003 Commercial paper, variable-rate senior notes and bank credit facilities........................ $11,728.3 1.77% $15,917.6 2.58% Fixed-rate senior and subordinated notes.................. 20,297.9 6.04% 16,108.6 5.78% --------- --------- Composite................................................. $32,026.2 4.48% $32,026.2 4.19% ========= ========= Nine Months Ended September 30, 2004 Commercial paper, variable-rate senior notes and bank credit facilities........................ $14,742.5 1.69% $17,842.5 2.43% Fixed-rate senior and subordinated notes.................. 19,206.0 5.72% 16,106.0 5.16% --------- --------- Composite................................................. $33,948.5 3.97% $33,948.5 3.72% ========= ========= Nine Months Ended September 30, 2003 Commercial paper, variable-rate senior notes and bank credit facilities........................ $12,154.3 1.87% $15,412.0 2.69% Fixed-rate senior and subordinated notes.................. 20,092.9 6.17% 16,835.2 5.94% --------- --------- Composite................................................. $32,247.2 4.55% $32,247.2 4.39% ========= =========
Operating Leases The table below summarizes operating lease margin, both in amount and as a percentage of average operating lease equipment ($ in millions):
Quarters Ended September 30, Nine Months Ended September 30, ---------------------------- ------------------------------- 2004 2003 2004 2003 ---------- ---------- ---------- ---------- Rental income................................... $ 366.6 $ 364.3 $1,051.0 $1,123.7 Depreciation expense............................ 245.7 252.4 716.5 804.1 -------- -------- -------- -------- Operating lease margin........................ $ 120.9 $ 111.9 $ 334.5 $ 319.6 ======== ======== ======== ======== Average operating lease equipment............... $7,873.2 $7,458.9 $7,720.1 $7,151.1 ======== ======== ======== ======== As a % of Average Operating Lease Equipment: Rental income................................... 18.62% 19.54% 18.15% 20.95% Depreciation expense............................ 12.48% 13.54% 12.37% 14.99% -------- -------- -------- -------- Operating lease margin.......................... 6.14% 6.00% 5.78% 5.96% ======== ======== ======== ========
Depreciation expense for the nine months ended September 30, 2004 included a $14.8 million impairment charge to reduce the carrying value of certain older, out of production aircraft to estimated fair value. The additional depreciation expense primarily relates to aircraft with a single lessee with upcoming lease terminations and for which market rental rates have declined. Therefore, the projected cash flows no longer supported the corresponding carrying value, resulting in the additional depreciation charge. The decline in operating lease margin and its components from 2003 for the nine months also reflects lower rentals on the Capital Finance aerospace portfolio due to the commercial airline industry downturn and the change in equipment mix to a greater proportion of aircraft and rail assets with an average depreciable life of 25 and 40 years, respectively, compared to smaller-ticket assets with lives generally of 3 years in the Specialty Finance and Equipment Finance portfolios. This trend was partially reversed during the current quarter by last quarter's small-ticket technology portfolio acquisition. Aerospace rentals trended downward following the terrorist attacks on September 11, 2001, but have recently shown some improvement. 25 The following table summarizes the total operating lease portfolio by segment ($ in millions):
September 30, June 30, December 31, September 30, 2004 2004 2003 2003 ------------- -------- ------------ ------------- Capital Finance -- Aerospace....................................... $4,247.3 $4,161.7 $4,141.1 $3,905.1 Capital Finance -- Rail and Other.................................. 2,227.6 2,212.5 2,095.3 2,075.1 Specialty Finance.................................................. 1,057.0 1,084.0 959.5 1,043.4 Equipment Finance.................................................. 401.0 380.6 419.6 461.7 -------- -------- -------- -------- Total............................................................ $7,932.9 $7,838.8 $7,615.5 $7,485.3 ======== ======== ======== ========
o The increase in the Capital Finance aerospace portfolio reflects deliveries of new commercial aircraft. o The Specialty Finance and Equipment Finance operating lease portfolios reflect the continued trend toward financing equipment through finance leases and loans, rather than operating leases, although the Specialty Finance runoff was offset by the above-mentioned second quarter 2004 technology portfolio acquisition. Maximizing equipment utilization levels is a prime component of operating lease portfolio profitability. Equipment not subject to lease agreements totaled $172.8 million and $265.9 million, at September 30, 2004 and December 31, 2003, respectively. The reduction was due to fewer commercial aerospace and rail assets off lease as well as the sale of a test equipment rental business in the second quarter of 2004. Weakness in the commercial airline industry could adversely impact prospective rental and utilization rates. Net Finance Margin after Provision for Credit Losses (Risk-adjusted Margin) The following table summarizes risk-adjusted margin, both in amount and as a percentage of AEA ($ in millions):
Quarters Ended September 30, Nine Months Ended September 30, ---------------------------- ------------------------------- 2004 2003 2004 2003 ------ ------ ------- ------ Net finance margin ................................................ $402.0 $335.1 $1,151.3 $973.3 Provision for credit losses ....................................... 60.2 82.9 211.5 286.5 ------ ------ ------- ------ Risk-adjusted margin ............................................ $341.8 $252.2 $ 939.8 $686.8 ====== ====== ======= ====== As a Percentage of AEA: Net finance margin ................................................ 4.10% 3.72% 4.03% 3.65% Provision for credit losses ....................................... 0.61% 0.92% 0.74% 1.07% ------ ------ ------- ------ Risk-adjusted margin ............................................ 3.49% 2.80% 3.29% 2.58% ====== ====== ======= ======
The improvement for both periods of 2004 compared to 2003 primarily reflects the previously discussed improvement in net finance margin, as well as incremental benefit from lower charge-offs, which is discussed further in "Credit Metrics". Other Revenue The components of other revenue are set forth in the following table ($ in millions):
Quarters Ended Nine Months Ended September 30, September 30, --------------------- ------------------------ 2004 2003 2004 2003 ------ ------ ------- ------ Fees and other income ............................................. $119.6 $151.5 $ 387.3 $430.8 Factoring commissions ............................................. 59.5 47.6 168.0 139.3 Gains on sales of leasing equipment ............................... 23.5 14.6 77.9 48.7 Gains on securitizations .......................................... 9.9 18.3 43.2 82.8 ------ ------ ------- ------ Total other revenue ............................................. $212.5 $232.0 $ 676.4 $701.6 ====== ====== ======= ====== Other revenue as a percentage of AEA .............................. 2.17% 2.57% 2.36% 2.63% ====== ====== ======= ======
26 We continue to emphasize growth and diversification of other revenues to improve our overall profitability, though in relation to 2003, our reduced level of securitization has shifted certain securitization-related revenues from other revenue back to interest margin. o Fees and other income include syndication fees, gains from asset sales, miscellaneous fees, accretion on retained securitization interests and servicing fees related to securitized assets. Both securitization accretion and servicing fees declined in 2004, corresponding to the reduction of approximately 20% in securitized assets during the period. Structuring and syndication fees in Capital Finance and Commercial Finance declined due to fewer transactions. Miscellaneous fees were down in all segments compared to prior periods. o Higher factoring commissions reflect strong volumes and year over year portfolio growth, benefiting from two large acquisitions completed during the latter part of 2003. o Gains on sales of leasing equipment increased in 2004 due to stronger equipment collateral values, including construction equipment in Equipment Finance and computer related equipment in the International unit of Specialty Finance. o Third quarter securitization gains were down considerably in 2004, due primarily to a decline in commercial (vendor finance) securitization volume in Specialty Finance. Additionally, we continue to fund home equity loan growth entirely on-balance sheet, which effectively transfers securitization accretion and servicing fees from fees and other income in 2003 to margin in 2004. Prior year volume included $0.5 billion of home equity loans that were securitized during the nine month period in 2003. The following table presents information regarding securitization activity ($ in millions):
Quarters Ended At or for the Nine Months September 30, Ended September 30, ------------------------- -------------------------- 2004 2003 2004 2003 --------- --------- --------- --------- Volume securitized ................................. $783.8 $1,317.5 $2,867.4 $ 4,207.4 Gains .............................................. $ 9.9 $ 18.3 $ 43.2 $ 82.8 Gains as a percentage of volume securitized ........ 1.26% 1.39% 1.51% 1.97% Gains as a percentage of pre-tax income ............ 3.28% 7.54% 4.79% 12.10% Securitized assets ................................. $7,994.9 $10,141.0 Retained interest in securitized assets ............ $1,124.9 $ 1,297.3
Venture Capital Investments On January 15, 2004, we announced the signing of a purchase and sale agreement for the disposition of the direct investment portfolio at an amount approximating the carrying value at December 31, 2003. During 2004, we closed the sale of approximately $68 million of this portfolio under the existing sales contract. We are working toward satisfying the outstanding closing conditions for remaining assets of $32 million at September 30, 2004. Our remaining portfolio of direct and private fund venture capital equity investments is summarized in the following table ($ in millions): September 30, December 31, 2004 2003 ------------- ------------ Direct investments.......................... $ 31.9 $101.1 Number of companies......................... 10 47 Private equity funds........................ $154.3 $148.8 Number of funds............................. 52 52 Remaining commitments....................... $ 97.0 $124.2 Total investment balance.................... $186.2 $249.9 The remaining commitments at September 30, 2004 relate to the private equity funds. 27 Reserve for Credit Losses Our provision for credit losses and reserve for credit losses is presented in the following table ($ in millions):
At or for the Quarters Ended Nine Months Ended September 30, September 30, ----------------------- ------------------------- 2004 2003 2004 2003 -------- -------- -------- -------- Balance beginning of period ........................ $621.0 $754.9 $ 643.7 $760.8 ------ ------ ------- ------ Provision for credit losses -- Finance receivables.. 60.2 82.9 224.0 286.5 -- Argentine reserve ... -- -- (12.5) -- ------ ------ ------- ------ Total provision for credit losses .................. 60.2 82.9 211.5 286.5 Reserves relating to acquisitions and other ........ 29.0 5.3 37.9 18.5 ------ ------ ------- ------ Additions to reserve for credit losses, net ...... 89.2 88.2 249.4 305.0 ------ ------ ------- ------ Net credit losses: Specialty Finance ................................ 42.5 38.6 114.6 122.5 Commercial Finance ............................... 21.6 28.9 76.2 83.9 Equipment Finance ................................ 7.8 23.1 49.6 99.8 Capital Finance .................................. 0.4 -- 14.8 7.1 ------ ------ ------- ------ Total net credit losses .......................... 72.3 90.6 255.2 313.3 ------ ------ ------- ------ Balance end of period .............................. $637.9 $752.5 $ 637.9 $752.5 ====== ====== ======= ====== Reserve for credit losses as a percentage of finance receivables ........................... 1.85% 2.48% Reserve for credit losses as a percentage of past due receivables (60 days or more)(1) ..... 111.3% 87.2% Reserve for credit losses as a percentage of non-performing assets(2) ...................... 120.7% 86.8%
- ---------- (1) The reserve for credit losses as a percentage of past due receivables (60 days or more), excluding telecommunication and Argentine reserves and corresponding delinquencies, was 100.7% and 62.0% at September 30, 2004 and 2003, respectively. (2) The reserve for credit losses as a percentage of non-performing assets, excluding telecommunication and Argentine reserves and corresponding non-performing assets, was 113.5% and 64.4% at September 30, 2004 and 2003, respectively. The decreased provision for 2004 in relation to 2003 reflects lower charge-offs and improving credit metrics. The increase in reserves relating to acquisitions during 2004 is due primarily to the European vendor leasing business and home equity bulk purchases. See "Credit Metrics" for further discussion. The following table presents the components of the reserve for credit losses, both in amount and as a percentage of corresponding finance receivables ($ in millions): September 30, 2004 December 31, 2003 ------------------ ----------------- Finance receivables................. $572.2 1.67% $524.6 1.71% Telecommunications(1)............... 65.7 18.90% 106.6 19.16% Argentina(2)........................ -- -- 12.5 55.07% ------ ------ Total............................... $637.9 1.85% $643.7 2.06% ====== ====== - ---------- (1) Percentage of finance receivables in telecommunications portfolio. (2) Percentage of finance receivables in Argentina. The decline in the reserve for credit losses at September 30, 2004 from 2003, in both amount and percentage, was due to telecommunication charge-offs taken against the previously established specific reserve and the improving credit metrics. The decline in the specific Argentine reserve resulted largely from the fourth quarter 2003 charge-off of $101.0 million, and the sale of that business during the second quarter of 2004. Reserve for Credit Losses -- Finance Receivables The reserve for credit losses is determined based on three key components: (1) specific reserves for collateral dependent loans which are impaired under SFAS 114, (2) reserves for estimated losses inherent in the portfolio based upon historical and projected credit trends and (3) reserves for general economic environment and other factors. 28 The reserve includes specific reserves relating to impaired loans (excluding telecommunication and Argentine) of $27.1 million at September 30, 2004, compared to $66.4 million at December 31, 2003. The portion of the reserve related to inherent estimated loss and estimation risk reflect our evaluation of trends in our key credit metrics, as well as our assessment of risk in certain industry sectors, including commercial aerospace. 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 values, among other things. Therefore, changes in economic conditions or credit metrics, including past due and non-performing accounts, or other events affecting specific obligors or industries may necessitate additions or reductions to the consolidated reserve for credit losses. Management continues to believe that the credit risk characteristics of the portfolio are well diversified by geography, industry, borrower and equipment type. Refer to "Concentrations" for more information. Based on currently available information, management believes that our total reserve for credit losses is adequate. Reserve for Credit Losses -- Telecommunications The telecommunications reserve was $65.7 million at September 30, 2004. We have recorded net write-offs of $134.3 million against this specific reserve since $200.0 million was added to the reserve for credit losses during the quarter ended June 30, 2002 (in light of the continued deterioration in the telecommunications sector at that time, particularly with respect to our competitive local exchange carrier ("CLEC") portfolio). Our telecommunications portfolio is included in "Communications" in the industry composition table included in Note 4 -- Concentrations to the Consolidated Financial Statements. This portfolio includes lending and leasing transactions to the telecommunications sector. Lending and leasing of telecommunication equipment to non-telecom companies is conducted in our Specialty Finance business and is categorized according to the customer's ("obligor's") industry in the industry composition table. Certain statistical data is presented in the following table ($ in millions): September 30, December 31, 2004 2003 ------------- ------------ CLEC accounts.................................. $117.4 $197.8 Other telecommunication accounts............... 230.2 381.2 ------ ------ Total telecommunication portfolio.............. $347.6 $579.0 ====== ====== Portfolio as a % of total financing and leasing assets........................... 0.79% 1.5% Number of accounts............................. 29 44 Top 10 accounts................................ $206.4 $253.4 Largest account exposure....................... $ 29.3 $ 31.0 Non-performing accounts........................ $ 24.5 $ 57.2 Number of non-performing accounts.............. 5 6 Non-performing accounts as a percentage of portfolio...................... 7.0% 9.9% Reserve for Credit Losses -- Argentina During the second quarter of 2004, we completed the previously announced sale of our Argentine portfolio to an Argentine bank at a modest gain. With the completion of this transaction, we transferred the remaining specific reserve of $12.5 million to the Reserve for Credit Losses -- Finance Receivables. In the first half of 2002, we established a $135.0 million specific reserve for Argentine exposure to reflect the geopolitical risks associated with collecting our peso-based assets and repatriating them into U.S. dollars that resulted from the Argentine government instituting certain economic reforms. When established, the reserve was about two-thirds of our combined currency and credit exposure. During the fourth quarter of 2003, based on the substantial progress with collection and work out efforts, we recorded a $101.0 million charge-off against this specific reserve and transferred $21.5 million to the Reserve for Credit Losses -- Finance Receivables. 29 Credit Metrics Net Charge-offs Net charge-offs, both in amount and as a percentage of average finance receivables, are shown in the following tables ($ in millions):
Before Liquidating and Liquidating and Total Telecommunications Telecommunications ----------------- ------------------ ------------------ Quarter Ended September 30, 2004 Specialty Finance -- commercial ........... $ 28.1 1.49% $ 28.1 1.49% $ -- -- Commercial Finance ........................ 21.6 0.72% 10.5 0.36% 11.1 11.63% Equipment Finance ......................... 7.8 0.49% 8.0 0.52% (0.2) (0.96)% Capital Finance ........................... 0.4 0.05% 0.4 0.05% -- -- ------ ------ ----- Total Commercial Segments .............. 57.9 0.81% 47.0 0.67% 10.9 9.03% Specialty Finance -- consumer ............. 14.4 1.30% 10.6 1.12% 3.8 2.41% ------ ------ ----- Total .................................. $ 72.3 0.88% $ 57.6 0.72% $14.7 5.25% ====== ====== ===== Quarter Ended September 30, 2003 Specialty Finance -- commercial ........... $ 25.6 1.47% $ 25.2 1.45% $ 0.4 -- Commercial Finance ........................ 28.9 1.08% 17.7 0.75% 11.2 7.39% Equipment Finance ......................... 23.1 1.52% 18.1 1.26% 5.0 6.53% Capital Finance ........................... -- -- -- -- -- -- ------ ------ ----- Total Commercial Segments .............. 77.6 1.17% 61.0 0.95% 16.6 7.13% Specialty Finance -- consumer ............. 13.0 1.80% 6.6 1.26% 6.4 3.22% ------ ------ ----- Total .................................. $ 90.6 1.23% $ 67.6 0.98% $23.0 5.33% ====== ====== ===== Nine Months Ended September 30, 2004 Specialty Finance -- commercial ........... $ 63.3 1.15% $ 63.2 1.15% $ 0.1 -- Commercial Finance ........................ 76.2 0.86% 34.5 0.41% 41.7 13.36% Equipment Finance ......................... 49.6 1.05% 42.9 0.93% 6.7 6.49% Capital Finance ........................... 14.8 0.73% 14.8 0.73% -- -- ------ ------ ----- Total Commercial Segments .............. 203.9 0.97% 155.4 0.75% 48.5 11.09% Specialty Finance -- consumer ............. 51.3 1.67% 30.9 1.22% 20.4 3.87% ------ ------ ----- Total .................................. $255.2 1.06% $186.3 0.80% $68.9 7.15% ====== ====== ===== Nine Months Ended September 30, 2003 Specialty Finance -- commercial ........... $ 80.5 1.51% $ 79.7 1.49% $ 0.8 15.92% Commercial Finance ........................ 83.9 1.10% 52.9 0.73% 31.0 6.54% Equipment Finance ......................... 99.8 2.14% 73.9 1.70% 25.9 8.34% Capital Finance ........................... 7.1 0.33% 1.8 0.08% 5.3 -- ------ ------ ----- Total Commercial Segments .............. 271.3 1.37% 208.3 1.10% 63.0 7.81% Specialty Finance -- consumer ............. 42.0 2.23% 23.1 1.81% 18.9 3.10% ------ ------ ----- Total .................................. $313.3 1.45% $231.4 1.14% $81.9 5.79% ====== ====== =====
Total charge-offs continued to decline during 2004, reflecting improvements across most segments: o Specialty Finance -- commercial charge-offs increased largely due to charge-offs taken with respect to leases to customers of NorVergence, Inc., a bankrupt vendor currently subject to regulatory investigations. At September 30, 2004, after taking into account charge-offs and loan loss reserves, the remaining outstanding receivables to NorVergence customers were approximately $6 million. 30 o Commercial Finance charge-offs fell well below the prior year in both the asset-based lending and factoring business, reflecting the stronger economy, retail in particular. In conjunction with the combination of the former Structured Finance into Capital Finance, the communications and media portfolio was transferred to the Commercial Finance segment. As a result, charge-offs against the specific telecommunications reserve are reflected in this segment. See "Results by Business Segment" for further discussion. o Equipment Finance improvement was considerable in relation to the prior year due to broad-based reductions across all product lines in both the U.S. and Canada, reflecting lower non-performing assets and strengthening collateral values. o Specialty Finance -- consumer charge-offs, while up in absolute amounts, were down as a percentage of average finance receivables from the prior year reflecting the return to on-balance sheet funding of the home equity portion of this portfolio. Past Due and Non-performing Assets The following table sets forth certain information concerning our past due (sixty days or more) and non-performing assets and the related percentages of finance receivables ($ in millions):
September 30, 2004 December 31, 2003 ----------------- ---------------- Past Dues: Specialty Finance -- commercial.................................... $212.3 2.60% $226.4 3.17% Commercial Finance................................................. 106.0 0.85% 131.9 1.14% Equipment Finance.................................................. 66.6 1.05% 137.9 2.18% Capital Finance.................................................... 28.4 1.04% 30.5 1.11% ------ ------ Total Commercial Segments....................................... 413.3 1.39% 526.7 1.90% Specialty Finance -- consumer...................................... 159.9 3.31% 149.6 4.26% ------ ------ Total .......................................................... $573.2 1.66% $676.3 2.16% ====== ====== Non-performing assets: Specialty Finance -- commercial.................................... $87.8 1.08% $119.8 1.68% Commercial Finance................................................. 96.9 0.78% 132.5 1.15% Equipment Finance.................................................. 164.9 2.60% 218.3 3.46% Capital Finance.................................................... 11.5 0.42% 49.7 1.81% ------ ------ Total Commercial Segments....................................... 361.1 1.22% 520.3 1.87% Specialty Finance -- consumer...................................... 167.6 3.47% 156.2 4.45% ------ ------ Total .......................................................... $528.7 1.53% $676.5 2.16% ====== ====== Non accrual loans.................................................. $427.9 $566.5 Repossessed assets................................................. 100.8 110.0 ------ ------ Total non-performing assets....................................... $528.7 $676.5 ====== ======
The September 30, 2004 delinquency rate of 1.66% marked the eighth consecutive quarter of improvement. o Specialty Finance -- commercial delinquency improvement from both prior year periods was driven by declines in the Small Business Lending portfolio and the international portfolios, most notably in our European operations, where servicing was centralized during 2003. o Commercial Finance past due levels were down considerably from 2003 due to improvements in the Commercial Services (factoring) and Business Credit (asset-based lending) units as well as in the telecommunications portfolio. o Equipment Finance delinquency improved across virtually all product lines in relation to 2003. o Capital Finance improvement from 2003 included lower delinquency in the project finance portfolio, though delinquency was up in the regional aerospace portfolio from last quarter. o Specialty Finance -- consumer delinquency was up in dollar amount but down as a percentage of finance receivables from 2003, reflecting a return to on-balance sheet funding of the home equity portfolio. Consumer delinquency on a managed basis has been relatively stable in percentage terms over the periods presented. 31 Likewise, non-performing assets also declined for the eighth consecutive quarter, reflecting the same trends discussed above. Non-performing telecommunications accounts (in Commercial Finance) totaled $24.5 million and $57.2 million September 30, 2004 and December 31, 2003, respectively. Managed past due loans in dollar amount and as a percentage of managed financial assets are shown in the table below ($ in millions): September 30, 2004 December 31, 2003 ------------------ ----------------- Past Dues: Specialty Finance -- commercial..... $294.8 2.29% $ 321.2 2.77% Commercial Finance.................. 106.0 0.85% 131.9 1.14% Equipment Finance................... 116.2 1.24% 243.6 2.49% Capital Finance..................... 28.4 1.04% 30.5 1.11% ------ -------- Total Commercial Segments........ 545.4 1.46% 727.2 2.04% Specialty Finance -- consumer....... 304.9 4.44% 294.8 4.78% ------ -------- Total ........................... $850.3 1.92% $1,022.0 2.44% ====== ======== Managed past due loans decreased both in dollar amount and as a percentage of managed financial assets, reflecting the same factors that are discussed in the owned delinquency analysis. Salaries and General Operating Expenses The efficiency ratio and the ratio of salaries and general operating expenses to average managed assets ("AMA") are summarized in the following table ($ in millions):
Quarters Ended September 30, Nine Months Ended September 30, ---------------------------- ------------------------------- 2004 2003 2004 2003 --------- --------- --------- --------- Efficiency ratio (1)............................ 41.5% 41.4% 41.6% 41.1% Salaries and general operating expenses as a percentage of AMA (2)......................... 2.18% 2.00% 2.18% 1.98% Salaries and general operating expenses ........ $ 256.7 $ 230.3 $ 764.3 $ 676.4 Average Managed Assets.......................... $47,166.8 $46,052.0 $46,737.1 $45,648.4
- -------------------------------------------------------------------------------- (1) Efficiency ratio is the ratio of salaries and general operating margin, excluding the provision for credit losses. (2) "AMA" means average managed assets, which is average earning assets plus the average of finance receivables previously securitized and still managed by us. Salaries and general operating expenses for the quarter and nine months ended September 30, 2004 increased from the prior year periods primarily due to higher incentive-based compensation, including restricted stock awards, acquisition activities and higher corporate expenses reflecting increased advertising, governance and compliance-related costs. Personnel decreased to approximately 5,700 at September 30, 2004, from 5,780 at September 30, 2003. Expenses are monitored closely by business unit and corporate management, and are reviewed monthly. An approval and review procedure is in place for major capital expenditures, such as computer equipment and software, including post-implementation evaluations. We continue to target an improved efficiency ratio in the mid 30% area and an AMA ratio of under 2.00%, as: (1) we have existing capacity to grow assets without commensurate expense increases; (2) we expect payback on our restructuring activities; (3) we have additional plans for platform consolidation technology investment; and (4) we expect compliance-related expenses to decline from the current level. Gain on Redemption of Debt In January 2004 and December 2003, we called at par $1.25 billion of term debt securities. These notes were listed on the New York Stock Exchange under the ticker symbols CIC and CIP and are commonly known as PINEs ("Public Income Notes"). The securities carried coupon rates of 8.25% and 8.125%, but were marked down to a market interest rate yield of approximately 7.5% in our financial statements through purchase accounting. In light of the high coupon rates, we called the securities for redemption pursuant to the terms outlined in the prospectuses. 32 The call of $512 million on January 15, 2004 resulted in a pretax gain of $41.8 million ($25.5 million after tax) in the first quarter of 2004. The December call of $735 million resulted in a pretax gain of $50.4 million ($30.8 million after tax) during the fourth quarter of 2003. Income Taxes The following table sets forth certain information concerning our income taxes ($ in millions):
Quarters Ended Nine Months Ended September 30, September 30, ------------------------ ----------------------- 2004 2003 2004 2003 --------- --------- --------- --------- Provision for income taxes................................ $117.7 $94.6 $351.6 $266.8 Effective tax rate........................................ 39.0% 39.0% 39.0% 39.0%
The effective tax rate exceeds the U.S. Federal tax rate of 35% primarily due to state and local, and foreign income taxes. At September 30, 2004, CIT had U.S. federal net operating losses of approximately $1.9 billion, which expire in various years beginning in 2011. In addition, CIT has various state net operating losses that will expire in various years beginning in 2004. Federal and state operating losses may be subject to annual use limitations under section 382 of the Internal Revenue Code of 1986, as amended, and other limitations under certain state laws. Management believes that CIT will have sufficient taxable income in future years and can avail itself of tax planning strategies in order to fully utilize these losses. Accordingly, we do not believe a valuation allowance is required with respect to these net operating losses. CIT has open tax years in the U.S., Canada and other jurisdictions that are currently under examination by the applicable taxing authorities, and certain later tax years that may in the future be subject to examination. CIT periodically evaluates the adequacy of our related tax reserves, taking into account our open tax return positions, tax law changes and third party indemnifications. We believe that our tax reserves are appropriate. The final determination of tax audits and any related litigation could affect our tax reserves. Results by Business Segment The tables that follow summarize selected financial information by business segment, based upon a fixed leverage ratio across business units, and the allocation of most corporate expenses ($ in millions):
Quarters Ended Nine Months Ended September 30, September 30, -------------------------- ---------------------- 2004 2003 2004 2003 --------- --------- --------- --------- Net Income (Loss) Specialty Finance......................................... $ 84.1 $ 71.6 $244.0 $186.8 Commercial Finance........................................ 78.3 58.8 217.6 181.3 Equipment Finance......................................... 19.1 9.0 52.6 27.6 Capital Finance........................................... 25.8 24.4 78.6 55.3 ------ ------ ------ ------ Total Segments............................................ 207.3 163.8 592.8 451.0 Corporate, including certain charges...................... (23.4) (16.0) (43.0) (39.3) ------ ------ ------ ------ Total .................................................... $183.9 $147.8 $549.8 $411.7 ====== ====== ====== ====== Return on AEA Specialty Finance......................................... 2.31% 2.34% 2.38% 2.04% Commercial Finance........................................ 3.74% 2.94% 3.54% 3.14% Equipment Finance......................................... 1.11% 0.53% 1.02% 0.53% Capital Finance........................................... 1.12% 1.11% 1.15% 0.88% Total Segments............................................ 2.13% 1.83% 2.09% 1.71% Corporate, including certain charges...................... (0.25)% (0.19)% (0.17)% (0.17)% Total .................................................... 1.88% 1.64% 1.92% 1.54%
33 Results by segment were as follows: o Specialty Finance profitability improvement reflected strong earnings in the international and home equity units. o Commercial Finance earnings remained strong, benefiting from continued high returns in both the factoring and asset-based lending businesses. The current year results also benefited from last year's factoring acquisitions. Current year profitability on the communications and media portfolio (transferred from Capital Finance) included higher levels of syndication activity. o Equipment Finance returns, while still below management's expectations, increased from the prior year, reflecting lower charge-offs, lower funding costs and higher equipment gains. Profitability improvement was broad-based across business lines in both the U.S. and Canada. o Capital Finance nine-month earnings reflected improved rail rentals and second quarter syndication gains in the project finance portfolio done largely for risk management purposes. Aerospace lease margins and profitability was dampened by a $14.8 million additional depreciation charge during the second quarter to reduce the carrying value of certain older leased aircraft, which are no longer manufactured, to estimated fair value. For all periods shown, Corporate includes unallocated corporate operating expenses and the results of the venture capital business including gains and losses on venture capital investments (losses of $0.5 million and $12.9 million after tax for the quarters ended September 30, 2004 and 2003 and losses of $5.4 million and $35.0 million after tax for the nine months ended September 30, 2004 and 2003). For the nine months ended September 30, 2004, Corporate also includes the gain on the early redemption of debt ($25.5 million after tax). 34 Financing and Leasing Assets The managed assets of our business segments and the corresponding strategic business units are presented in the following table ($ in millions):
September 30, December 31, Percentage 2004 2003 Change ------------ ----------- --------- Specialty Finance Segment Commercial Finance receivables................................................. $ 8,166.3 $ 7,150.0 14.2% Operating lease equipment, net...................................... 1,057.0 959.5 10.2% Finance receivables held for sale................................... 1,447.9 548.1 164.2% --------- --------- Owned assets........................................................ 10,671.2 8,657.6 23.3% Finance receivables securitized and managed by CIT.................. 3,251.1 3,915.4 (17.0)% --------- --------- Managed assets...................................................... 13,922.3 12,573.0 10.7% --------- --------- Consumer Finance receivables -- home equity.................................. 3,996.4 2,513.1 59.0% Finance receivables -- other........................................ 840.2 997.7 (15.8)% Finance receivables held for sale................................... 209.0 150.0 39.3% --------- --------- Owned assets........................................................ 5,045.6 3,660.8 37.8% Home equity finance receivables securitized and managed by CIT.................................................... 1,352.6 1,867.6 (27.6)% Other finance receivables securitized and managed by CIT............ 466.5 642.5 (27.4)% --------- --------- Managed assets...................................................... 6,864.7 6,170.9 11.2% --------- --------- Commercial Finance Segment Commercial Services Finance receivables................................................. 6,764.0 6,325.8 6.9% Business Credit Finance receivables................................................. 5,699.6 5,247.1 8.6% --------- --------- Owned assets........................................................ 12,463.6 11,572.9 7.7% --------- --------- Equipment Finance Segment Finance receivables ................................................ 6,343.2 6,317.9 0.4% Operating lease equipment, net...................................... 401.0 419.6 (4.4)% Finance receivables held for sale................................... 100.4 220.2 (54.4)% --------- --------- Owned assets........................................................ 6,844.6 6,957.7 (1.6)% Finance receivables securitized and managed by CIT.................. 2,924.7 3,226.2 (9.3)% --------- --------- Managed assets...................................................... 9,769.3 10,183.9 (4.1)% --------- --------- Capital Finance Segment Finance receivables................................................. 2,733.1 2,748.6 (0.6)% Operating lease equipment, net...................................... 6,474.9 6,236.4 3.8% --------- --------- Owned assets........................................................ 9,208.0 8,985.0 2.5% --------- --------- Other -- Equity Investments............................................ 186.2 249.9 (25.5)% --------- --------- Total Finance receivables................................................. $34,542.8 $31,300.2 10.4% Operating lease equipment, net...................................... 7,932.9 7,615.5 4.2% Finance receivables held for sale................................... 1,757.3 918.3 91.4% --------- --------- Financing and leasing assets excluding equity investments........... 44,233.0 39,834.0 11.0% Equity investments (included in other assets)....................... 186.2 249.9 (25.5)% --------- --------- Owned assets...................................................... 44,419.2 40,083.9 10.8% Finance receivables securitized and managed by CIT.................. 7,994.9 9,651.7 (17.2)% --------- --------- Managed assets.................................................... $52,414.1 $49,735.6 5.4% ========= =========
35 The increase in owned assets from 2003 was driven by: the combination of a strong mortgage refinancing market and bulk receivable purchases in the Specialty Finance home equity portfolio; strategic acquisitions in Specialty Finance-commercial including a European vendor leasing business and technology leasing business; two factoring acquisitions in Commercial Services in late 2003; and deliveries of aerospace assets in Capital Finance. The decline in receivables securitized reflects our return to funding home equity growth on-balance sheet and a lower level of commercial equipment securitizations. The following table presents new business volume by segment ($ in millions):
Quarters Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------- 2004 2003 2004 2003 --------- --------- --------- --------- Specialty Finance....................................... $3,823.4 $3,445.0 $10,677.6 $ 9,455.3 Commercial Finance...................................... 671.8 726.0 2,117.4 2,111.8 Equipment Finance....................................... 1,115.1 898.0 3,086.4 2,584.4 Capital Finance........................................ 357.2 334.0 1,007.3 1,100.0 -------- -------- --------- --------- Total new business volume............................. $5,967.5 $5,403.0 $16,888.7 $15,251.5 ======== ======== ========= =========
New origination volume for the quarter and nine months ended September 30, 2004 included stronger volume from our Specialty Finance vendor finance, international and home equity units, as well as improved demand for financing in Equipment Finance. Home equity new business volume in Specialty Finance was $1.2 billion and $3.0 billion for the quarter and nine months of 2004, up 54% and 13% from 2003. Volume was particularly strong in the third quarter, as the interest rate environment remained relatively low, and that resulted in strong production from our broker origination channel. Softness in the home equity securitization markets afforded us the opportunity for bulk portfolio purchases during the third quarter. The table below summarizes the targeted non-strategic business lines. During the third quarter, we sold virtually all of the remaining recreational marine and recreational vehicle receivables, following the prior quarter's decision to pursue a more rapid liquidation of these portfolios. In addition, during 2001 we ceased making new venture capital investments beyond existing commitments, and during the first quarter of 2004 we entered into an agreement to sell our direct investment portfolio. We will consider additional opportunities for more rapid liquidation of non-strategic assets to the extent available. See "Losses on Venture Capital Investments" for more information. ($ in millions) September 30, December 31, 2004 2003 ------------ ----------- Portfolio Manufactured housing............................ $576 $584 Franchise finance............................... 59 102 Owner-operator trucking......................... 38 91 Recreational marine............................. 1 86 Recreational vehicle............................ 1 58 Wholesale inventory finance..................... -- 2 ---- ---- Total on-balance sheet financing and leasing assets................. $675 $923 ==== ==== 36 Concentrations Ten Largest Accounts Our ten largest financing and leasing asset accounts in the aggregate represented 5.0% of our total financing and leasing assets at September 30, 2004 (the largest account being less than 1.0%) and 5.2% at December 31, 2003. Leveraged Leases As of September 30, 2004, net investments in leveraged leases totaled $1.3 billion, or 3.7% of finance receivables, with the major components being: (i) $553.2 million in commercial aerospace transactions, including $219.9 million of tax-optimization leveraged leases (which generally have increased risk for lessors in relation to conventional lease structures due to additional leverage in the transactions); (ii) $331.7 million of project finance transactions, primarily in the power and utility sector; and (iii) $232.3 million in rail transactions. Joint Venture Relationships Our strategic relationships with industry-leading equipment vendors are a significant origination channel for our financing and leasing activities. These vendor alliances include traditional vendor finance programs, joint ventures and profit sharing structures. Our vendor programs with Dell, Snap-on and Avaya Inc. are among our largest alliances. On September 8, 2004, CIT and Dell agreed to extend and modify the terms of the relationship. The new agreements provide CIT with the right to purchase a percentage of DFS's finance receivables through January 2010 and Dell also has the option to purchase CIT's 30% interest in DFS in February 2008. The joint venture agreement with Snap-on runs until January 2006. The Avaya agreement, which relates to profit sharing on a CIT direct origination program, extends through September 2006. At September 30, 2004, our financing and leasing assets included $3,723.8 million, $1,107.5 million and $700.8 million related to the Dell, Snap-on and Avaya programs, respectively. These amounts include receivables originated directly by CIT as well as receivables purchased from joint venture entities. Securitized assets included $2,018.5 million, $67.1 million and $590.3 million from the Dell, Snap-on and Avaya origination sources, respectively. The Dell amounts include $1,287.8 million in financing and leasing assets and $7.2 million in securitized assets originated by CIT in Canada and other countries outside of the U.S. A significant reduction in origination volumes from any of these alliances could have a material impact on our asset and net income levels. For additional information regarding certain of our joint venture activities, see Note 8 -- Certain Relationships and Related Transactions. Home Equity Portfolio The Specialty Finance home equity portfolio totaled $4.2 billion (owned) and $5.6 billion (managed) at September 30, 2004, representing 9.9% and 10.6% of owned and managed assets, respectively. The average loan size approximated $109 thousand. The top 5 state concentrations (California, Texas, Ohio, Pennsylvania and North Carolina) represented an aggregate 44% of the managed portfolio at September 30, 2004. Our home equity loan portfolio is 68% fixed-rate and 86% first mortgages with an average loan-to-value of 76% and an average FICO score of 637. Managed delinquencies (sixty days or more) were 3.91% and 4.22% at September 30, 2004 and September 30, 2003, while charge-offs on a managed basis for the nine-months ended September 30, 2004 and September 2003 were 1.04% and 0.96%. 37 Geographic Composition The following table summarizes significant state concentrations greater than 5.0% and foreign concentrations in excess of 1.0% of our owned financing and leasing portfolio assets. For each period presented, our managed asset geographic composition did not differ significantly from our owned asset geographic composition. During the third quarter, the state of Florida experienced significant weather-related damage. Our geographic concentration in Florida is approximately 4.0% and we do not expect resulting weather-related losses to be significant. September 30, December 31, 2004 2003 ------------- ------------ State California.................................... 10.2% 10.2% Texas......................................... 8.1% 7.7% New York...................................... 7.1% 7.4% All other states.............................. 53.6% 54.0% ---- ---- Total U.S........................................ 79.0% 79.3% ==== ==== Country Canada........................................ 4.9% 5.1% England....................................... 3.6% 2.8% France........................................ 1.4% 1.1% Australia..................................... 1.2% 1.3% Mexico........................................ 1.2% 1.0% Germany....................................... 1.2% 1.0% China......................................... 1.0% 0.9% All other countries........................... 6.5% 7.5% ---- ---- Total Outside U.S................................ 21.0% 20.7% ==== ==== Industry Composition The following discussions provide information with respect to selected industry compositions. Commercial Aerospace Our commercial aerospace portfolio, which includes financing and leasing transactions with commercial airlines and regional carriers, is managed in our Capital Finance segment. At September 30, 2004, our commercial airlines portfolio consists of financing and leasing assets with an average age of approximately 6 years (based on a dollar value weighted average). The portfolio was comprised of 89 customers, with the majority placed with major airlines around the world. The portfolio at December 31, 2003 consisted of 84 customers, and aircraft with a weighted average age of approximately 6 years. The commercial aircraft all comply with stage III noise regulations. 38 The following table summarizes the composition of the commercial airline portfolio ($ in millions):
September 30, 2004 December 31, 2003 ------------------------ ------------------------- Net Number of Net Number of Investment Planes Investment Planes ---------- ---------- ---------- ---------- By Geography: Europe......................................... $2,175.1 72 $1,991.0 65 North America(1)............................... 926.9 62 1,029.7 72 Asia Pacific................................... 1,129.3 43 1,013.6 40 Latin America.................................. 618.8 25 612.7 28 Africa/Middle East............................. 55.1 3 69.1 4 -------- --- -------- --- Total............................................. $4,905.2 205 $4,716.1 209 ======== === ======== === By Manufacturer: Boeing......................................... $ 2,540.4 132 $2,581.7 140 Airbus......................................... 2,329.5 64 2,114.6 57 Other.......................................... 35.3 9 19.8 12 -------- --- -------- --- Total............................................. $4,905.2 205 $4,716.1 209 ======== === ======== === By Body Type(2): Narrow......................................... $3,657.1 161 $3,415.7 159 Intermediate................................... 848.8 18 877.0 18 Wide........................................... 364.0 17 403.6 20 Other.......................................... 35.3 9 19.8 12 -------- --- -------- --- Total............................................. $4,905.2 205 $4,716.1 209 ======== === ======== === By Product: Operating Lease................................ $4,113.6 160 $4,011.7 159 Leverage Lease (Other)......................... 333.3 12 232.5 12 Leverage Lease (Tax optimized)................. 219.9 9 217.9 9 Capital Lease.................................. 142.0 6 135.6 7 Loan........................................... 96.4 18 118.4 22 -------- --- -------- --- Total............................................. $4,905.2 205 $4,716.1 209 ======== === ======== ===
- -------------------------------------------------------------------------------- (1) Comprised of net investments in the U.S. and Canada of $744.2 million (56 aircraft) and $182.7 million (6 aircraft) at September 30, 2004, and $822.7 million (66 aircraft) and $207.0 million (6 aircraft) at December 31, 2003. (2) Narrow body are single aisle design and consist primarily of Boeing 737 and 757 series and Airbus A320 series aircraft. Intermediate body are smaller twin aisle design and consist primarily of Boeing 767 series and Airbus A330 series aircraft. Wide body are large twin aisle design and consist primarily of Boeing 747 and 777 series and McDonnell Douglas DC10 series aircraft. The top five commercial aerospace exposures totaled $1,064.7 million at September 30, 2004, the largest of which was $288.4 million. All top five exposures are to carriers outside of the U.S., and three are to European carriers. The largest exposure to a U.S. carrier at September 30, 2004 was $132.0 million. Of the 205 aircraft, three are off-lease and covered by signed letters of intent. Future revenues and aircraft values could be impacted by the actions of the carriers, management's actions with respect to re-marketing the aircraft, airline industry performance and aircraft utilization. The regional aircraft portfolio at September 30, 2004 consists of 127 planes with a net investment of $351.9 million, up from $291.6 million at December 31, 2003. The carriers are primarily located in North America and Europe. Operating leases account for about 38% of the portfolio, with the rest capital leases or loans. The following is a list of our exposure to bankrupt aerospace carriers and the current status of the related aircraft at September 30, 2004: o UAL Corp. -- United Airlines leases 4 CIT-owned narrow body aircraft (2 Boeing 757 aircraft and 2 Boeing 737 aircraft) with a net investment of $82.8 million. Additionally, we hold Senior A tranche Enhanced Equipment Trust Certificates ("EETCs") issued by United Airlines, which are debt instruments 39 collateralized by aircraft operated by the airline, with a fair value of $42.5 million. In connection with the United Airlines' filing under Chapter 11, as of September 30, 2004, we have an outstanding balance of $53.1 million (with a commitment of $75 million) relating to a debtor-in-possession facility. During the third quarter, as co-arranger with three other lenders, CIT committed to $250 million of an aggregate $1.0 billion facility, which is secured by unencumbered aircraft, among other collateral. CIT syndicated its exposure down to $75 million, with further reduction to $50 million expected to close in the fourth quarter. o Air Canada -- Our net investment in aircraft is approximately $47.5 million, relating to one CIT-owned Boeing 767 aircraft. o Avianca Airlines -- Avianca is a lessee of one MD 80 aircraft and one Boeing 757, with a combined net investment of $30.9 million. o US Airways -- On September 11, 2004, US Airways Group, Inc. announced that it had filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Under existing agreements, CIT has operating leases where US Airways is the lessee of two 737-300, CIT-owned aircraft, for a total net investment of $13.6 million. Our aerospace assets include both operating leases and capital leases. Management monitors economic conditions affecting equipment values, trends in equipment values, and periodically obtains third party appraisals of commercial aerospace equipment, which include projected rental rates. We adjust the depreciation schedules of commercial aerospace equipment on operating leases or residual values underlying capital leases when required. Aerospace assets are reviewed for impairment annually, or more often when events or circumstances warrant. An aerospace asset is defined as impaired when the expected undiscounted cash flow over its expected remaining life is less than its book value. Both historical information and current economic trends are factored into the assumptions and analyses used when determining the expected undiscounted cash flow. Included among these assumptions are the following: o Lease terms o Remaining life of the asset o Lease rates supplied by independent appraisers o Remarketing prospects o Maintenance costs An impairment loss is recognized if circumstances indicate that the carrying amount of the asset may not be recoverable. Depreciation expense for the nine months ended September 30, 2004 included a $14.8 million impairment charge taken in the second quarter to reduce certain older, out of production aircraft to estimated fair value. The additional depreciation expense primarily related to aircraft with a single lessee with upcoming lease terminations and for which market rental rates have recently declined. Therefore, the projected cash flows no longer supported the corresponding carrying value, resulting in the additional depreciation charge. Commercial airline equipment utilization is high, with only three aircraft off-lease (with a book value of $30.5 million) at September 30, 2004, which demonstrates our ability to place aircraft. However, current placements are at compressed rental rates, which reflects current market conditions. Generally, leases are being written for terms between three and five years. Within the regional aircraft portfolio at September 30, 2004, there were 12 aircraft off-lease with a total book value of approximately $41.6 million. See table in "Risk Management" section for additional information regarding commitments to purchase additional aircraft. Other Assets Other assets totaled $2.5 billion at September 30, 2004 and $3.3 billion at December 31, 2003. The decline in other assets is primarily due to lower receivables from derivative counterparties in 2004. Other assets primarily consisted of the following at September 30, 2004: investments in and receivables from non-consolidated subsidiaries of $0.7 billion, deposits on commercial aerospace flight equipment of $0.4 billion, 40 accrued interest and receivables from derivative counterparties of $0.3 billion, direct and private fund equity investments of $0.2 billion, prepaid expenses of $0.1 billion and repossessed assets and off-lease equipment of $0.1 billion. The remaining balance includes furniture and fixtures, miscellaneous receivables and other assets. Risk Management Our risk management process is described in more detail in our 2003 Annual Report on Form 10-K. Our processes remain substantially the same as outlined in our 2003 Form 10-K. Interest Rate Risk Management -- We monitor our interest rate sensitivity on a regular basis by analyzing the impact of interest rate changes upon the financial performance of the business. We also consider factors such as the strength of the economy, customer prepayment behavior and re-pricing characteristics of our assets and liabilities. We evaluate and monitor various risk metrics: o Value at Risk (VAR), which measures the net economic value of assets by assessing the duration of assets and liabilities. Our asset portfolio is generally comprised of loans and leases of short to intermediate term. As such, the duration of our asset portfolio is generally less than three years. We target to closely match the duration of our liability portfolio with that of our asset portfolio. As of September 30, 2004, our liability portfolio duration was slightly longer than our asset portfolio duration. o Margin at Risk (MAR), which measures the impact of changing interest rates upon interest income over the subsequent twelve months. At the date that interest rate sensitivity is modeled, net interest income is derived considering the current level of interest-sensitive assets and related run-off (including both contractual repayment and historical prepayment experience), the current level of interest-sensitive liabilities and related maturities, and the current level of derivatives. Market interest rates are then raised 100 basis points instantaneously and paralleled across the entire yield curve, and a "rate shocked" simulation is run. An immediate hypothetical 100 basis point parallel increase in the yield curve on October 1, 2004 modeled against interest rate sensitive assets and liabilities as shown in the table below would reduce net income by an estimated $15 million after-tax over the next twelve months. A corresponding decrease in the yield curve would cause an increase in net income of a like amount. Although management believes that this measure provides an estimate of our interest rate sensitivity, there are certain limitations inherent in this sensitivity analysis, as it is unlikely that rate movements would be instantaneous or parallel, nor would our assets and debt reprice immediately. Additionally, it does not consider any potential remedial actions that management could take such as the pre-funding of liabilities and other business developments consistent with an increasing rate environment that may affect net income, for example asset growth and changes to our liability durations. Further, it does not account for potential changes in the credit quality, size, composition and prepayment characteristics of the balance sheet. Accordingly, no assurance can be given that actual results would not differ materially from the estimated outcomes of our simulations. Such simulations do not represent management's current view of future market interest rate movements. The following table summarizes the composition of our interest sensitive assets (including operating leases) and liabilities (excluding equity) before and after derivatives:
Before Swaps After Swaps ----------------------------- ------------------------------- Fixed rate Floating rate Fixed rate Floating rate ---------- ------------- ---------- ------------- September 30, 2004 Assets.................................................... 57% 43% 57% 43% Liabilities............................................... 60% 40% 50% 50% December 31, 2003 Assets.................................................... 57% 43% 57% 43% Liabilities............................................... 63% 37% 49% 51%
41 Total interest sensitive assets were $40.8 billion and $36.7 billion at September 30, 2004 and December 31, 2003, while total interest sensitive liabilities were $35.3 billion and $31.5 billion at September 30, 2004 and December 31, 2003. Certain December 31, 2003 amounts have been adjusted to conform to the current period presentation. Liquidity Risk Management -- Liquidity risk refers to the risk of being unable to meet potential cash outflows promptly and cost-effectively. Factors that could cause such a risk to arise might be a disruption of a securities market or other source of funds. We actively manage and mitigate liquidity risk by maintaining diversified sources of funding and committed alternate sources of funding, and we maintain and periodically review a contingency funding plan to be implemented in the event of any form of market disruption. The primary funding sources are commercial paper (U.S., Canada and Australia), long-term debt (U.S. and International) and asset-backed securities (U.S. and Canada). Outstanding commercial paper totaled $4.6 billion at September 30, 2004 and $4.2 billion at December 31, 2003. Our targeted U.S. program size remains at $5.0 billion with modest foreign programs aggregating $500 million to be maintained in Canada and Australia. Our goal is to maintain committed bank lines in excess of aggregate outstanding commercial paper. We have aggregate bank facilities of $6.3 billion with $4.2 billion in multi-year facilities. We maintain registration statements with the Securities and Exchange Commission ("SEC") covering debt securities that we may sell in the future. At September 30, 2004, we had $0.5 billion of registered, but unissued, debt securities available under a shelf registration statement. Subsequent to September 30, 2004, we registered and now have available a $15 billion program under which we may issue debt securities and other capital market securities. Term-debt issued during 2004 totaled $9.6 billion: $5.8 billion in variable-rate medium-term notes and $3.8 billion in fixed-rate notes. To further strengthen our funding capabilities, we maintain committed asset-backed facilities and shelf registration statements, which cover a range of assets from equipment to consumer home equity receivables and trade accounts receivable. While these are predominantly in the U.S., we also maintain facilities for Canadian domiciled assets. As of September 30, 2004, we had approximately $4.4 billion of availability in our committed asset-backed facilities and $2.4 billion of registered, but unissued, securities available under public shelf registration statements relating to our asset-backed securitization program. Our committed asset-backed commercial paper programs in the U.S. and Canada provide a substantial source of alternate liquidity. We also maintain committed bank lines of credit to provide backstop support of commercial paper borrowings and local bank lines to support our international operations. Additional sources of liquidity are loan and lease payments from customers, whole-loan asset sales and loan syndications. We also target and monitor certain liquidity metrics to ensure both a balanced liability profile and adequate alternate liquidity availability as outlined in the following table:
September 30, December 31, Liquidity Measurement Current Target 2004 2003 - --------------------- -------------- ------------- ------------ Commercial paper to total debt............................. Maximum of 15% 12% 13% Short-term debt to total debt.............................. Maximum of 45% 35% 36% Bank lines to commercial paper............................. Minimum of 100% 141% 149% Aggregate alternate liquidity* to short-term debt.......... Minimum of 75% 101% 93%
- -------------------------------------------------------------------------------- * Aggregate alternative liquidity includes available bank facilities, asset-backed conduit facilities and cash. Our credit ratings are an important factor in meeting our margin targets as better ratings generally correlate to lower cost of funds (see Net Finance Margin, interest expense discussion). The following credit ratings have been in place since September 30, 2002:
Short-Term Long-Term Outlook ---------- --------- ------- Moody's.......................................................... P-1 A2 Stable Standard & Poor's................................................ A-1 A Stable Fitch............................................................ F1 A Stable
42 The credit ratings previously stated 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. We have certain covenants contained in our legal documents that govern our funding sources. The most significant covenant in CIT's indentures and credit agreements is a negative pledge provision, which limits granting or permitting liens on our assets, but provides for exceptions for certain ordinary course liens needed to operate our business. In addition, our credit agreements also contain a minimum net worth requirement of $4.0 billion. The following tables summarize various contractual obligations, selected contractual cash receipts and contractual commitments as of September 30, 2004 ($ in millions):
Payments and Collections by Period(3) ---------------------------------------------------------------------------------- Remaining Total 2004 2005 2006 2007 2008(3) --------- --------- -------- -------- --------- --------- Commercial Paper .......................... $ 4,496.5 $ 4,496.5 $ -- $ -- $ -- $ -- Variable-rate term debt ................... 11,507.7 1,117.4 3,331.3 3,667.2 2,551.0 840.8 Fixed-rate term debt ...................... 21,022.2 1,723.0 4,444.6 2,729.2 3,448.0 8,677.4 Preferred capital security ................ 254.2 -- -- -- -- 254.2 Lease rental expense ...................... 149.6 12.9 45.4 35.0 27.3 29.0 --------- --------- -------- -------- --------- --------- Total contractual obligations .......... 37,430.2 7,349.8 7,821.3 6,431.4 6,026.3 9,801.4 --------- --------- -------- -------- --------- --------- Finance receivables(1) .................... 34,542.8 8,148.1 5,618.2 4,656.9 3,266.4 12,853.2 Operating lease rental income ............. 2,817.6 270.9 908.6 624.1 366.0 648.0 Finance receivables held for sale(2) ...... 1,757.3 1,757.3 -- -- -- -- Cash -- current balance ................... 2,160.1 2,160.1 -- -- -- -- Retained interest in securitizations and other investments .................... 1,188.4 174.5 451.6 264.8 167.1 130.4 --------- --------- -------- -------- --------- --------- Total projected cash availability ...... 42,466.2 12,510.9 6,978.4 5,545.8 3,799.5 13,631.6 --------- --------- -------- -------- --------- --------- Net projected cash inflow (outflow) ....... $ 5,036.0 $ 5,161.1 $ (842.9) $ (885.6) $(2,226.8) $ 3,830.2 ========= ========= ======== ======== ========= =========
- -------------------------------------------------------------------------------- (1) Based upon contractual cash flows; amount could differ due to prepayments, extensions of credit, charge-offs and other factors. (2) Based upon management's intent to sell rather than contractual maturities of underlying assets. (3) Projected proceeds from the sale of operating lease equipment, interest revenue from finance receivables, debt interest expense and other items are excluded. Obligations relating to postretirement programs are also excluded.
Commitment Expiration by Period ---------------------------------------------------------------------------------- Remaining Total 2004 2005 2006 2007 2008+ --------- --------- -------- -------- --------- --------- Credit extensions ....................... $ 7,414.0 $1,010.4 $ 624.2 $1,114.8 $ 794.0 $3,870.6 Aircraft purchases ...................... 2,447.0 279.0 906.0 1,002.0 260.0 -- Letters of credit ....................... 1,273.2 1,037.1 232.8 3.3 -- -- Sale-leaseback payments ................. 457.8 -- 28.5 28.5 28.5 372.3 Manufacturer purchase commitments ....... 280.9 280.9 -- -- -- -- Venture capital commitments ............. 97.0 3.4 0.5 -- 3.1 90.0 Guarantees .............................. 125.2 112.9 -- -- 10.5 1.8 Acceptances ............................. 25.0 25.0 -- -- -- -- --------- -------- -------- -------- -------- -------- Total contractual commitments ........... $12,120.1 $2,748.7 $1,792.0 $2,148.6 $1,096.1 $4,334.7 ========= ======== ======== ======== ======== ========
Internal Controls The Internal Controls Committee is responsible for monitoring and improving internal controls and overseeing the internal controls attestation mandated by Section 404 of the Sarbanes-Oxley Act of 2002 ("SARBOX"), for which the implementation year is 2004. The committee, which is chaired by the Controller, includes the CFO, the Director of Internal Audit and other senior executives in finance, legal, risk management and information technology. The documentation phase of the SARBOX project is complete and we are concluding the testing and remediation phases. Our management self-assessment is targeted to be completed during the fourth quarter of 2004. 43 Off-Balance Sheet Arrangements Securitization Program We fund asset originations on our balance sheet by accessing various sectors of the capital markets, including the term debt and commercial paper markets. In an effort to broaden funding sources and provide an additional source of liquidity, we use an array of securitization programs, including both asset-backed commercial paper and term structures, to access both the public and private asset-backed securitization markets. Current products in these programs include receivables and leases secured by equipment as well as consumer loans secured by residential real estate. The following tables summarizes data relating to our securitization balance and activity ($ in millions):
September 30, ------------------------ 2004 2003 -------- --------- Securitized Assets: Specialty Finance -- commercial................................................... $3,251.1 $ 3,876.8 Specialty Finance -- consumer..................................................... 1,819.1 2,759.7 Equipment Finance................................................................. 2,924.7 3,504.5 -------- --------- Total securitized assets.......................................................... $7,994.9 $10,141.0 ======== ========= Securitized assets as a % of managed assets....................................... 15.3% 20.6% ======== =========
Quarters Ended Nine Months Ended September 30, September 30, ---------------------- ----------------------- 2004 2003 2004 2003 ------ -------- -------- -------- Volume Securitized: Specialty Finance -- commercial................. $458.4 $ 936.0 $1,897.2 $2,546.3 Specialty Finance -- consumer................... -- -- -- 489.2 Equipment Finance............................... 325.4 381.5 970.2 1,171.9 ------ -------- -------- -------- Total volume securitized........................ $783.8 $1,317.5 $2,867.4 $4,207.4 ====== ======== ======== ========
Under our 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 typically 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 quarterly for impairment based on estimated fair value. 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. The key assumptions used in measuring the retained interests at the date of securitization for transactions completed during 2004 were as follows:
Commercial Equipment ----------------------- Specialty Equipment Finance Finance --------- --------- Weighted average prepayment speed................................................ 49.4% 12.1% Weighted average expected credit losses.......................................... 0.51% 0.80% Weighted average discount rate................................................... 6.48% 9.00% Weighted average life (in years)................................................. 1.22 1.92
44 Key assumptions used in calculating the fair value of the retained interests in securitized assets by product type at September 30, 2004 were as follows:
Commercial Equipment Consumer --------------------------- ------------------------------ Home Equity and Recreational Specialty Equipment Manufactured Vehicles Finance Finance Housing and Boat -------------- ---------- ---------------- ------------ Weighted average prepayment speed.............. 29.1% 12.1% 26.9% 20.3% Weighted average expected credit losses........ 1.28% 1.57% 1.36% 1.90% Weighted average discount rate................. 7.64% 9.58% 13.08% 14.48% Weighted average life (in years)............... 1.06 1.30 3.11 2.72
The Specialty Finance -- commercial securitized assets include receivables originated to consumers through DFS. Securitization and Joint Venture Activities We utilize special purpose entities ("SPEs") and joint ventures in the normal course of business to execute securitization transactions and conduct business in key vendor relationships. Securitization Transactions -- SPEs are used to achieve "true sale" requirements for these transactions in accordance with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." Pools of assets are originated or acquired and sold to SPEs, which in turn issue debt securities to investors solely backed by asset pools. Accordingly, CIT has no legal obligations to repay the securities in the event of a default by the SPE. CIT retains the servicing rights and participates in certain cash flows of the pools. The present value of expected net cash flows that exceeds the estimated cost of servicing is recorded in other assets as a "retained interest." Assets securitized are shown in our managed assets and our capitalization ratios on a managed basis. Under the recently issued rules relating to consolidation and SPEs, non-qualifying securitization entities have to be consolidated. We believe that all of our existing asset-backed SPE structures meet the definition of a qualifying special purpose entity ("QSPE") as defined by SFAS No. 140 and therefore will continue to qualify as off-balance sheet transactions. As part of these related activities, CIT entered into $2.3 billion in notional amount of hedge transactions to protect the related trusts against interest rate risk. CIT is insulated from this risk by entering into offsetting swap transactions with third parties totaling $2.3 billion in notional amount at September 30, 2004. Joint Ventures -- We utilize joint ventures organized through distinct legal entities to conduct financing activities with certain strategic vendor partners. Receivables are originated by the joint venture and purchased by CIT. The vendor partner and CIT jointly own these distinct legal entities, and there is no third-party debt involved. These arrangements are accounted for using the equity method, with profits and losses distributed according to the joint venture agreement. See disclosure in Item 1. Financial Statements, Note 8 -- Certain Relationships and Related Transactions. Capitalization The following table presents information regarding our capital structure ($ in millions):
September 30, December 31, 2004 2003 ------------ ------------ Commercial paper................................................................. $ 4,496.5 $ 4,173.9 Term debt........................................................................ 32,529.9 29,239.2 Preferred Capital Securities..................................................... 254.2 255.5 Stockholders' equity(1).......................................................... 5,882.3 5,427.8 --------- --------- Total capitalization............................................................. 43,162.9 39,096.4 Goodwill and other intangible assets............................................. (594.4) (487.7) --------- --------- Total tangible capitalization.................................................... $42,568.5 $38,608.7 ========= ========= Tangible stockholders' equity(1) and Preferred Capital Securities to managed assets................................................................. 10.57% 10.45% Tangible stockholders' equity(1) and Preferred Capital Securities................ 6.38x 6.14x
- -------------------------------------------------------------------------------- (1) Stockholders' equity excludes the impact of the accounting change for derivative financial instruments described in Note 7 to the Consolidated Financial Statements and certain unrealized gains or losses on retained interests and investments, as these amounts are not necessarily indicative of amounts that will be realized. See "Non-GAAP Financial Measurements." 45 The European vendor finance acquisition increased goodwill and acquired intangibles by approximately $80 million and treasury stock increased to $81 million. The preferred capital securities are 7.70% Preferred Capital Securities issued in 1997 by CIT Capital Trust I, a wholly-owned subsidiary. CIT Capital Trust I invested the proceeds of that issue in Junior Subordinated Debentures of CIT having identical rates and payment dates. Consistent with rating agency measurements, preferred capital securities are included in tangible equity in our leverage ratios. See "Non-GAAP Financial Measurements" for additional information. See "Liquidity Risk Management" for discussion of risks impacting our liquidity and capitalization. Critical Accounting Estimates The preparation of financial statements in conformity with GAAP requires management to use judgment in making estimates and assumptions that affect reported amounts of assets and liabilities, the reported amounts of income and expense during the reporting period and the disclosure of contingent assets and liabilities at the date of the financial statements. We consider accounting estimates relating to the following to be critical in applying our accounting policies: o Investments o Charge-off of Finance Receivables o Impaired Loans o Reserve for Credit Losses o Retained Interests in Securitizations o Lease Residual Values o Goodwill and Intangibles o Income Tax Asset and Liability Accounts There have been no significant changes to the methodologies and processes used in developing estimates relating to these items from what is described in our 2003 Annual Report on Form 10-K. Statistical Data The following table presents components of net income as a percent of AEA, along with other selected financial data ($ in millions): Nine Months Ended September 30, ----------------------- 2004 2003 --------- --------- Finance income..................................... 9.73% 10.51% Interest expense................................... 3.20% 3.84% --------- --------- Net finance income............................... 6.53% 6.67% Depreciation on operating lease equipment.......... 2.50% 3.02% --------- --------- Net finance margin............................... 4.03% 3.65% Provision for credit losses........................ 0.74% 1.07% --------- --------- Net finance margin after provision for credit losses............................... 3.29% 2.58% Other revenue...................................... 2.36% 2.63% Gain (loss) on venture capital investments......... 0.03% (0.11)% --------- --------- Operating margin................................... 5.68% 5.10% Salaries and general operating expenses............ 2.67% 2.54% Gain on redemption of debt......................... 0.14% -- --------- --------- Income before provision for income taxes......... 3.15% 2.56% Provision for income taxes......................... (1.23)% (1.00)% Minority interest, after tax....................... -- -- Dividends on preferred capital securities, after tax........................... -- (0.02)% --------- --------- Net income....................................... 1.92% 1.54% ========= ========= Average Earning Assets............................. $38,119.0 $35,559.0 ========= ========= 46 Non-GAAP Financial Measurements The SEC adopted Regulation G, which applies to any public disclosure or release of material information that includes a non-GAAP financial measure. The accompanying Management's Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosure about Market Risk contain certain non-GAAP financial measures. The SEC defines a non-GAAP financial measure as a numerical measure of a company's historical or future financial performance, financial position, or cash flows that excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with GAAP in the financial statements or includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated and presented. Non-GAAP financial measures disclosed in this report are meant to provide additional information and insight relative to historical operating results and financial position of the business, are used by management in its analysis and, in certain cases, to provide financial information that is presented to rating agencies and other users of financial information. These measures are not in accordance with, or a substitute for, GAAP and may be different from or inconsistent with non-GAAP financial measures used by other companies. Selected non-GAAP disclosures are presented and reconciled in the table below ($ in millions):
September 30, December 31, 2004 2003 ------------ ------------ Managed assets(1) Finance receivables .................................................................. $34,542.8 $31,300.2 Operating lease equipment, net ....................................................... 7,932.9 7,615.5 Finance receivables held for sale .................................................... 1,757.3 918.3 Equity and venture capital investments (included in other assets) .................... 186.2 249.9 --------- --------- Total financing and leasing portfolio assets ......................................... 44,419.2 40,083.9 Securitized assets ................................................................... 7,994.9 9,651.7 --------- --------- Managed Assets ....................................................................... $52,414.1 $49,735.6 ========= ========= Earning assets(2) Total financing and leasing portfolio assets ......................................... $44,419.2 $40,083.9 Credit balances of factoring clients ................................................. (3,929.9) (3,894.6) --------- --------- Earning assets ....................................................................... $40,489.3 $36,189.3 ========= ========= Tangible equity(3) Total equity ......................................................................... $ 5,837.0 $ 5,394.2 Other comprehensive loss relating to derivative financial instruments ................ 52.5 41.3 Unrealized gain on securitization investments ........................................ (7.2) (7.7) Goodwill and intangible assets ....................................................... (594.4) (487.7) --------- --------- Tangible common equity ............................................................... 5,287.9 4,940.1 Preferred capital securities ......................................................... 254.2 255.5 --------- --------- Tangible equity ...................................................................... $ 5,542.1 $ 5,195.6 ========= ========= Debt, net of overnight deposits(4) Total Debt ........................................................................... $37,280.6 $33,668.6 Overnight deposits ................................................................... (1,651.7) (1,529.4) Preferred capital securities ......................................................... (254.2) (255.5) --------- --------- Debt, net of overnight deposits ...................................................... $35,374.7 $31,883.7 ========= ========= Earnings per share, excluding certain items(5) GAAP Earnings per share .............................................................. $ 0.86 $ 0.72 Gain on debt redemption .............................................................. -- (0.14) --------- --------- Adjusted earnings per share .......................................................... $ 0.86 $ 0.58 ========= =========
- -------------------------------------------------------------------------------- (1) Managed assets are utilized in certain credit and expense ratios. Securitized assets are included in managed assets because CIT retains certain credit risk and the servicing related to assets that are funded through securitizations. (2) Earning assets are utilized in certain revenue and earnings ratios. Earning assets are net of credit balances of factoring clients. This net amount, which corresponds to amounts funded, is a basis for revenues earned, such as finance income and factoring commissions. (3) Tangible equity is utilized in leverage ratios, and is consistent with our presentation to rating agencies. Other comprehensive losses and unrealized gains on securitization investments (both included in the separate component of equity) are excluded from the calculation, as these amounts are not necessarily indicative of amounts that will be realized. (4) Debt, net of overnight deposits, is utilized in certain leverage ratios. Overnight deposits are excluded from these calculations, as these amounts are retained by the Company to repay debt. Overnight deposits are reflected in both debt and cash and cash equivalents. (5) The EPS related to the items listed are shown separately, as the items are not indicative of our on-going operations. 47 Forward-Looking Statements Certain statements contained in this document are "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. All statements contained herein that are not clearly historical in nature are forward-looking and the words "anticipate," "believe," "expect," "estimate" and similar expressions are generally intended to identify forward-looking statements. Any forward-looking statements contained herein, in press releases, written statements or other documents filed with the Securities and Exchange Commission or in communications and discussions with investors and analysts in the normal course of business through meetings, webcasts, phone calls and conference calls, concerning our operations, economic performance and financial condition are subject to known and unknown risks, uncertainties and contingencies. Forward-looking statements are included, for example, in the discussions about: o our liquidity risk management, o our credit risk management, o our asset/liability risk management, o our funding, borrowing costs and net finance margin, o our capital, leverage and credit ratings, o our operational and legal risks, o our growth rates, o our commitments to extend credit or purchase equipment, and o how we may be affected by legal proceedings. All forward-looking statements involve risks and uncertainties, many of which are beyond our control, which may cause actual results, performance or achievements to differ materially from anticipated results, performance or achievements. Also, forward-looking statements are based upon management's estimates of fair values and of future costs, using currently available information. Therefore, actual results may differ materially from those expressed or implied in those statements. Factors that could cause such differences include, but are not limited to: o risks of economic slowdown, downturn or recession, o industry cycles and trends, o risks inherent in changes in market interest rates and quality spreads, o funding opportunities and borrowing costs, o changes in funding markets, including commercial paper, term debt and the asset-backed securitization markets, o uncertainties associated with risk management, including credit, prepayment, asset/liability, interest rate and currency risks, o adequacy of reserves for credit losses, o risks associated with the value and recoverability of leased equipment and lease residual values, o changes in laws or regulations governing our business and operations, o changes in competitive factors, and o future acquisitions and dispositions of businesses or asset portfolios. 48 Item 4. Controls and Procedures As of the end of the period covered by this report, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures. The Company's disclosure controls and procedures are designed to ensure that the information that the Company must disclose in its reports filed under the Securities Exchange Act is communicated and processed in a timely manner. Jeffrey M. Peek, President and Chief Executive Officer, and Joseph M. Leone, Vice Chairman and Chief Financial Officer, participated in this evaluation. Based on this evaluation, Messrs. Peek and Leone concluded that, during the last fiscal quarter covered by this report, the Company's disclosure controls and procedures were effective, except as noted below. Since the date of the evaluation described above, there have not been any significant changes in the Company's internal controls or in other factors that could significantly affect those controls. In connection with the June 2001 acquisition by Tyco, our income tax compliance, reporting and planning function was transferred to Tyco. Following our 2002 IPO, we classified our tax reporting as a "reportable condition", as defined by standards established by the American Institute of Certified Public Accountants. As previously reported, we have made substantial progress with respect to the reportable condition by hiring and training personnel, rebuilding tax reporting systems, preparing amendments to prior period U.S. Federal income tax returns, and implementing processes and controls with respect to income tax reporting and compliance. During the quarter ended September 30, 2004, we continued to develop the processes and data to complete the analysis of our income tax asset and liability accounts, including the refinement of and reconciliation to transactional level detail of book to tax differences. In conjunction with these efforts, we incorporated the effects of filing our 2003 U.S. Federal income tax return and based thereon, made adjustments to the December 31, 2003 tax basis balance sheet. We also identified additional amendments relating to prior period income tax returns. Work is continuing to validate income tax asset and liability accounts. In addition, we prepared the initial documentation relating to our tax processes and internal controls over related financial reporting in connection with our Sarbanes-Oxley section 404 initiative, and performed initial tests of key controls. The results of these tests and our work indicated that further improvements are required with respect to tax reporting processes and controls. We are continuing to focus significant effort and resources in this regard with our objective being to remediate the income tax reporting processes and controls in connection with our December 31, 2004 financial reporting. 49 PART II. OTHER INFORMATION Item 1. Legal Proceedings On April 10, 2003, a putative class action lawsuit, asserting claims under the Securities Act of 1933, was filed in the United States District Court for the Southern District of New York against CIT, its former Chief Executive Officer and its Chief Financial Officer. The lawsuit contained allegations that the registration statement and prospectus prepared and filed in connection with CIT's 2002 initial public offering ("IPO") were materially false and misleading, principally with respect to the adequacy of CIT's telecommunications-related loan loss reserves at the time. The lawsuit purported to have been brought on behalf of all those who purchased CIT common stock in or traceable to the IPO, and sought, among other relief, unspecified damages or rescission for those alleged class members who still hold CIT stock and unspecified damages for other alleged class members. On June 25, 2003, by order of the United States District Court, the lawsuit was consolidated with five other substantially similar suits, all of which had been filed after April 10, 2003 and one of which named as defendants some of the underwriters in the IPO and certain former directors of CIT. Glickenhaus & Co., a privately held investment firm, has been named lead plaintiff in the consolidated action. On September 16, 2003, an amended and consolidated complaint was filed. That complaint contains substantially the same allegations as the original complaints. In addition to the foregoing, two similar suits were brought by certain shareholders on behalf of CIT against CIT and some of its present and former directors under Delaware corporate law. On September 9, 2004, Exquisite Caterers v. Popular Leasing et al. ("Exquisite Caterers"), a putative class action, was filed against 13 financial institutions, including CIT, who had acquired equipment leases ("NorVergence Leases") from NorVergence, Inc., a reseller of telecommunications and Internet services to businesses. The Exquisite Caterers lawsuit is pending in the U.S. District Court for the District of New Jersey. Exquisite Caterers based its complaint on allegations that NorVergence misrepresented the capabilities of the equipment leased to its customers and overcharged for the equipment. The complaint asserts that the NorVergence Leases are unenforceable and seeks rescission, punitive damages, treble damages and attorneys' fees. In addition, putative class action suits in Florida and Texas and several individual suits, all based upon the same core allegations and seeking the same relief, have been filed by NorVergence customers against CIT and the other financial institutions. On July 14, 2004, the U.S. Bankruptcy Court ordered the liquidation of NorVergence under Chapter 7 of the Bankruptcy Code. Since then, the Attorneys General of Florida, New Jersey, New York, Illinois and Texas commenced investigations of NorVergence and the financial institutions, including CIT, who purchased NorVergence Leases. CIT has cooperated with the Attorneys General and agreed to refrain from collection activities related to the NorVergence Leases in each of these States pending the outcome of the investigations. In addition, there are various legal proceedings against CIT, which have arisen in the ordinary course of business. While the outcomes of the above mentioned and ordinary course legal proceedings and the related activities are not certain, based on present assessments, management does not believe that they will have a material adverse effect on the financial condition of CIT. 50 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The following table details the repurchase activity of CIT common stock during the September 2004 quarter:
Total Number of Shares Purchased Maximum Number Total as Part of of Shares that May Number of Average Publically Yet Be Purchased Shares Price Paid Announced Plans Under the Plans Purchased per Share or Programs or Programs --------- --------- ---------------- --------------- Balance at June 30, 2004 ............................ 896,730 $36.40 2,060,000 --------- July 1 - July 31, 2004 ...................... 420,000 $36.69 420,000 1,640,000 August 1 - August 31, 2004 .................. 880,000 $35.60 880,000 760,000 September 1 - September 30, 2004 ............ 486,500 $36.96 486,500 273,500 --------- Total Purchases ............................. 1,786,500 --------- Reissuances(1) ...................................... (460,974) --------- Balance at September 30, 2004 ....................... 2,222,256 =========
- ---------- (1) Includes the issuance of shares of our common stock upon exercise of stock options and the vesting of restricted stock. On October 20, 2004, our Board of Directors approved a continuation of the common stock repurchase program to acquire up to an additional three million shares of our outstanding common stock in conjunction with employee equity compensation programs. These are in addition to the shares remaining from the previously approved program on April 21, 2004. The program authorizes the company to purchase shares on the open market from time to time over a two-year period beginning October 21, 2004. The repurchased common stock is held as treasury shares and may be used for the issuance of shares under CIT's employee stock plans. Acquisitions under the share repurchase program will be made from time to time at prevailing prices as permitted by applicable laws, and subject to market conditions and other factors. The program may be discontinued at any time and is not expected to have a significant impact on our capitalization. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3.1 Second Restated Certificate of Incorporation of the Company (incorporated by reference to Form 10-Q filed by CIT on August 12, 2003). 3.2 Amended and Restated By-laws of the Company (incorporated by reference to Form 10-Q filed by CIT on August 12, 2003). 4.1 Indenture dated as of August 26, 2002 by and among CIT Group Inc., Bank One Trust Company, N.A., as Trustee and Bank One NA, London Branch, as London Paying Agent and London Calculation Agent, for the issuance of unsecured and unsubordinated debt securities (incorporated by reference to Exhibit 4.18 to Form 10-K filed by CIT on February 26, 2003). 10.1 Amendment to Employment Agreement by and among CIT Group Inc. and Jeffrey M. Peek dated as of July 22, 2004. 10.2 Employment agreement by and among CIT Group Inc. and Thomas B. Hallman dated as of August 1, 2004. 10.3 Employment agreement by and among CIT Group Inc. and Joseph M. Leone dated as of August 1, 2004. 10.4 Employment agreement by and among CIT Group Inc. and Lawrence A. Marsiello dated as of August 1, 2004. 10.5 Employment agreement by and among CIT Group Inc. and Frederick E. Wolfert dated as of August 1, 2004. 51 10.6 2004 Extension and Funding Agreement dated September 8, 2004, by and among Dell Financial Services L.P., Dell Credit Company L.L.C., DFS-SPV L.P., DFS-GP, Inc., Dell Inc., Dell Gen. P. Corp., Dell DFS Corporation, CIT Group Inc., CIT Financial USA, Inc., CIT DCC Inc., CIT DFS Inc., CIT Communications Finance Corporation, and CIT Credit Group USA Inc. (incorporated by reference to Form 8-K filed by CIT on September 9, 2004). 12.1 CIT Group Inc. and Subsidiaries Computation of Earnings to Fixed Charges. 31.1 Certification of Jeffrey M. Peek pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Joseph M. Leone pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Jeffrey M. Peek pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Joseph M. Leone pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K Current Report on Form 8-K filed July 22, 2004, reporting (i) that CIT declared a dividend of $0.13 per share, payable August 30, 2004 to stockholders of record on August 13 2004, (ii) the financial results of CIT as of and for the quarter ended June 30, 2004 and (iii) the election of Jeffrey M. Peek as CEO of the Company. Current Report on Form 8-K filed August 17, 2004, reporting the election of Frederick E. Wolfert as Vice Chairman, Commercial Finance. Current Report on Form 8-K filed September 9, 2004, reporting the extension and modification of the Dell Financial Services joint venture. Current Report on Form 8-K filed September 14, 2004, reporting the Company's current financing relationship with US Airways Group Inc. Current Report on Form 8-K filed September 21, 2004, reporting the Company's Financial results for prior periods revised to reflect CIT's new segment reporting. 52 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CIT GROUP INC. By: /s/ Joseph M. Leone ----------------------------------------- Joseph M. Leone Vice Chairman and Chief Financial Officer By: /s/ William J. Taylor ----------------------------------------- William J. Taylor Executive Vice President, Controller and Principal Accounting Officer November 9, 2004 EX-10.1 2 e19537ex10_1.txt AMENDMENT TO EMPLOYMENT AGREEMENT Exhibit 10.1 AMENDMENT TO EMPLOYMENT AGREEMENT --------------------------------- AMENDMENT, dated July 21, 2004, to the Employment Agreement by and among CIT Group Inc., a Delaware corporation (the "Company") and Jeffrey M. Peek (the "Executive") dated as of the 22nd day of July 2003 (the "Employment Agreement"). WHEREAS, the Board of Directors of the Company has elected the Executive to the position of President and Chief Executive Officer of the Company effective on July ____, 2004 (the "Succession Date"); WHEREAS, the Company and the Executive desire to amend the Employment Agreement as of the Succession Date. IT IS HEREBY AGREED AS FOLLOWS: 1. (a) Section 5(a)(i)(B) of the Employment Agreement shall be deleted and replaced with the following provision: "the amount equal to the product of (x) 3 and (y) the sum of (I) the Executive's Annual Base Salary and (II) the Severance Bonus, which shall be paid in accordance with Executive's normal payroll periods immediately prior to the Date of Termination in equal installments for a period of 3 years, subject to compliance with Section 8 of this Agreement; and"; (b) Section 5(a)(iii) shall be deleted and replaced with the following provision: "subject to compliance with Section 8, continued benefit coverage which permits the Executive to continue to receive, for three (3) years from the Date of Termination, at the Company's expense, life insurance and medical, dental and disability benefits at least comparable to those provided by the Company on the Date of Termination, provided that the Executive shall not receive such life insurance, medical, dental or disability benefits, respectively, if the Executive obtains other employment that provides for such benefit(s); and". 2. Except as set forth herein, the provisions of the Employment Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the Executive has executed this Amendment and, pursuant to authorization from the Company's Board of Directors, the undersigned has executed this Amendment on behalf of the Company. ------------------------ Jeffrey M. Peek CIT GROUP INC. By: --------------------- Susan M. Mitchell EVP - Human Resources EX-10.2 3 e19537ex10_2.txt AGREEMENT BY CIT GROUP INC. Exhibit 10.2 AGREEMENT by and among CIT Group Inc. a Delaware corporation (the "Company") and Thomas B. Hallman (the "Executive") dated as of the first day of August 2004. WHEREAS, the Company desires to continue to employ the Executive in accordance with the following terms and conditions, and the Executive desires to be so employed. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Effective Date. The "Effective Date" shall mean September 1, 2004. 2. Term. The Company hereby agrees to employ the Executive, and the Executive hereby agrees to be employed by the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on December 31, 2007 (the "Term"). This Employment Agreement and the Term may be extended for one (1) or more additional periods by written agreement signed by the parties hereto at any time prior to the end of the term in effect. The Company or the Executive, as applicable, shall give notice no later than thirty (30) days before the end of the Term (or extended term) of its or his intent not to extend the Agreement. 3. Terms of Employment. (a) Position and Duties. (i) During the Term (A) the Executive shall serve as Vice Chairman - Specialty Finance with such authority, duties and responsibilities as are commensurate with such position and as may be consistent with such position, reporting to the Chief Executive Officer of the Company or such other officer as designated by the Chief Executive Officer of the Company, and (B) the Executive's services shall be performed at the location such services were performed immediately prior to the Effective Date. (ii) During the Term, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote substantially all of his attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Term, it shall not be a violation of this Agreement for the Executive to serve on civic or charitable boards or committees, or manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) Compensation. (i) Base Salary. During the Term, the Executive shall receive an annual base salary ("Annual Base Salary") of no less than the rate of the Executive's base salary on the date immediately prior to the Effective Date. During the Term, the Annual Base Salary shall be reviewed at the time that the salaries of all of the executive officers of the Company are reviewed. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. (ii) Annual Bonus. For each complete calendar year during the Term, the Executive shall be entitled to a bonus pursuant to the Company's incentive plans and programs ("Annual Bonus"). Executive's target bonus for the first complete year during the Term shall be 150% of his Annual Base Salary ("Target Bonus"). Notwithstanding paragraph 3(b)(v) hereof, the Target Bonus in subsequent years of the Term shall not be less than the amount set forth in the previous sentence. (iii) Incentive Awards. A. During the Term, the Executive shall be eligible to participate in annual and long-term incentive plans applicable to comparable executives of the Company. (iv) Other Benefits. During the Term, the Executive shall be entitled to participate in all employee pension, welfare, perquisites, fringe benefit, and other benefit plans, practices, policies and programs generally applicable to comparable executives of the Company in substantially comparable positions as the Executive. In addition, the Executive shall be entitled to continued participation in any supplemental and/or excess retirement plans available to similarly situated executives of the Company, and in the Company's Executive Retirement Plan, and retiree medical and life insurance plans in which the Executive was participating on the date of this Agreement during the Term, at economic levels at least equal to the levels of Executive's participation in such plans or programs as of the date immediately prior to the Effective Date. (v) Modifications. The Company may at any time or from time to time amend, modify, suspend or terminate any bonus or incentive compensation or employee benefit plans or programs provided hereunder for any reason and without the Executive's consent; provided that, without the Executive's consent, the Company may not reduce the aggregate value of the employee benefit plans or programs provided to the Executive hereunder unless such reduction is consistent with reductions affecting similarly situated employees of comparable rank of the Company. (vi) Expense Reimbursement. During the Term, the Executive shall be entitled to receive prompt reimbursement for all expenses incurred by the Executive in accordance with the Company's expense reimbursement policies. -2- (vii) Vacation. During the Term, the Executive shall be entitled to paid vacation in accordance with the plans, policies, programs and practices of the Company as in effect with respect to the senior executives of the Company. 4. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Term. If the Company determines in good faith that the Disability of the Executive has occurred during the Term (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 11(a) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative. (b) Cause. The Company may terminate the Executive's employment during the Term for Cause. For purposes of this Agreement, "Cause" shall mean: (i) the willful and continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Chief Executive Officer of the Company or such other officer as designated by the Chief Executive Officer which specifically identifies the manner in which the Chief Executive Officer or his designee believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company or its affiliates, or (iii) conviction of a felony or guilty or nolo contendere plea by the Executive with respect thereto; or (iv) a material breach of Section 8 of this Agreement. For purposes of this provision, no act or failure to act on the part of the Executive shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon express authority given pursuant to a resolution duly adopted by the Board with respect to such act or omission or upon the instructions of the Chief Executive Officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. -3- (c) Good Reason. The Executive's employment may be terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean in the absence of a written consent of the Executive: (i) the assignment to the Executive of any duties materially inconsistent with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 3(a) of this Agreement, provided that a promotion shall not be Good Reason, or any other action by the Company which results in a material diminution in such position, authority, duties or responsibilities, excluding for this purpose an action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; or (ii) any material failure by the Company to comply with any of the provisions of Section 3(b) of this Agreement, other than failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; or (iii) the Company's requiring the Executive to be based at any office or location more than 50 miles from that provided in Section 3(a)(i)(B) hereof; or (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (v) the failure of the Company to offer to renew this Agreement on the terms and conditions (including payment of Annual Base Salary and participation in incentive plan and benefit programs) at least as favorable as in the final year of the Executive's last Employment Agreement, unless, at the time of a failure to renew this Employment Agreement, the Executive has reached the age of 65 and can be lawfully required to retire; or (vi) any failure by the Company to comply with and satisfy Section 10(b) of this Agreement. (d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 11(a) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon; (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated; and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. -4- (e) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein within 30 days of such notice, as the case may be; (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination; and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 5. Obligations of the Company upon Termination. (a) Good Reason; Other Than for Cause. If, during the Term, the Company shall terminate the Executive's employment other than for Cause or the Executive shall terminate employment for Good Reason: (i) the Company shall pay to the Executive in cash the aggregate of the following amounts: A. in a lump sum within 10 days after the Date of Termination, the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, and (2) the product of (x) the Severance Bonus defined below and (y) a fraction, the numerator of which is the number of days in the calendar year in which the Date of Termination occurs through the Date of Termination, and the denominator of which is 365, in each case to the extent not theretofore paid. For purposes of this Agreement, the term "Severance Bonus" means the greater of (I) the Executive's average Annual Bonus over the two calendar years preceding the Date of Termination and (II) the Executive's Target Bonus. For the purpose of calculating the Executive's average Annual Bonus hereunder, $455,000 shall be the Executive's Annual Bonus for 2002; and B. the sum of (1) the greater of (x) the Annual Base Salary payable for the remainder of the Term after the Date of Termination, or (y) the product of 2.5 times the Annual Base Salary, and (2) the product of 2.5 times the Executive's Severance Bonus, which amount shall be payable in accordance with Executive's normal payroll periods immediately prior to the Date of Termination in equal installments for a period of 2.5 years, subject to compliance with Section 8 of this Agreement; and (ii) all restrictions on restricted stock held by the Executive shall lapse and all outstanding unvested stock options, stock appreciation rights, tandem options, tandem stock appreciation rights, performance shares, performance units, or any similar equity share or unit held by the Executive shall vest immediately. Notwithstanding any provision regarding an earlier termination of stock options set forth in any stock option or other agreement, the stock options referred to in this Section 5(a)(ii) shall terminate and have no force or effect upon the earlier of (x) two (2) years after a termination of employment for Good Reason or Other Than for Cause or (y) the expiration of the option term as defined in the applicable stock option agreement; and -5- (iii) subject to compliance with Section 8, continued benefit coverage which permits the Executive to continue to receive, for 2.5 years from the Date of Termination, at the Company's expense, life insurance and medical, dental and disability benefits at least comparable to those provided by the Company on the Date of Termination, provided that the Executive shall not receive such life insurance, medical, dental or disability benefits, respectively, if the Executive obtains other employment that provides for such benefit(s); and (iv) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliates in accordance with the terms and normal procedures of each such plan, program, policy or practice; and (v) to the extent permitted by applicable law, the Executive shall be credited with two additional years of age and service credit under all relevant Company retirement plans (including qualified, supplemental and excess plans, including without limitation the Company's Executive Retirement Plan and New Executive Retirement Plan, and, for the purpose of clarity, to the extent the Executive is a participant in the cash balance arrangement under the Company's Retirement Plan, the cash balance account will be increased as if the Executive had received two additional years of contributions based upon the Executive's compensation as of the Date of Termination); and (vi) the Company shall provide the Executive with outplacement services, not to exceed a reasonable cost, until the Executive accepts new employment. (b) Cause; Other than for Good Reason. If the Executive's employment shall be terminated for Cause or the Executive terminates his employment without Good Reason during the Term, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay or provide to the Executive an amount equal to the amount described in clause (1) of Section 5(a)(i)(A) above and timely payment or provision of the benefits set forth in Section 5(a)(iv) above, in each case to the extent theretofore unpaid. (c) Death. If the Executive's employment is terminated by reason of the Executive's death during the Term, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for (i) payment of a lump sum cash amount equal to the Executive's Annual Base Salary as in effect at the time of the Executive's death, (ii) payment of the amount set forth in Section 5(a)(i)(A) above; and (iii) timely payment or provision of the benefits set forth in Section 5(a)(iv) above. In addition, all restrictions on restricted stock held by the Executive shall lapse and all outstanding unvested stock options, stock appreciation rights, tandem options, tandem stock appreciation rights, performance shares, performance units, or any similar equity share or unit held by the Executive shall vest immediately. The payments provided for in subsections (i) and (ii) of this Section 5(c) shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. (d) Disability. If the Executive's employment is terminated by reason of the Executive's Disability, this Agreement shall terminate without further obligations to the -6- Executive, other than for (i) payment of a lump sum cash amount equal to the Executive's Annual Base Salary as in effect at the time of the Executive's disability, (ii) payment of the amount set forth in Section 5(a)(i)(A) above (payable to the Executive in a lump sum in cash within 30 days of the Date of Termination); and (iii) timely payment or provision of the benefits set forth in Section 5(a)(iv) above. In addition, all restrictions on restricted stock held by the Executive shall lapse and all outstanding unvested stock options, stock appreciation rights, tandem options, tandem stock appreciation rights, performance shares, performance units, or any similar equity share or unit held by the Executive shall vest immediately. To the extent permitted by applicable law and in accordance with the Company's Long-Term Disability plan, the Executive shall continue to accrue age and service credit through retirement for purposes of the Company's qualified and nonqualified retirement plans. (e) Retirement. If the Executive's employment is terminated by reason of his retirement under the terms of the applicable Company retirement plan during the Term, this Agreement shall terminate without further obligations to the Executive other than for (i) payment of the amount set forth in Section 5(a)(i)(A) above (payable to the Executive in a lump sum in cash within 30 days of the Date of Termination) and (ii) timely payment or provision of the benefits set forth in Section 5(a)(iv) above. (f) Non-exclusivity of Rights. Except as specifically provided, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliates and for which the Executive may qualify, nor, subject to Section 11(e), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or its affiliates. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of, or any contract or agreement with, the Company or its affiliates at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. As used in this Agreement, the terms "affiliated companies" and "affiliates" shall include any company controlled by, controlling or under common control with the Company. 6. Full Settlement. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"), if the Executive -7- prevails on any material claim made by the Executive and disputed by the Company under this Agreement. 7. Certain Additional Payments by the Company. If at any time for any reason any payment or distribution (a "Payment") by the Company or any other person or entity to or for the benefit of the Executive is determined to be a "parachute payment" (within the meaning of Section 280G(b)(2) of the Code), whether paid or copayable or distributed or distributable pursuant to the terms of this Agreement or otherwise in connection with or arising out of his employment with the Company or a change in ownership or excise tax imposed by Section 4999 of the Code (the "Excise Tax"), within a reasonable period of time after such determination is reached the Company shall pay to the Executive an additional payment (the Gross-Up Payment") in an amount such that the net amount retained by the Executive, after deduction of any Excise Tax on such Payment and any federal, state or local income or employment tax or other taxes and Excise Tax on the Gross-Up Payment, shall equal the amount of such Payment (including any interest or penalties with respect to any of the foregoing). All determinations concerning the application of the foregoing shall be made by a nationally recognized firm of independent accountants (together with legal counsel of its choosing), selected by the Company after consultation with the Executive (which may be the Company's independent auditors), whose determination shall be conclusive and binding on all parties. The fees and expenses of such accountants and counsel shall be borne by the Company. If the accounting firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with an opinion that the Executive has substantial authority not to report any Excise Tax on his Federal income tax return. In the event the Internal Revenue Service assesses the Executive an amount of Excise Tax in excess of that determined in accordance with the foregoing, the Company shall pay to the Executive an additional Gross-Up Payment, calculated as described above in respect of such excess Excise Tax, including a Gross-Up Payment in respect of any interest or penalties imposed by the Internal Revenue Service with respect to such excess Excise Tax. 8. Confidentiality and Competitive Activity. (a) The Executive acknowledges that he has acquired and will continue to acquire during the Term confidential information regarding the business of the Company and its respective affiliates. Accordingly, the Executive agrees that, without the written consent of the Board, he will not, at any time, disclose to any unauthorized person or otherwise use any such confidential information. For this purpose, confidential information means nonpublic information concerning the financial data, business strategies, product development (and proprietary product data), customer lists, marketing plans, and other proprietary information concerning the Company and its respective affiliates, except for specific items which have become publicly available other than as a result of the Executive's breach of this agreement. Notwithstanding the foregoing, nothing herein shall prevent Executive from responding to lawful subpoenas or court orders without the Company's prior written consent; provided, that the Executive shall have given the Company prior written notice of any such subpoena or court order promptly following receipt thereof. (b) During the time that the Executive is employed by the Company under this Agreement and then for one year after the date of termination of the employment of the -8- Executive for any reason, the Executive will not, without the written consent of the Board, directly or indirectly (A) knowingly engage or be interested in (as owner, partner, stockholder, employee, director, officer, agent, consultant or otherwise), with or without compensation, any business in the United States which is in competition with any line of business actively being conducted on the Date of Termination by the Company, and (B) disparage or publicly criticize the Company or any of its affiliates. Nothing herein, however, will prohibit the Executive from acquiring or holding not more than one percent of any class of publicly traded securities of any such business; provided that such securities entitle the Executive to not more than one percent of the total outstanding votes entitled to be cast by securityholders of such business in matters on which such securityholders are entitled to vote. (c) During the time that the Executive is employed by the Company under this Agreement and then for two years after the Date of Termination of the employment of the Executive for any reason, the Executive will not, without the written consent of the Board, directly or indirectly, hire any person who was employed by the Company or any of its subsidiaries or affiliates (other than persons employed in a clerical or other non-professional position) within the six-month period preceding the date of such hiring, or solicit, entice, persuade or induce any person or entity doing business with the Company and its respective affiliates, to terminate such relationship or to refrain from extending or renewing the same. (d) The Executive hereby acknowledges that the provisions of this Section 8 are reasonable and necessary for the protection of the Company and its respective affiliates. In addition, he further acknowledges that the Company and its respective affiliates will be irrevocably damaged if such covenants are not specifically enforced. Accordingly, the Executive agrees that, in addition to any other relief to which the Company may be entitled, the Company will be entitled to seek and obtain injunctive relief (without the requirement of any bond) from a court of competent jurisdiction for the purposes of restraining him from an actual or threatened breach of such covenants. In addition, and without limiting the Company's other remedies, in the event of any breach by the Executive of such covenants, the Company will have no obligation to pay any of the amounts that continue to remain payable to the Executive after the date of such breach under Section 5 hereof. 9. Change of Control. (a) Contract Extension. In the event of a Change of Control during the Term, the Term shall be extended to the second anniversary of the Change of Control (such two year period, the "Change of Control Extension Period"). (b) Special Payment. If the Executive's employment is terminated without Cause or by the Executive for Good Reason during the Change of Control Extension Period, the Executive will receive the compensation and benefits already required under the provisions of this Agreement, other than under Section 5(a)(i)(B), and, in lieu of the payments set forth in Section 5(a)(i)(B), the Executive will receive 2.5 times the sum of the Executive's Annual Base Salary and the Severance Bonus (the "Special Payment"), payable in a lump sum within 30 days after the Date of Termination. -9- (c) No Plan Modification. In the event of a Change of Control during the Term, Section 3(b)(v) shall not be effective. (d) Change of Control Defined. For purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if: (i) any Person or Group, as a result of a Transaction (as defined below) or otherwise, becomes the Beneficial Owner, directly or indirectly, of securities representing a majority of the combined voting power of the Company's then outstanding securities generally entitled to vote for the election of directors (capitalized terms not otherwise defined herein are used as defined under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder); or (ii) as a direct or indirect result of any cash tender offer, acquisition of securities, merger or other business combination, acquisition or sale of assets, actual or threatened election contest (including any settlement thereof or any agreement intended to avoid or settle such a contest) or contractual arrangement, or any combination of the foregoing (a "Transaction"), the persons who were directors of the Company immediately before the Transaction (the "Incumbent Board") shall cease to constitute at least a majority of the Board of the Company or any successor to the Company (including any entity resulting from such Transaction or which, as a result of such Transaction, directly or indirectly owns or controls the Company or such successor or all or substantially all of its assets); provided that any person becoming a director thereafter whose election as a director was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be deemed to be a member of the Incumbent Board. 10. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (b) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 11. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of New York without reference to principles of conflict of laws. The parties hereto irrevocably agree to submit to the jurisdiction and venue of the courts of the States of New York or New Jersey in any action or proceeding brought with respect to or in connection -10- with this Agreement. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: At the most recent home address on file for the Executive at the Company; If to the Company: 1 CIT Drive Livingston, New Jersey 07039 Attention: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (b) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (c) The Company may withhold from any amounts payable under this Agreement such Federal, state, or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (d) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 4 of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (e) From and after the Effective Date, this Agreement shall supersede the Retention Agreement and any other employment, severance or change of control agreement between the parties or severance or change of control plan, program or policy of the Company covering the Executive with respect to the subject matter except as expressly provided herein. -11- IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors and the Company have caused these presents to be executed in its name on its behalf, all as of the day and year first above written. ----------------- Thomas B. Hallman CIT GROUP INC. By ----------------- Jeffrey M. Peek -12- EX-10.3 4 e19537ex10_3.txt AGREEMENT BY CIT GROUP INC. Exhibit 10.3 AGREEMENT by and among CIT Group Inc. a Delaware corporation (the "Company") and Joseph M. Leone (the "Executive") dated as of the first day of August 2004. WHEREAS, the Company desires to continue to employ the Executive in accordance with the following terms and conditions, and the Executive desires to be so employed. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Effective Date. The "Effective Date" shall mean September 1, 2004. 2. Term. The Company hereby agrees to employ the Executive, and the Executive hereby agrees to be employed by the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on December 31, 2007 (the "Term"). This Employment Agreement and the Term may be extended for one (1) or more additional periods by written agreement signed by the parties hereto at any time prior to the end of the term in effect. The Company or the Executive, as applicable, shall give notice no later than thirty (30) days before the end of the Term (or extended term) of its or his intent not to extend the Agreement. 3. Terms of Employment. (a) Position and Duties. (i) During the Term (A) the Executive shall serve as Vice Chairman - Chief Financial Officer with such authority, duties and responsibilities as are commensurate with such position and as may be consistent with such position, reporting to the Chief Executive Officer of the Company or such other officer as designated by the Chief Executive Officer of the Company, and (B) the Executive's services shall be performed at the location such services were performed immediately prior to the Effective Date. (ii) During the Term, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote substantially all of his attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Term, it shall not be a violation of this Agreement for the Executive to serve on civic or charitable boards or committees, or manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) Compensation. (i) Base Salary. During the Term, the Executive shall receive an annual base salary ("Annual Base Salary") of no less than the rate of the Executive's base salary on the date immediately prior to the Effective Date. During the Term, the Annual Base Salary shall be reviewed at the time that the salaries of all of the executive officers of the Company are reviewed. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. (ii) Annual Bonus. For each complete calendar year during the Term, the Executive shall be entitled to a bonus pursuant to the Company's incentive plans and programs ("Annual Bonus"). Executive's target bonus for the first complete year during the Term shall be 150% of his Annual Base Salary ("Target Bonus"). Notwithstanding paragraph 3(b)(v) hereof, the Target Bonus in subsequent years of the Term shall not be less than the amount set forth in the previous sentence. (iii) Incentive Awards. A. During the Term, the Executive shall be eligible to participate in annual and long-term incentive plans applicable to comparable executives of the Company. (iv) Other Benefits. During the Term, the Executive shall be entitled to participate in all employee pension, welfare, perquisites, fringe benefit, and other benefit plans, practices, policies and programs generally applicable to comparable executives of the Company in substantially comparable positions as the Executive. In addition, the Executive shall be entitled to continued participation in any supplemental and/or excess retirement plans available to similarly situated executives of the Company, and in the Company's Executive Retirement Plan, and retiree medical and life insurance plans in which the Executive was participating on the date of this Agreement during the Term, at economic levels at least equal to the levels of Executive's participation in such plans or programs as of the date immediately prior to the Effective Date. (v) Modifications. The Company may at any time or from time to time amend, modify, suspend or terminate any bonus or incentive compensation or employee benefit plans or programs provided hereunder for any reason and without the Executive's consent; provided that, without the Executive's consent, the Company may not reduce the aggregate value of the employee benefit plans or programs provided to the Executive hereunder unless such reduction is consistent with reductions affecting similarly situated employees of comparable rank of the Company. (vi) Expense Reimbursement. During the Term, the Executive shall be entitled to receive prompt reimbursement for all expenses incurred by the Executive in accordance with the Company's expense reimbursement policies. -2- (vii) Vacation. During the Term, the Executive shall be entitled to paid vacation in accordance with the plans, policies, programs and practices of the Company as in effect with respect to the senior executives of the Company. 4. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Term. If the Company determines in good faith that the Disability of the Executive has occurred during the Term (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 11(a) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative. (b) Cause. The Company may terminate the Executive's employment during the Term for Cause. For purposes of this Agreement, "Cause" shall mean: (i) the willful and continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Chief Executive Officer of the Company or such other officer as designated by the Chief Executive Officer which specifically identifies the manner in which the Chief Executive Officer or his designee believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company or its affiliates, or (iii) conviction of a felony or guilty or nolo contendere plea by the Executive with respect thereto; or (iv) a material breach of Section 8 of this Agreement. For purposes of this provision, no act or failure to act on the part of the Executive shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon express authority given pursuant to a resolution duly adopted by the Board with respect to such act or omission or upon the instructions of the Chief Executive Officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. -3- (c) Good Reason. The Executive's employment may be terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean in the absence of a written consent of the Executive: (i) the assignment to the Executive of any duties materially inconsistent with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 3(a) of this Agreement, provided that a promotion shall not be Good Reason, or any other action by the Company which results in a material diminution in such position, authority, duties or responsibilities, excluding for this purpose an action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; or (ii) any material failure by the Company to comply with any of the provisions of Section 3(b) of this Agreement, other than failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; or (iii) the Company's requiring the Executive to be based at any office or location more than 50 miles from that provided in Section 3(a)(i)(B) hereof; or (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (v) the failure of the Company to offer to renew this Agreement on the terms and conditions (including payment of Annual Base Salary and participation in incentive plan and benefit programs) at least as favorable as in the final year of the Executive's last Employment Agreement, unless, at the time of a failure to renew this Employment Agreement, the Executive has reached the age of 65 and can be lawfully required to retire; or (vi) any failure by the Company to comply with and satisfy Section 10(b) of this Agreement. (d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 11(a) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon; (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated; and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. -4- (e) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein within 30 days of such notice, as the case may be; (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination; and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 5. Obligations of the Company upon Termination. (a) Good Reason; Other Than for Cause. If, during the Term, the Company shall terminate the Executive's employment other than for Cause or the Executive shall terminate employment for Good Reason: (i) the Company shall pay to the Executive in cash the aggregate of the following amounts: A. in a lump sum within 10 days after the Date of Termination, the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, and (2) the product of (x) the Severance Bonus defined below and (y) a fraction, the numerator of which is the number of days in the calendar year in which the Date of Termination occurs through the Date of Termination, and the denominator of which is 365, in each case to the extent not theretofore paid. For purposes of this Agreement, the term "Severance Bonus" means the greater of (I) the Executive's average Annual Bonus over the two calendar years preceding the Date of Termination and (II) the Executive's Target Bonus. For the purpose of calculating the Executive's average Annual Bonus hereunder, $388,333 shall be the Executive's Annual Bonus for 2002; and B. the sum of (1) the greater of (x) the Annual Base Salary payable for the remainder of the Term after the Date of Termination, or (y) the product of 2.5 times the Annual Base Salary, and (2) the product of 2.5 times the Executive's Severance Bonus, which amount shall be payable in accordance with Executive's normal payroll periods immediately prior to the Date of Termination in equal installments for a period of 2.5 years, subject to compliance with Section 8 of this Agreement; and (ii) all restrictions on restricted stock held by the Executive shall lapse and all outstanding unvested stock options, stock appreciation rights, tandem options, tandem stock appreciation rights, performance shares, performance units, or any similar equity share or unit held by the Executive shall vest immediately. Notwithstanding any provision regarding an earlier termination of stock options set forth in any stock option or other agreement, the stock options referred to in this Section 5(a)(ii) shall terminate and have no force or effect upon the earlier of (x) two (2) years after a termination of employment for Good Reason or Other Than for Cause or (y) the expiration of the option term as defined in the applicable stock option agreement; and -5- (iii) subject to compliance with Section 8, continued benefit coverage which permits the Executive to continue to receive, for 2.5 years from the Date of Termination, at the Company's expense, life insurance and medical, dental and disability benefits at least comparable to those provided by the Company on the Date of Termination, provided that the Executive shall not receive such life insurance, medical, dental or disability benefits, respectively, if the Executive obtains other employment that provides for such benefit(s); and (iv) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliates in accordance with the terms and normal procedures of each such plan, program, policy or practice; and (v) to the extent permitted by applicable law, the Executive shall be credited with two additional years of age and service credit under all relevant Company retirement plans (including qualified, supplemental and excess plans, including without limitation the Company's Executive Retirement Plan and New Executive Retirement Plan, and, for the purpose of clarity, to the extent the Executive is a participant in the cash balance arrangement under the Company's Retirement Plan, the cash balance account will be increased as if the Executive had received two additional years of contributions based upon the Executive's compensation as of the Date of Termination); and (vi) the Company shall provide the Executive with outplacement services, not to exceed a reasonable cost, until the Executive accepts new employment. (b) Cause; Other than for Good Reason. If the Executive's employment shall be terminated for Cause or the Executive terminates his employment without Good Reason during the Term, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay or provide to the Executive an amount equal to the amount described in clause (1) of Section 5(a)(i)(A) above and timely payment or provision of the benefits set forth in Section 5(a)(iv) above, in each case to the extent theretofore unpaid. (c) Death. If the Executive's employment is terminated by reason of the Executive's death during the Term, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for (i) payment of a lump sum cash amount equal to the Executive's Annual Base Salary as in effect at the time of the Executive's death, (ii) payment of the amount set forth in Section 5(a)(i)(A) above; and (iii) timely payment or provision of the benefits set forth in Section 5(a)(iv) above. In addition, all restrictions on restricted stock held by the Executive shall lapse and all outstanding unvested stock options, stock appreciation rights, tandem options, tandem stock appreciation rights, performance shares, performance units, or any similar equity share or unit held by the Executive shall vest immediately. The payments provided for in subsections (i) and (ii) of this Section 5(c) shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. (d) Disability. If the Executive's employment is terminated by reason of the Executive's Disability, this Agreement shall terminate without further obligations to the -6- Executive, other than for (i) payment of a lump sum cash amount equal to the Executive's Annual Base Salary as in effect at the time of the Executive's disability, (ii) payment of the amount set forth in Section 5(a)(i)(A) above (payable to the Executive in a lump sum in cash within 30 days of the Date of Termination); and (iii) timely payment or provision of the benefits set forth in Section 5(a)(iv) above. In addition, all restrictions on restricted stock held by the Executive shall lapse and all outstanding unvested stock options, stock appreciation rights, tandem options, tandem stock appreciation rights, performance shares, performance units, or any similar equity share or unit held by the Executive shall vest immediately. To the extent permitted by applicable law and in accordance with the Company's Long-Term Disability plan, the Executive shall continue to accrue age and service credit through retirement for purposes of the Company's qualified and nonqualified retirement plans. (e) Retirement. If the Executive's employment is terminated by reason of his retirement under the terms of the applicable Company retirement plan during the Term, this Agreement shall terminate without further obligations to the Executive other than for (i) payment of the amount set forth in Section 5(a)(i)(A) above (payable to the Executive in a lump sum in cash within 30 days of the Date of Termination) and (ii) timely payment or provision of the benefits set forth in Section 5(a)(iv) above. (f) Non-exclusivity of Rights. Except as specifically provided, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliates and for which the Executive may qualify, nor, subject to Section 11(e), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or its affiliates. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of, or any contract or agreement with, the Company or its affiliates at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. As used in this Agreement, the terms "affiliated companies" and "affiliates" shall include any company controlled by, controlling or under common control with the Company. 6. Full Settlement. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"), if the Executive -7- prevails on any material claim made by the Executive and disputed by the Company under this Agreement. 7. Certain Additional Payments by the Company. If at any time for any reason any payment or distribution (a "Payment") by the Company or any other person or entity to or for the benefit of the Executive is determined to be a "parachute payment" (within the meaning of Section 280G(b)(2) of the Code), whether paid or copayable or distributed or distributable pursuant to the terms of this Agreement or otherwise in connection with or arising out of his employment with the Company or a change in ownership or excise tax imposed by Section 4999 of the Code (the "Excise Tax"), within a reasonable period of time after such determination is reached the Company shall pay to the Executive an additional payment (the Gross-Up Payment") in an amount such that the net amount retained by the Executive, after deduction of any Excise Tax on such Payment and any federal, state or local income or employment tax or other taxes and Excise Tax on the Gross-Up Payment, shall equal the amount of such Payment (including any interest or penalties with respect to any of the foregoing). All determinations concerning the application of the foregoing shall be made by a nationally recognized firm of independent accountants (together with legal counsel of its choosing), selected by the Company after consultation with the Executive (which may be the Company's independent auditors), whose determination shall be conclusive and binding on all parties. The fees and expenses of such accountants and counsel shall be borne by the Company. If the accounting firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with an opinion that the Executive has substantial authority not to report any Excise Tax on his Federal income tax return. In the event the Internal Revenue Service assesses the Executive an amount of Excise Tax in excess of that determined in accordance with the foregoing, the Company shall pay to the Executive an additional Gross-Up Payment, calculated as described above in respect of such excess Excise Tax, including a Gross-Up Payment in respect of any interest or penalties imposed by the Internal Revenue Service with respect to such excess Excise Tax. 8. Confidentiality and Competitive Activity. (a) The Executive acknowledges that he has acquired and will continue to acquire during the Term confidential information regarding the business of the Company and its respective affiliates. Accordingly, the Executive agrees that, without the written consent of the Board, he will not, at any time, disclose to any unauthorized person or otherwise use any such confidential information. For this purpose, confidential information means nonpublic information concerning the financial data, business strategies, product development (and proprietary product data), customer lists, marketing plans, and other proprietary information concerning the Company and its respective affiliates, except for specific items which have become publicly available other than as a result of the Executive's breach of this agreement. Notwithstanding the foregoing, nothing herein shall prevent Executive from responding to lawful subpoenas or court orders without the Company's prior written consent; provided, that the Executive shall have given the Company prior written notice of any such subpoena or court order promptly following receipt thereof. (b) During the time that the Executive is employed by the Company under this Agreement and then for one year after the date of termination of the employment of the -8- Executive for any reason, the Executive will not, without the written consent of the Board, directly or indirectly (A) knowingly engage or be interested in (as owner, partner, stockholder, employee, director, officer, agent, consultant or otherwise), with or without compensation, any business in the United States which is in competition with any line of business actively being conducted on the Date of Termination by the Company, and (B) disparage or publicly criticize the Company or any of its affiliates. Nothing herein, however, will prohibit the Executive from acquiring or holding not more than one percent of any class of publicly traded securities of any such business; provided that such securities entitle the Executive to not more than one percent of the total outstanding votes entitled to be cast by securityholders of such business in matters on which such securityholders are entitled to vote. (c) During the time that the Executive is employed by the Company under this Agreement and then for two years after the Date of Termination of the employment of the Executive for any reason, the Executive will not, without the written consent of the Board, directly or indirectly, hire any person who was employed by the Company or any of its subsidiaries or affiliates (other than persons employed in a clerical or other non-professional position) within the six-month period preceding the date of such hiring, or solicit, entice, persuade or induce any person or entity doing business with the Company and its respective affiliates, to terminate such relationship or to refrain from extending or renewing the same. (d) The Executive hereby acknowledges that the provisions of this Section 8 are reasonable and necessary for the protection of the Company and its respective affiliates. In addition, he further acknowledges that the Company and its respective affiliates will be irrevocably damaged if such covenants are not specifically enforced. Accordingly, the Executive agrees that, in addition to any other relief to which the Company may be entitled, the Company will be entitled to seek and obtain injunctive relief (without the requirement of any bond) from a court of competent jurisdiction for the purposes of restraining him from an actual or threatened breach of such covenants. In addition, and without limiting the Company's other remedies, in the event of any breach by the Executive of such covenants, the Company will have no obligation to pay any of the amounts that continue to remain payable to the Executive after the date of such breach under Section 5 hereof. 9. Change of Control. (a) Contract Extension. In the event of a Change of Control during the Term, the Term shall be extended to the second anniversary of the Change of Control (such two year period, the "Change of Control Extension Period"). (b) Special Payment. If the Executive's employment is terminated without Cause or by the Executive for Good Reason during the Change of Control Extension Period, the Executive will receive the compensation and benefits already required under the provisions of this Agreement, other than under Section 5(a)(i)(B), and, in lieu of the payments set forth in Section 5(a)(i)(B), the Executive will receive 2.5 times the sum of the Executive's Annual Base Salary and the Severance Bonus (the "Special Payment"), payable in a lump sum within 30 days after the Date of Termination. -9- (c) No Plan Modification. In the event of a Change of Control during the Term, Section 3(b)(v) shall not be effective. (d) Change of Control Defined. For purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if: (i) any Person or Group, as a result of a Transaction (as defined below) or otherwise, becomes the Beneficial Owner, directly or indirectly, of securities representing a majority of the combined voting power of the Company's then outstanding securities generally entitled to vote for the election of directors (capitalized terms not otherwise defined herein are used as defined under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder); or (ii) as a direct or indirect result of any cash tender offer, acquisition of securities, merger or other business combination, acquisition or sale of assets, actual or threatened election contest (including any settlement thereof or any agreement intended to avoid or settle such a contest) or contractual arrangement, or any combination of the foregoing (a "Transaction"), the persons who were directors of the Company immediately before the Transaction (the "Incumbent Board") shall cease to constitute at least a majority of the Board of the Company or any successor to the Company (including any entity resulting from such Transaction or which, as a result of such Transaction, directly or indirectly owns or controls the Company or such successor or all or substantially all of its assets); provided that any person becoming a director thereafter whose election as a director was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be deemed to be a member of the Incumbent Board. 10. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (b) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 11. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of New York without reference to principles of conflict of laws. The parties hereto irrevocably agree to submit to the jurisdiction and venue of the courts of the States of New York or New Jersey in any action or proceeding brought with respect to or in connection -10- with this Agreement. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: At the most recent home address on file for the Executive at the Company; If to the Company: 1 CIT Drive Livingston, New Jersey 07039 Attention: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (b) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (c) The Company may withhold from any amounts payable under this Agreement such Federal, state, or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (d) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 4 of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (e) From and after the Effective Date, this Agreement shall supersede the Retention Agreement and any other employment, severance or change of control agreement between the parties or severance or change of control plan, program or policy of the Company covering the Executive with respect to the subject matter except as expressly provided herein. -11- IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors and the Company have caused these presents to be executed in its name on its behalf, all as of the day and year first above written. ------------------- Joseph M. Leone CIT GROUP INC. By ----------------- Jeffrey M. Peek -12- EX-10 5 e19537ex10_4.txt AGREEMENT BY CIT GROUP INC. Exhibit 10.4 AGREEMENT by and among CIT Group Inc. a Delaware corporation (the "Company") and Lawrence A. Marsiello (the "Executive") dated as of the first day of August 2004. WHEREAS, the Company desires to continue to employ the Executive in accordance with the following terms and conditions, and the Executive desires to be so employed. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Effective Date. The "Effective Date" shall mean September 1, 2004. 2. Term. The Company hereby agrees to employ the Executive, and the Executive hereby agrees to be employed by the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on December 31, 2007 (the "Term"). This Employment Agreement and the Term may be extended for one (1) or more additional periods by written agreement signed by the parties hereto at any time prior to the end of the term in effect. The Company or the Executive, as applicable, shall give notice no later than thirty (30) days before the end of the Term (or extended term) of its or his intent not to extend the Agreement. 3. Terms of Employment. (a) Position and Duties. (i) During the Term (A) the Executive shall serve as Vice Chairman - Chief Lending Officer with such authority, duties and responsibilities as are commensurate with such position and as may be consistent with such position, reporting to the Chief Executive Officer of the Company or such other officer as designated by the Chief Executive Officer of the Company, and (B) the Executive's services shall be performed at the location such services were performed immediately prior to the Effective Date. (ii) During the Term, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote substantially all of his attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Term, it shall not be a violation of this Agreement for the Executive to serve on civic or charitable boards or committees, or manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) Compensation. (i) Base Salary. During the Term, the Executive shall receive an annual base salary ("Annual Base Salary") of no less than the rate of the Executive's base salary on the date immediately prior to the Effective Date. During the Term, the Annual Base Salary shall be reviewed at the time that the salaries of all of the executive officers of the Company are reviewed. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. (ii) Annual Bonus. For each complete calendar year during the Term, the Executive shall be entitled to a bonus pursuant to the Company's incentive plans and programs ("Annual Bonus"). Executive's target bonus for the first complete year during the Term shall be 150% of his Annual Base Salary ("Target Bonus"). Notwithstanding paragraph 3(b)(v) hereof, the Target Bonus in subsequent years of the Term shall not be less than the amount set forth in the previous sentence. (iii) Incentive Awards. A. During the Term, the Executive shall be eligible to participate in annual and long-term incentive plans applicable to comparable executives of the Company. (iv) Other Benefits. During the Term, the Executive shall be entitled to participate in all employee pension, welfare, perquisites, fringe benefit, and other benefit plans, practices, policies and programs generally applicable to comparable executives of the Company in substantially comparable positions as the Executive. In addition, the Executive shall be entitled to continued participation in any supplemental and/or excess retirement plans available to similarly situated executives of the Company, and in the Company's Executive Retirement Plan, and retiree medical and life insurance plans in which the Executive was participating on the date of this Agreement during the Term, at economic levels at least equal to the levels of Executive's participation in such plans or programs as of the date immediately prior to the Effective Date. (v) Modifications. The Company may at any time or from time to time amend, modify, suspend or terminate any bonus or incentive compensation or employee benefit plans or programs provided hereunder for any reason and without the Executive's consent; provided that, without the Executive's consent, the Company may not reduce the aggregate value of the employee benefit plans or programs provided to the Executive hereunder unless such reduction is consistent with reductions affecting similarly situated employees of comparable rank of the Company. (vi) Expense Reimbursement. During the Term, the Executive shall be entitled to receive prompt reimbursement for all expenses incurred by the Executive in accordance with the Company's expense reimbursement policies. -2- (vii) Vacation. During the Term, the Executive shall be entitled to paid vacation in accordance with the plans, policies, programs and practices of the Company as in effect with respect to the senior executives of the Company. 4. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Term. If the Company determines in good faith that the Disability of the Executive has occurred during the Term (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 11(a) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative. (b) Cause. The Company may terminate the Executive's employment during the Term for Cause. For purposes of this Agreement, "Cause" shall mean: (i) the willful and continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Chief Executive Officer of the Company or such other officer as designated by the Chief Executive Officer which specifically identifies the manner in which the Chief Executive Officer or his designee believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company or its affiliates, or (iii) conviction of a felony or guilty or nolo contendere plea by the Executive with respect thereto; or (iv) a material breach of Section 8 of this Agreement. For purposes of this provision, no act or failure to act on the part of the Executive shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon express authority given pursuant to a resolution duly adopted by the Board with respect to such act or omission or upon the instructions of the Chief Executive Officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. -3- (c) Good Reason. The Executive's employment may be terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean in the absence of a written consent of the Executive: (i) the assignment to the Executive of any duties materially inconsistent with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 3(a) of this Agreement, provided that a promotion shall not be Good Reason, or any other action by the Company which results in a material diminution in such position, authority, duties or responsibilities, excluding for this purpose an action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; or (ii) any material failure by the Company to comply with any of the provisions of Section 3(b) of this Agreement, other than failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; or (iii) the Company's requiring the Executive to be based at any office or location more than 50 miles from that provided in Section 3(a)(i)(B) hereof; or (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (v) the failure of the Company to offer to renew this Agreement on the terms and conditions (including payment of Annual Base Salary and participation in incentive plan and benefit programs) at least as favorable as in the final year of the Executive's last Employment Agreement, unless, at the time of a failure to renew this Employment Agreement, the Executive has reached the age of 65 and can be lawfully required to retire; or (vi) any failure by the Company to comply with and satisfy Section 10(b) of this Agreement. (d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 11(a) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon; (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated; and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. -4- (e) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein within 30 days of such notice, as the case may be; (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination; and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 5. Obligations of the Company upon Termination. (a) Good Reason; Other Than for Cause. If, during the Term, the Company shall terminate the Executive's employment other than for Cause or the Executive shall terminate employment for Good Reason: (i) the Company shall pay to the Executive in cash the aggregate of the following amounts: A. in a lump sum within 10 days after the Date of Termination, the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, and (2) the product of (x) the Severance Bonus defined below and (y) a fraction, the numerator of which is the number of days in the calendar year in which the Date of Termination occurs through the Date of Termination, and the denominator of which is 365, in each case to the extent not theretofore paid. For purposes of this Agreement, the term "Severance Bonus" means the greater of (I) the Executive's average Annual Bonus over the two calendar years preceding the Date of Termination and (II) the Executive's Target Bonus. For the purpose of calculating the Executive's average Annual Bonus hereunder, $448,333 shall be the Executive's Annual Bonus for 2002; and B. the sum of (1) the greater of (x) the Annual Base Salary payable for the remainder of the Term after the Date of Termination, or (y) the product of 2.5 times the Annual Base Salary, and (2) the product of 2.5 times the Executive's Severance Bonus, which amount shall be payable in accordance with Executive's normal payroll periods immediately prior to the Date of Termination in equal installments for a period of 2.5 years, subject to compliance with Section 8 of this Agreement; and (ii) all restrictions on restricted stock held by the Executive shall lapse and all outstanding unvested stock options, stock appreciation rights, tandem options, tandem stock appreciation rights, performance shares, performance units, or any similar equity share or unit held by the Executive shall vest immediately. Notwithstanding any provision regarding an earlier termination of stock options set forth in any stock option or other agreement, the stock options referred to in this Section 5(a)(ii) shall terminate and have no force or effect upon the earlier of (x) two (2) years after a termination of employment for Good Reason or Other Than for Cause or (y) the expiration of the option term as defined in the applicable stock option agreement; and -5- (iii) subject to compliance with Section 8, continued benefit coverage which permits the Executive to continue to receive, for 2.5 years from the Date of Termination, at the Company's expense, life insurance and medical, dental and disability benefits at least comparable to those provided by the Company on the Date of Termination, provided that the Executive shall not receive such life insurance, medical, dental or disability benefits, respectively, if the Executive obtains other employment that provides for such benefit(s); and (iv) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliates in accordance with the terms and normal procedures of each such plan, program, policy or practice; and (v) to the extent permitted by applicable law, the Executive shall be credited with two additional years of age and service credit under all relevant Company retirement plans (including qualified, supplemental and excess plans, including without limitation the Company's Executive Retirement Plan and New Executive Retirement Plan, and, for the purpose of clarity, to the extent the Executive is a participant in the cash balance arrangement under the Company's Retirement Plan, the cash balance account will be increased as if the Executive had received two additional years of contributions based upon the Executive's compensation as of the Date of Termination); and (vi) the Company shall provide the Executive with outplacement services, not to exceed a reasonable cost, until the Executive accepts new employment. (b) Cause; Other than for Good Reason. If the Executive's employment shall be terminated for Cause or the Executive terminates his employment without Good Reason during the Term, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay or provide to the Executive an amount equal to the amount described in clause (1) of Section 5(a)(i)(A) above and timely payment or provision of the benefits set forth in Section 5(a)(iv) above, in each case to the extent theretofore unpaid. (c) Death. If the Executive's employment is terminated by reason of the Executive's death during the Term, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for (i) payment of a lump sum cash amount equal to the Executive's Annual Base Salary as in effect at the time of the Executive's death, (ii) payment of the amount set forth in Section 5(a)(i)(A) above; and (iii) timely payment or provision of the benefits set forth in Section 5(a)(iv) above. In addition, all restrictions on restricted stock held by the Executive shall lapse and all outstanding unvested stock options, stock appreciation rights, tandem options, tandem stock appreciation rights, performance shares, performance units, or any similar equity share or unit held by the Executive shall vest immediately. The payments provided for in subsections (i) and (ii) of this Section 5(c) shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. (d) Disability. If the Executive's employment is terminated by reason of the Executive's Disability, this Agreement shall terminate without further obligations to the -6- Executive, other than for (i) payment of a lump sum cash amount equal to the Executive's Annual Base Salary as in effect at the time of the Executive's disability, (ii) payment of the amount set forth in Section 5(a)(i)(A) above (payable to the Executive in a lump sum in cash within 30 days of the Date of Termination); and (iii) timely payment or provision of the benefits set forth in Section 5(a)(iv) above. In addition, all restrictions on restricted stock held by the Executive shall lapse and all outstanding unvested stock options, stock appreciation rights, tandem options, tandem stock appreciation rights, performance shares, performance units, or any similar equity share or unit held by the Executive shall vest immediately. To the extent permitted by applicable law and in accordance with the Company's Long-Term Disability plan, the Executive shall continue to accrue age and service credit through retirement for purposes of the Company's qualified and nonqualified retirement plans. (e) Retirement. If the Executive's employment is terminated by reason of his retirement under the terms of the applicable Company retirement plan during the Term, this Agreement shall terminate without further obligations to the Executive other than for (i) payment of the amount set forth in Section 5(a)(i)(A) above (payable to the Executive in a lump sum in cash within 30 days of the Date of Termination) and (ii) timely payment or provision of the benefits set forth in Section 5(a)(iv) above. (f) Non-exclusivity of Rights. Except as specifically provided, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliates and for which the Executive may qualify, nor, subject to Section 11(e), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or its affiliates. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of, or any contract or agreement with, the Company or its affiliates at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. As used in this Agreement, the terms "affiliated companies" and "affiliates" shall include any company controlled by, controlling or under common control with the Company. 6. Full Settlement. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"), if the Executive -7- prevails on any material claim made by the Executive and disputed by the Company under this Agreement. 7. Certain Additional Payments by the Company. If at any time for any reason any payment or distribution (a "Payment") by the Company or any other person or entity to or for the benefit of the Executive is determined to be a "parachute payment" (within the meaning of Section 280G(b)(2) of the Code), whether paid or copayable or distributed or distributable pursuant to the terms of this Agreement or otherwise in connection with or arising out of his employment with the Company or a change in ownership or excise tax imposed by Section 4999 of the Code (the "Excise Tax"), within a reasonable period of time after such determination is reached the Company shall pay to the Executive an additional payment (the Gross-Up Payment") in an amount such that the net amount retained by the Executive, after deduction of any Excise Tax on such Payment and any federal, state or local income or employment tax or other taxes and Excise Tax on the Gross-Up Payment, shall equal the amount of such Payment (including any interest or penalties with respect to any of the foregoing). All determinations concerning the application of the foregoing shall be made by a nationally recognized firm of independent accountants (together with legal counsel of its choosing), selected by the Company after consultation with the Executive (which may be the Company's independent auditors), whose determination shall be conclusive and binding on all parties. The fees and expenses of such accountants and counsel shall be borne by the Company. If the accounting firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with an opinion that the Executive has substantial authority not to report any Excise Tax on his Federal income tax return. In the event the Internal Revenue Service assesses the Executive an amount of Excise Tax in excess of that determined in accordance with the foregoing, the Company shall pay to the Executive an additional Gross-Up Payment, calculated as described above in respect of such excess Excise Tax, including a Gross-Up Payment in respect of any interest or penalties imposed by the Internal Revenue Service with respect to such excess Excise Tax. 8. Confidentiality and Competitive Activity. (a) The Executive acknowledges that he has acquired and will continue to acquire during the Term confidential information regarding the business of the Company and its respective affiliates. Accordingly, the Executive agrees that, without the written consent of the Board, he will not, at any time, disclose to any unauthorized person or otherwise use any such confidential information. For this purpose, confidential information means nonpublic information concerning the financial data, business strategies, product development (and proprietary product data), customer lists, marketing plans, and other proprietary information concerning the Company and its respective affiliates, except for specific items which have become publicly available other than as a result of the Executive's breach of this agreement. Notwithstanding the foregoing, nothing herein shall prevent Executive from responding to lawful subpoenas or court orders without the Company's prior written consent; provided, that the Executive shall have given the Company prior written notice of any such subpoena or court order promptly following receipt thereof. (b) During the time that the Executive is employed by the Company under this Agreement and then for one year after the date of termination of the employment of the -8- Executive for any reason, the Executive will not, without the written consent of the Board, directly or indirectly (A) knowingly engage or be interested in (as owner, partner, stockholder, employee, director, officer, agent, consultant or otherwise), with or without compensation, any business in the United States which is in competition with any line of business actively being conducted on the Date of Termination by the Company, and (B) disparage or publicly criticize the Company or any of its affiliates. Nothing herein, however, will prohibit the Executive from acquiring or holding not more than one percent of any class of publicly traded securities of any such business; provided that such securities entitle the Executive to not more than one percent of the total outstanding votes entitled to be cast by securityholders of such business in matters on which such securityholders are entitled to vote. (c) During the time that the Executive is employed by the Company under this Agreement and then for two years after the Date of Termination of the employment of the Executive for any reason, the Executive will not, without the written consent of the Board, directly or indirectly, hire any person who was employed by the Company or any of its subsidiaries or affiliates (other than persons employed in a clerical or other non-professional position) within the six-month period preceding the date of such hiring, or solicit, entice, persuade or induce any person or entity doing business with the Company and its respective affiliates, to terminate such relationship or to refrain from extending or renewing the same. (d) The Executive hereby acknowledges that the provisions of this Section 8 are reasonable and necessary for the protection of the Company and its respective affiliates. In addition, he further acknowledges that the Company and its respective affiliates will be irrevocably damaged if such covenants are not specifically enforced. Accordingly, the Executive agrees that, in addition to any other relief to which the Company may be entitled, the Company will be entitled to seek and obtain injunctive relief (without the requirement of any bond) from a court of competent jurisdiction for the purposes of restraining him from an actual or threatened breach of such covenants. In addition, and without limiting the Company's other remedies, in the event of any breach by the Executive of such covenants, the Company will have no obligation to pay any of the amounts that continue to remain payable to the Executive after the date of such breach under Section 5 hereof. 9. Change of Control. (a) Contract Extension. In the event of a Change of Control during the Term, the Term shall be extended to the second anniversary of the Change of Control (such two year period, the "Change of Control Extension Period"). (b) Special Payment. If the Executive's employment is terminated without Cause or by the Executive for Good Reason during the Change of Control Extension Period, the Executive will receive the compensation and benefits already required under the provisions of this Agreement, other than under Section 5(a)(i)(B), and, in lieu of the payments set forth in Section 5(a)(i)(B), the Executive will receive 2.5 times the sum of the Executive's Annual Base Salary and the Severance Bonus (the "Special Payment"), payable in a lump sum within 30 days after the Date of Termination. -9- (c) No Plan Modification. In the event of a Change of Control during the Term, Section 3(b)(v) shall not be effective. (d) Change of Control Defined. For purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if: (i) any Person or Group, as a result of a Transaction (as defined below) or otherwise, becomes the Beneficial Owner, directly or indirectly, of securities representing a majority of the combined voting power of the Company's then outstanding securities generally entitled to vote for the election of directors (capitalized terms not otherwise defined herein are used as defined under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder); or (ii) as a direct or indirect result of any cash tender offer, acquisition of securities, merger or other business combination, acquisition or sale of assets, actual or threatened election contest (including any settlement thereof or any agreement intended to avoid or settle such a contest) or contractual arrangement, or any combination of the foregoing (a "Transaction"), the persons who were directors of the Company immediately before the Transaction (the "Incumbent Board") shall cease to constitute at least a majority of the Board of the Company or any successor to the Company (including any entity resulting from such Transaction or which, as a result of such Transaction, directly or indirectly owns or controls the Company or such successor or all or substantially all of its assets); provided that any person becoming a director thereafter whose election as a director was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be deemed to be a member of the Incumbent Board. 10. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (b) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 11. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of New York without reference to principles of conflict of laws. The parties hereto irrevocably agree to submit to the jurisdiction and venue of the courts of the States of New York or New Jersey in any action or proceeding brought with respect to or in connection -10- with this Agreement. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: At the most recent home address on file for the Executive at the Company; If to the Company: 1 CIT Drive Livingston, New Jersey 07039 Attention: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (b) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (c) The Company may withhold from any amounts payable under this Agreement such Federal, state, or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (d) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 4 of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (e) From and after the Effective Date, this Agreement shall supersede the Retention Agreement and any other employment, severance or change of control agreement between the parties or severance or change of control plan, program or policy of the Company covering the Executive with respect to the subject matter except as expressly provided herein. -11- IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors and the Company have caused these presents to be executed in its name on its behalf, all as of the day and year first above written. --------------------- Lawrence A. Marsiello CIT GROUP INC. By --------------------- Jeffrey M. Peek -12- EX-10.5 6 e19537ex10_5.txt AGREEMENT BY CIT GROUP INC. Exhibit 10.5 AGREEMENT by and among CIT Group Inc. a Delaware corporation (the "Company") and Frederick E. Wolfert (the "Executive") dated as of the first day of August 2004. WHEREAS, the Company desires to employ the Executive in accordance with the following terms and conditions, and the Executive desires to be so employed. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Effective Date. The "Effective Date" shall mean September 13, 2004. 2. Term. The Company hereby agrees to employ the Executive, and the Executive hereby agrees to be employed by the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on December 31, 2007 (the "Term"). This Employment Agreement and the Term may be extended for one (1) or more additional periods by written agreement signed by the parties hereto at any time prior to the end of the term in effect. The Company or the Executive, as applicable, shall give notice no later than thirty (30) days before the end of the Term (or extended term) of its or his intent not to extend the Agreement. 3. Terms of Employment. (a) Position and Duties. (i) During the Term (A) the Executive shall serve as Vice Chairman - Commercial Finance with such authority, duties and responsibilities as are commensurate with such position and as may be consistent with such position, reporting to the Chief Executive Officer of the Company or such other officer as designated by the Chief Executive Officer of the Company, and (B) the Executive's services shall be performed at New York. (ii) During the Term, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote substantially all of his attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Term, it shall not be a violation of this Agreement for the Executive to serve on civic or charitable boards or committees, or manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) Compensation. (i) Base Salary. During the Term, the Executive shall receive an annual base salary ("Annual Base Salary"). The Annual Base Salary shall be $500,000. During the Term, the Annual Base Salary shall be reviewed at the time that the salaries of all of the executive officers of the Company are reviewed. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. (ii) Annual Bonus. For each complete calendar year during the Term, the Executive shall be entitled to a bonus pursuant to the Company's incentive plans and programs ("Annual Bonus"). For partial calendar year 2004, Executive shall receive a guaranteed cash bonus of $750,000 payable to the Executive in February 2005 if the Executive's employment is not terminated for "Cause" as defined in Section 4(b) or by the Executive without Good Reason as defined in Section 4(c) prior to February 1, 2005. Executive's target bonus for the first complete year during the Term shall be 150% of his Annual Base Salary ("Target Bonus"). Notwithstanding paragraph 3(b)(v) hereof, the Target Bonus in subsequent years of the Term shall not be less than the amount set forth in the previous sentence. (iii) Incentive Awards. A. During the Term, the Executive shall be eligible to participate in annual and long-term incentive plans applicable to the senior most executives of the Company. During the 2004 calendar year, the Company shall grant stock options and restricted stock under the CIT Group Inc. Long-Term Equity Compensation Plan (the "Plan") as set forth below. The Company shall grant, pursuant to the terms of the Plan, (i) options to purchase Company common stock having the aggregate fair market value of $800,000 on the date of grant determined in accordance with the terms of and standard practice under the Plan (the "Option"). One-third of the Options will vest, on a cumulative basis, on each of the first, second and third anniversaries of the date of grant; (ii) performance share units based on the Company's common stock having the aggregate fair market value of $1,000,000 on the date of grant determined in accordance with the terms of and standard practice under the Plan (the "Performance Restricted Stock"). The restrictions on the shares of Performance Restricted Stock shall lapse based on attainment of performance targets set by the Company in its sole discretion; and (iii) restricted shares of the Company's common stock having the aggregate fair market value of $1,400,000 on the date of grant determined in accordance with the terms of and standard practice under the Plan (the "Restricted Stock"). The restrictions on the shares of Restricted Stock shall lapse on the second anniversary of the date of grant. (iv) Other Benefits. The Executive shall be eligible for a Hiring Bonus of one million dollars ($1,000,000) payable within thirty (30) days of the Executive's commencement of employment. During the Term, the Executive shall be entitled to participate in all employee pension, welfare, perquisites, fringe benefit, and other benefit plans, practices, policies and programs generally applicable to comparable executives of the Company in substantially comparable positions as the Executive. In addition, the Executive shall be entitled to participation in any supplemental and/or excess retirement plans available to similarly situated executives of the Company, and in the Company's Executive Retirement Plan, and retiree medical and life insurance plans. -2- (v) Modifications. The Company may at any time or from time to time amend, modify, suspend or terminate any bonus or incentive compensation or employee benefit plans or programs provided hereunder for any reason and without the Executive's consent; provided that, without the Executive's consent, the Company may not reduce the aggregate value of the employee benefit plans or programs provided to the Executive hereunder unless such reduction is consistent with reductions affecting similarly situated employees of comparable rank of the Company. (vi) Expense Reimbursement. During the Term, the Executive shall be entitled to receive prompt reimbursement for all expenses incurred by the Executive in accordance with the Company's expense reimbursement policies. In addition, participation in the Company's relocation program. (vii) Vacation. During the Term, the Executive shall be entitled to paid vacation in accordance with the plans, policies, programs and practices of the Company as in effect with respect to the senior executives of the Company. 4. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Term. If the Company determines in good faith that the Disability of the Executive has occurred during the Term (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 11(a) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative. (b) Cause. The Company may terminate the Executive's employment during the Term for Cause. For purposes of this Agreement, "Cause" shall mean: (i) the willful and continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Chief Executive Officer of the Company or such other officer as designated by the Chief Executive Officer which specifically identifies the manner in which the Chief Executive Officer or his designee believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company or its affiliates, or -3- (iii) conviction of a felony or guilty or nolo contendere plea by the Executive with respect thereto; or (iv) a material breach of Section 8 of this Agreement. For purposes of this provision, no act or failure to act on the part of the Executive shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon express authority given pursuant to a resolution duly adopted by the Board with respect to such act or omission or upon the instructions of the Chief Executive Officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. (c) Good Reason. The Executive's employment may be terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean in the absence of a written consent of the Executive: (i) the assignment to the Executive of any duties materially inconsistent with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 3(a) of this Agreement, provided that a promotion shall not be Good Reason, or any other action by the Company which results in a material diminution in such position, authority, duties or responsibilities, excluding for this purpose an action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; or (ii) any material failure by the Company to comply with any of the provisions of Section 3(b) of this Agreement, other than failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; or (iii) the Company's requiring the Executive to be based at any office or location more than 50 miles from that provided in Section 3(a)(i)(B) hereof; or (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (v) the failure of the Company to offer to renew this Agreement on the terms and conditions (including payment of Annual Base Salary and participation in incentive plan and benefit programs) at least as favorable as in the final year of the Executive's last Employment Agreement, unless, at the time of a failure to renew this Employment Agreement, the Executive has reached the age of 65 and can be lawfully required to retire; or (vi) any failure by the Company to comply with and satisfy Section 10(b) of this Agreement. (d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other -4- party hereto given in accordance with Section 11(a) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon; (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated; and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein within 30 days of such notice, as the case may be; (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination; and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 5. Obligations of the Company upon Termination. (a) Good Reason; Other Than for Cause. If, during the Term, the Company shall terminate the Executive's employment other than for Cause or the Executive shall terminate employment for Good Reason: (i) the Company shall pay to the Executive in cash the aggregate of the following amounts: A. in a lump sum within 10 days after the Date of Termination, the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, and (2) the product of (x) the Severance Bonus defined below and (y) a fraction, the numerator of which is the number of days in the calendar year in which the Date of Termination occurs through the Date of Termination, and the denominator of which is 365, in each case to the extent not theretofore paid. For purposes of this Agreement, the term "Severance Bonus" means the greater of (I) the Executive's average Annual Bonus over the two calendar years preceding the Date of Termination and (II) the Executive's Target Bonus. B. the sum of (1) the greater of (x) the Annual Base Salary payable for the remainder of the Term after the Date of Termination, or (y) the product of 2.5 times the Annual Base Salary, and (2) the product of 2.5 times the Executive's Severance Bonus, which amount shall be payable in accordance with Executive's normal payroll periods immediately prior to the Date of Termination in equal installments for a period of 2.5 years, subject to compliance with Section 8 of this Agreement; and -5- (ii) all restrictions on restricted stock held by the Executive shall lapse and all outstanding unvested stock options, stock appreciation rights, tandem options, tandem stock appreciation rights, performance shares, performance units, or any similar equity share or unit held by the Executive shall vest immediately. Notwithstanding any provision regarding an earlier termination of stock options set forth in any stock option or other agreement, the stock options referred to in this Section 5(a)(ii) shall terminate and have no force or effect upon the earlier of (x) two (2) years after a termination of employment for Good Reason or Other Than for Cause or (y) the expiration of the option term as defined in the applicable stock option agreement; and (iii) subject to compliance with Section 8, continued benefit coverage which permits the Executive to continue to receive, for 2.5 years from the Date of Termination, at the Company's expense, life insurance and medical, dental and disability benefits at least comparable to those provided by the Company on the Date of Termination, provided that the Executive shall not receive such life insurance, medical, dental or disability benefits, respectively, if the Executive obtains other employment that provides for such benefit(s); and (iv) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliates in accordance with the terms and normal procedures of each such plan, program, policy or practice; and (v) to the extent permitted by applicable law, the Executive shall be credited with two additional years of age and service credit under all relevant Company retirement plans (including qualified, supplemental and excess plans, including without limitation the Company's Executive Retirement Plan and, for the purpose of clarity, to the extent the Executive is a participant in the cash balance arrangement under the Company's Retirement Plan, the cash balance account will be increased as if the Executive had received two additional years of contributions based upon the Executive's compensation as of the Date of Termination); and (vi) the Company shall provide the Executive with outplacement services, not to exceed a reasonable cost, until the Executive accepts new employment. (b) Cause; Other than for Good Reason. If the Executive's employment shall be terminated for Cause or the Executive terminates his employment without Good Reason during the Term, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay or provide to the Executive an amount equal to the amount described in clause (1) of Section 5(a)(i)(A) above and timely payment or provision of the benefits set forth in Section 5(a)(iv) above, in each case to the extent theretofore unpaid. (c) Death. If the Executive's employment is terminated by reason of the Executive's death during the Term, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for (i) payment of a lump sum cash amount equal to the Executive's Annual Base Salary as in effect at the time of the Executive's death, (ii) payment of the amount set forth in Section 5(a)(i)(A) above; and (iii) -6- timely payment or provision of the benefits set forth in Section 5(a)(iv) above. In addition, all restrictions on restricted stock held by the Executive shall lapse and all outstanding unvested stock options, stock appreciation rights, tandem options, tandem stock appreciation rights, performance shares, performance units, or any similar equity share or unit held by the Executive shall vest immediately. The payments provided for in subsections (i) and (ii) of this Section 5(c) shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. (d) Disability. If the Executive's employment is terminated by reason of the Executive's Disability, this Agreement shall terminate without further obligations to the Executive, other than for (i) payment of a lump sum cash amount equal to the Executive's Annual Base Salary as in effect at the time of the Executive's disability, (ii) payment of the amount set forth in Section 5(a)(i)(A) above (payable to the Executive in a lump sum in cash within 30 days of the Date of Termination); and (iii) timely payment or provision of the benefits set forth in Section 5(a)(iv) above. In addition, all restrictions on restricted stock held by the Executive shall lapse and all outstanding unvested stock options, stock appreciation rights, tandem options, tandem stock appreciation rights, performance shares, performance units, or any similar equity share or unit held by the Executive shall vest immediately. To the extent permitted by applicable law and in accordance with the Company's Long-Term Disability plan, the Executive shall continue to accrue age and service credit through retirement for purposes of the Company's qualified and nonqualified retirement plans. (e) Retirement. If the Executive's employment is terminated by reason of his retirement under the terms of the applicable Company retirement plan during the Term, this Agreement shall terminate without further obligations to the Executive other than for (i) payment of the amount set forth in Section 5(a)(i)(A) above (payable to the Executive in a lump sum in cash within 30 days of the Date of Termination) and (ii) timely payment or provision of the benefits set forth in Section 5(a)(iv) above. (f) Non-exclusivity of Rights. Except as specifically provided, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliates and for which the Executive may qualify, nor, subject to Section 11(e), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or its affiliates. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of, or any contract or agreement with, the Company or its affiliates at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. As used in this Agreement, the terms "affiliated companies" and "affiliates" shall include any company controlled by, controlling or under common control with the Company. 6. Full Settlement. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts -7- payable to the Executive under any of the provisions of this Agreement and, such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"), if the Executive prevails on any material claim made by the Executive and disputed by the Company under this Agreement. 7. Certain Additional Payments by the Company. If at any time for any reason any payment or distribution (a "Payment") by the Company or any other person or entity to or for the benefit of the Executive is determined to be a "parachute payment" (within the meaning of Section 280G(b)(2) of the Code), whether paid or copayable or distributed or distributable pursuant to the terms of this Agreement or otherwise in connection with or arising out of his employment with the Company or a change in ownership or excise tax imposed by Section 4999 of the Code (the "Excise Tax"), within a reasonable period of time after such determination is reached the Company shall pay to the Executive an additional payment (the Gross-Up Payment") in an amount such that the net amount retained by the Executive, after deduction of any Excise Tax on such Payment and any federal, state or local income or employment tax or other taxes and Excise Tax on the Gross-Up Payment, shall equal the amount of such Payment (including any interest or penalties with respect to any of the foregoing). All determinations concerning the application of the foregoing shall be made by a nationally recognized firm of independent accountants (together with legal counsel of its choosing), selected by the Company after consultation with the Executive (which may be the Company's independent auditors), whose determination shall be conclusive and binding on all parties. The fees and expenses of such accountants and counsel shall be borne by the Company. If the accounting firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with an opinion that the Executive has substantial authority not to report any Excise Tax on his Federal income tax return. In the event the Internal Revenue Service assesses the Executive an amount of Excise Tax in excess of that determined in accordance with the foregoing, the Company shall pay to the Executive an additional Gross-Up Payment, calculated as described above in respect of such excess Excise Tax, including a Gross-Up Payment in respect of any interest or penalties imposed by the Internal Revenue Service with respect to such excess Excise Tax. 8. Confidentiality and Competitive Activity. (a) The Executive acknowledges that he has acquired and will continue to acquire during the Term confidential information regarding the business of the Company and its respective affiliates. Accordingly, the Executive agrees that, without the written consent of the Board, he will not, at any time, disclose to any unauthorized person or otherwise use any such confidential information. For this purpose, confidential information means nonpublic information concerning the financial data, business strategies, product development (and proprietary product data), customer lists, marketing plans, and other proprietary information -8- concerning the Company and its respective affiliates, except for specific items which have become publicly available other than as a result of the Executive's breach of this agreement. Notwithstanding the foregoing, nothing herein shall prevent Executive from responding to lawful subpoenas or court orders without the Company's prior written consent; provided, that the Executive shall have given the Company prior written notice of any such subpoena or court order promptly following receipt thereof. (b) During the time that the Executive is employed by the Company under this Agreement and then for one year after the date of termination of the employment of the Executive for any reason, the Executive will not, without the written consent of the Board, directly or indirectly (A) knowingly engage or be interested in (as owner, partner, stockholder, employee, director, officer, agent, consultant or otherwise), with or without compensation, any business in the United States which is in competition with any line of business actively being conducted on the Date of Termination by the Company, and (B) disparage or publicly criticize the Company or any of its affiliates. Nothing herein, however, will prohibit the Executive from acquiring or holding not more than one percent of any class of publicly traded securities of any such business; provided that such securities entitle the Executive to not more than one percent of the total outstanding votes entitled to be cast by securityholders of such business in matters on which such securityholders are entitled to vote. (c) During the time that the Executive is employed by the Company under this Agreement and then for two years after the Date of Termination of the employment of the Executive for any reason, the Executive will not, without the written consent of the Board, directly or indirectly, hire any person who was employed by the Company or any of its subsidiaries or affiliates (other than persons employed in a clerical or other non-professional position) within the six-month period preceding the date of such hiring, or solicit, entice, persuade or induce any person or entity doing business with the Company and its respective affiliates, to terminate such relationship or to refrain from extending or renewing the same. (d) The Executive hereby acknowledges that the provisions of this Section 8 are reasonable and necessary for the protection of the Company and its respective affiliates. In addition, he further acknowledges that the Company and its respective affiliates will be irrevocably damaged if such covenants are not specifically enforced. Accordingly, the Executive agrees that, in addition to any other relief to which the Company may be entitled, the Company will be entitled to seek and obtain injunctive relief (without the requirement of any bond) from a court of competent jurisdiction for the purposes of restraining him from an actual or threatened breach of such covenants. In addition, and without limiting the Company's other remedies, in the event of any breach by the Executive of such covenants, the Company will have no obligation to pay any of the amounts that continue to remain payable to the Executive after the date of such breach under Section 5 hereof. 9. Change of Control. (a) Contract Extension. In the event of a Change of Control during the Term, the Term shall be extended to the second anniversary of the Change of Control (such two year period, the "Change of Control Extension Period"). -9- (b) Special Payment. If the Executive's employment is terminated without Cause or by the Executive for Good Reason during the Change of Control Extension Period, the Executive will receive the compensation and benefits already required under the provisions of this Agreement, other than under Section 5(a)(i)(B), and, in lieu of the payments set forth in Section 5(a)(i)(B), the Executive will receive 2.5 times the sum of the Executive's Annual Base Salary and the Severance Bonus (the "Special Payment"), payable in a lump sum within 30 days after the Date of Termination. (c) No Plan Modification. In the event of a Change of Control during the Term, Section 3(b)(v) shall not be effective. (d) Change of Control Defined. For purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if: (i) any Person or Group, as a result of a Transaction (as defined below) or otherwise, becomes the Beneficial Owner, directly or indirectly, of securities representing a majority of the combined voting power of the Company's then outstanding securities generally entitled to vote for the election of directors (capitalized terms not otherwise defined herein are used as defined under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder); or (ii) as a direct or indirect result of any cash tender offer, acquisition of securities, merger or other business combination, acquisition or sale of assets, actual or threatened election contest (including any settlement thereof or any agreement intended to avoid or settle such a contest) or contractual arrangement, or any combination of the foregoing (a "Transaction"), the persons who were directors of the Company immediately before the Transaction (the "Incumbent Board") shall cease to constitute at least a majority of the Board of the Company or any successor to the Company (including any entity resulting from such Transaction or which, as a result of such Transaction, directly or indirectly owns or controls the Company or such successor or all or substantially all of its assets); provided that any person becoming a director thereafter whose election as a director was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be deemed to be a member of the Incumbent Board. 10. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (b) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as -10- hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 11. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of New York without reference to principles of conflict of laws. The parties hereto irrevocably agree to submit to the jurisdiction and venue of the courts of the States of New York or New Jersey in any action or proceeding brought with respect to or in connection with this Agreement. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: At the most recent home address on file for the Executive at the Company; If to the Company: 1 CIT Drive Livingston, New Jersey 07039 Attention: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (b) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (c) The Company may withhold from any amounts payable under this Agreement such Federal, state, or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (d) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 4 of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (e) From and after the Effective Date, this Agreement shall supersede the Retention Agreement and any other employment, severance or change of control agreement between the parties or severance or change of control plan, program or policy of the Company covering the Executive with respect to the subject matter except as expressly provided herein. -11- IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors and the Company have caused these presents to be executed in its name on its behalf, all as of the day and year first above written. -------------------- Frederick E. Wolfert CIT GROUP INC. By ------------------ Jeffrey M. Peek -12- EX-12.1 7 e19537ex12_1.txt CIT GROUP INC. & SUBSIDIARIES COMP. OF EARNINGS EXHIBIT 12.1 CIT GROUP INC. AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES ($ IN MILLIONS)
Nine Months Ended September 30, ---------------------------------- 2004 2003 ---------- ---------- Net income ......................................................... $ 549.8 $ 411.7 Provision for income taxes ......................................... 351.6 263.4 ---------- ---------- Earnings before provision for income taxes ......................... 901.4 675.1 ---------- ---------- Fixed Charges Interest and debt expense on indebtedness .................. 900.3 1,021.9 Dividends on preferred capital securities .................. 13.1 13.1 Interest factor-one third of rentals on real and personal properties .............................................. 10.1 10.5 ---------- ---------- Total fixed charges ................................................ 923.5 1,045.5 ---------- ---------- Total earnings before provision for income taxes and fixed charges ..................................... $ 1,824.9 $ 1,720.6 ========== ========== Ratios of earnings to fixed charges(1) ............................. 1.98x 1.65x ========== ==========
- ---------- (1) Excluding the gain from redemption of debt in the quarter ended March 31, 2004, the ratio of earnings to fixed charges was 1.95x. This gain from debt redemption is significant, does not occur on a regular basis, and is not indicative of our ongoing operations. EX-31.1 8 e19537ex31_1.txt CERTIFICATION EXHIBIT 31.1 CERTIFICATIONS I, Jeffrey M. Peek certify that: 1. I have reviewed this quarterly report on Form 10-Q of CIT Group Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 9, 2004 /s/ Jeffrey M. Peek ------------------------------------ Jeffrey M. Peek President and Chief Executive Officer EX-31.2 9 e19537ex31_2.txt CERTIFICATION EXHIBIT 31.2 CERTIFICATIONS I, Joseph M. Leone, certify that: 1. I have reviewed this quarterly report on Form 10-Q of CIT Group Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 9, 2004 /s/ Joseph M. Leone ----------------------------------------- Joseph M. Leone Vice Chairman and Chief Financial Officer EX-32.1 10 e19537ex32_1.txt CERTIFICATION EXHIBIT 32.1 Certification Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of CIT Group Inc. ("CIT") on Form 10-Q for the three months ended September 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jeffrey M. Peek, the Chief Executive Officer of CIT, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant tO Section 906 of the Sarbanes-Oxley Act of 2002, that: (i) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and (ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of CIT. /S/ JEFFREY M. PEEK -------------------------------- Jeffrey M. Peek President and Chief Executive Officer CIT Group Inc. Dated: November 9, 2004 EX-32.2 11 e19537ex32_2.txt CERTIFICATION EXHIBIT 32.2 Certification Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of CIT Group Inc. ("CIT") on Form 10-Q for the three months ended September 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Joseph M. Leone, the Chief Financial Officer of CIT, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant tO Section 906 of the Sarbanes-Oxley Act of 2002, that: (i) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and (ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of CIT. /S/ JOSEPH M. LEONE --------------------------------- Joseph M. Leone Vice Chairman and Chief Financial Officer CIT Group Inc. Dated: November 9, 2004 -----END PRIVACY-ENHANCED MESSAGE-----