-----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, HwrF5Qvk4jATgHpVsFZIXAN5DLdm8e6NsvW281qF6U3MDcmTlPFJDwyp2flt9rvr 8uMmFzaLTTsR28svZ9wY8Q== 0000891092-99-000120.txt : 19990322 0000891092-99-000120.hdr.sgml : 19990322 ACCESSION NUMBER: 0000891092-99-000120 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CIT GROUP INC CENTRAL INDEX KEY: 0000020388 STANDARD INDUSTRIAL CLASSIFICATION: SHORT-TERM BUSINESS CREDIT INSTITUTIONS [6153] IRS NUMBER: 132994534 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-01861 FILM NUMBER: 99568322 BUSINESS ADDRESS: STREET 1: 1211 AVE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10036 BUSINESS PHONE: 2125361390 MAIL ADDRESS: STREET 1: 1211 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10036 FORMER COMPANY: FORMER CONFORMED NAME: CIT GROUP HOLDINGS INC /DE/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: CIT FINANCIAL CORP/OLD/ DATE OF NAME CHANGE: 19860512 10-K 1 FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549-1004 ---------- Form 10-K ---------- (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to ---------- Commission file number 1-1861 The CIT Group, Inc. (Exact name of registrant as specified in its charter) Delaware 13-2994534 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1211 Avenue of the Americas, New York, New York 10036 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (212) 536-1950 ---------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------- ------------------------ Class A Common Stock, par value $0.01 per share........ New York Stock Exchange 5 7/8% Notes Due October 15, 2008...................... New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No _____. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the New York Stock Exchange Composite Transaction closing price of the Class A Common Stock ($29.50 per share) on February 26, 1999, was $2,349,107,745. For purposes of this computation, all officers, directors, and 5% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed an admission that such officers, directors, and beneficial owners are, in fact, affiliates of the registrant. At February 26, 1999, 162,114,331 shares of the Company's Class A Common Stock, par value $0.01 per share, were outstanding. List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) any annual report to stockholders; (2) any proxy or information statement; and (3) any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. None ================================================================================ TABLE OF CONTENTS - -------------------------------------------------------------------------------- Part I Item 1. Business ......................................................... 1 Overview ...................................................... 1 Industry Concentration ........................................ 8 Competition ................................................... 8 Regulation .................................................... 8 Item 2. Properties ....................................................... 10 Item 3. Legal Proceedings ................................................ 10 Item 4. Submission of Matters to a Vote of Security Holders .............. 10 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ........................................... 11 Item 6. Selected Financial Data .......................................... 12 Item 7. Management's Discussion and Analysis of Financial and Condition and Results of Operations ........................... 14 Item 7A. Quantitative and Qualitative Disclosure about Market Risk ................................................... 14 Item 8. Financial Statements and Supplementary Data ...................... 29 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........................... 57 Part III Item 10. Directors and Executive Officers of the Registrant ............... 58 Item 11. Executive Compensation ........................................... 60 Item 12. Security Ownership of Certain Beneficial Owners and Management ................................................ 65 Item 13. Certain Relationships and Related Transactions ................... 67 Part IV Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.................................................... 69 Forward-Looking Statements Certain statements contained in this filing are forward-looking statements concerning our operations, economic performance and financial condition. Forward-looking statements are included, for example, in the discussions about: o our liquidity, o our credit risk management, o our asset/liability risk management, o our operational and legal risks, o Year 2000 issues, and o how we may be affected by certain legal proceedings. These statements involve risks and uncertainties that may be difficult to predict. Therefore, actual results may differ materially from those expressed or implied in those statements. Factors that could cause such differences include, but are not limited to: o economic conditions and trends, o changes in market interest rates, in the relationship between short-term rates and long-term rates, or in the relationship between different interest rate indices, o industry cycles and trends, o changes in the market for equipment and other collateral due to market conditions, oversupply, obsolescence or other factors, o disruptions in the commercial paper or capital markets, o changes in laws or regulations, and o competitive conditions and trends. i PART I Item 1. Business OVERVIEW The CIT Group, Inc., ("we," "our," "us," or "CIT"), a Delaware corporation, is a leading diversified finance organization with over $26 billion of managed assets at December 31, 1998. We offer secured commercial and consumer financing primarily in the United States to smaller, middle-market and larger businesses and to individuals through a nationwide distribution network. We commenced operations in 1908 and have developed a broad array of "franchise" businesses that focus on specific industries, asset types and markets, which are balanced by client, industry and geographic diversification. Our principal executive offices are located at 1211 Avenue of the Americas, New York, New York 10036 and our telephone number is (212) 536-1390. Our business focus is commercial and consumer finance and we offer a broad array of products to our customers, including loans and leases. We operate through three business segments: o Equipment Financing and Leasing o Commercial Finance o Consumer Each segment conducts its operations through strategic business units which market its products and services to satisfy the financing needs of specific customers, industries and markets. Our business segments are described in greater detail below. Recent Developments On March 8, 1999, we announced that we would acquire Newcourt Credit Group, Inc. ("Newcourt") in an exchange of common stock. Under the terms of the transaction, which will be accounted for on a purchase basis, 0.92 shares of our common stock will be exchanged for each outstanding share of Newcourt common stock. Based upon the closing price of $30.75 on March 5, 1999, the value of the acquisition is approximately $4.2 billion. Following the acquisition, CIT stockholders will own 54% of the combined company and Newcourt stockholders will own 46%. The transaction is expected to close during the third quarter of 1999, and is conditioned upon, among other things, regulatory and stockholder approval. Newcourt is headquartered in Toronto, Canada and its stock is traded on the New York, Toronto, and Montreal Stock Exchanges. Newcourt is an independent, non-bank financial services enterprise with operations primarily in the United States, Canada and Europe. Newcourt orginates, invests in and sells asset-based financings including secured loans, leases and conditional sales contracts. Newcourt's origination activities focus on the commercial and corporate finance segments of the asset-based financing market. Common Stock In November 1998, The Dai-Ichi Kangyo Bank, Limited ("DKB") sold 55,000,000 shares of Class A Common Stock in a secondary public offering (the "Secondary Offering") for which it received all the proceeds. Prior to the sale, DKB converted all of its Class B Common Stock into an identical number of shares of Class A Common Stock, which is now the only class of common stock outstanding. DKB held 94.4% of the combined voting power and 77.2% of the economic interest of all of our outstanding common stock prior to the sale. At December 31, 1998, DKB held 43.8% of the voting power and economic interest of our outstanding common stock. In November 1997, we issued 36,225,000 shares of Class A Common Stock in an initial public offering (the "IPO"). Prior to the IPO, DKB owned 80% of our issued and outstanding stock, and The Chase Manhattan Corporation, ("Chase") owned the remaining 20% common stock interest. DKB had an option expiring December 15, 2000 to purchase the remaining 20% common stock interest from Chase. In November 1997, we purchased DKB's option at its fair market value, exercised the option to purchase the stock held by Chase and recapitalized by converting the outstanding common stock to 157,500,000 shares of Class B Common Stock. Twenty percent of the Class B Common Stock shares (which had five votes per 1 share) were converted to Class A Common Stock shares (which has one vote per share) and, in addition to an underwriter's overallotment option, were issued in the IPO. The issuance of Class A Common Stock pursuant to the underwriter's overallotment resulted in an increase to stockholders' equity of $117.7 million. Commercial Segments Our commercial operations are diverse and provide a wide range of financing and leasing products to small, midsize and larger companies across a wide variety of industries, including aerospace, retailing, construction, rail, machine tool, business aircraft, apparel, textiles, electronics and technology, chemicals, manufacturing, and transportation. The secured lending, leasing and factoring products of our commercial operations include direct loans and leases, operating leases, leveraged and single investor leases, secured revolving lines of credit and term loans, credit protection, accounts receivable collection, import and export financing and factoring, debtor-in-possession and turnaround financing, and acquisition and expansion financing. The following table sets forth the financing and leasing assets of our commercial operations at December 31 of each of the years in the five-year period ended December 31, 1998.
December 31, -------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Dollars in Millions Equipment Financing and Leasing ...... $13,367.0 $11,709.7 $11,321.6 $10,591.6 $ 9,631.1 Commercial Finance ................... 4,996.2 4,250.8 3,838.1 3,973.0 4,057.9 --------- --------- --------- --------- --------- $18,363.2 $15,960.5 $15,159.7 $14,564.6 $13,689.0 ========= ========= ========= ========= =========
Commercial transactions are generated through direct calling efforts with borrowers, lessees, equipment end-users, manufacturers and distributors and through referral sources and other intermediaries. In addition, our strategic business units jointly structure transactions and refer or cross-sell transactions to other CIT units to best meet customers' overall financing needs. Our marketing efforts are supplemented by the Multi-National Marketing Group, which promotes our products to the U.S. subsidiaries of foreign corporations in need of asset-based financing, developing business through referrals from DKB and through direct calling efforts. We also buy and sell participations in and syndications of finance receivables and/or lines of credit. In addition, from time to time in the normal course of business, we purchase finance receivables in bulk to supplement our originations and sell selected finance receivables and equipment under operating leases for risk management and/or other balance sheet management purposes. Equipment Financing and Leasing Our Equipment Financing and Leasing operations had total financing and leasing assets of $13.4 billion at December 31, 1998, representing 56.4% of total financing and leasing assets. We conduct our Equipment Financing and Leasing operations through two strategic business units: o The CIT Group/Equipment Financing ("Equipment Financing"), offers secured equipment financing and leasing and focuses on the broad distribution of its products through manufacturers, dealers/distributors, intermediaries and direct calling efforts primarily with the construction, transportation and machine tool industries. o The CIT Group/Capital Finance ("Capital Finance") offers secured equipment financing and leasing and focuses on the direct marketing of customized transactions, particularly operating leases, relating primarily to commercial aircraft and rail equipment. Equipment Financing and Capital Finance personnel have extensive expertise in managing equipment over its full life cycle, including purchases of new equipment, maintenance and repairs, residual value estimation and remarketing via releasing or sale. Equipment Financing's and Capital Finance's equipment and industry expertise enable them to evaluate effectively residual value risk. For example, Capital Finance can repossess commercial aircraft, if necessary, obtain any required maintenance and repairs for such aircraft, and recertify such aircraft with appropriate authorities. They manage the equipment, residual value, and/or the risk of equipment remaining idle for extended periods of time or in amounts that could materially impact profitability by locating alternative equipment users and/or purchasers. For each year in the period 1994 through 1998, Equipment Financing and Capital Finance have realized in excess of 100% of the aggregate booked residual values in connection with their equipment sales. 2 The following table sets forth certain information concerning the financing and leasing assets of our Equipment Financing and Leasing segment at December 31 of each of the years in the five-year period ended December 31, 1998.
December 31, -------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Dollars in Millions Finance receivables - loans ........... $ 6,419.3 $ 6,091.7 $ 6,357.5 $ 6,383.4 $5,852.6 Finance receivables - leases .......... 4,173.6 3,712.4 3,562.0 3,095.2 2,910.6 Operating lease equipment, net ........ 2,774.1 1,905.6 1,402.1 1,113.0 867.9 --------- --------- --------- --------- -------- Total financing and leasing assets ............................ $13,367.0 $11,709.7 $11,321.6 $10,591.6 $9,631.1 ========= ========= ========= ========= ========
On January 1, 1997, $1,519.2 million of financing and leasing assets and related marketing and servicing operations were transferred from Capital Finance to Equipment Financing. The transferred financing and leasing assets and operations were considered more complementary to the Equipment Financing business and the transfers were undertaken to increase Equipment Financing's nationwide market reach and further utilize its existing systems and infrastructure. The transfer also enabled Capital Finance to focus on the specialized commercial aircraft and railcar markets. Equipment Financing Equipment Financing is the largest of our strategic business units with total financing and leasing assets of $9.3 billion at December 31, 1998, representing 39.1% of our total financing and leasing assets. Equipment Financing offers secured equipment financing and leasing products, including direct secured loans, leases, revolving lines of credit, operating leases, sale and leaseback arrangements, vendor financing and specialized wholesale and retail financing for distributors and manufacturers. Equipment Financing is a leading nationwide asset-based equipment lender. At December 31, 1998, its portfolio included significant outstandings to customers in a number of different industries, with manufacturing being the largest as a percentage of financing and leasing assets, followed by construction and transportation. The Equipment Financing portfolio at December 31, 1998 included many different types of equipment, including construction, transportation, manufacturing equipment and business aircraft. Products are originated through direct calling on customers and through relationships with manufacturers, dealers/distributors and intermediaries that have leading or significant marketing positions in their respective industries. This provides Equipment Financing with efficient access to equipment end-users in many industries across a variety of equipment types. The following table sets forth certain information concerning the financing and leasing assets of Equipment Financing at December 31 of each of the years in the five-year period ended December 31, 1998.
December 31, -------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Dollars in Millions Finance receivables - loans ......... $5,683.6 $5,042.8 $3,859.0 $3,657.0 $3,081.7 Finance receivables - leases ........ 2,814.0 2,360.6 1,757.8 1,272.9 1,188.0 Operating lease equipment, net ...... 765.1 623.8 426.6 363.0 219.2 -------- -------- -------- -------- -------- Total financing and leasing assets ......................... $9,262.7 $8,027.2 $6,043.4 $5,292.9 $4,488.9 ======== ======== ======== ======== ========
Capital Finance Capital Finance had financing and leasing assets of $4.1 billion at December 31, 1998, which represented 17.3% of our total financing and leasing assets. Capital Finance specializes in customized leasing and secured financing, including operating leases, single investor leases, equity portions of leveraged leases, sale and leaseback arrangements, as well as loans secured by equipment relating primarily to end-users of commercial aircraft and railcars. Typical Capital Finance customers are middle-market to larger-sized companies. Capital Finance has provided financing to commercial airlines for over 30 years. The Capital Finance aerospace portfolio includes most of the leading U.S. and foreign commercial airlines. Capital Finance has developed strong relationships with most major airlines and all major aircraft and aircraft engine manufacturers. This provides Capital Finance with access to technical information, which supports customer service and provides opportunities to finance new business. 3 Capital Finance has over 25 years experience in financing the rail industry, contributing to its knowledge of asset values, industry trends, product structuring and customer needs. To strengthen its position in the rail financing market, Capital Finance formed a dedicated rail equipment group in 1994 and currently maintains relationships with several leading railcar manufacturers, and has a significant direct calling effort on all railroads and rail shipping in the United States. The Capital Finance rail portfolio includes all of the U.S. and Canadian Class I railroads and numerous shippers. The Capital Finance operating lease fleet includes primarily covered hopper cars used to ship grain and agricultural products, plastic pellets and cement; gondola cars for coal, steel coil and mill service; open hopper cars for coal and aggregates; center beam flat cars for lumber; and boxcars for paper and auto parts. Capital Finance also has a fleet of locomotives on lease to U.S. railroads. New business is generated by Capital Finance through: o direct calling efforts with equipment end-users and borrowers, including major airlines, railroads and shippers, o relationships with aerospace, railcar and other manufacturers and o intermediaries and other referral sources. The following table sets forth certain information concerning the financing and leasing assets of Capital Finance at December 31 of each of the years in the five-year period ended December 31, 1998.
December 31, --------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Dollars in Millions Finance receivables - loans ......... $ 735.7 $1,048.9 $2,498.5 $2,726.4 $2,770.9 Finance receivables - leases ........ 1,359.6 1,351.8 1,804.2 1,822.3 1,722.6 Operating lease equipment, net ...... 2,009.0 1,281.8 975.5 750.0 648.7 -------- -------- -------- -------- -------- Total financing and leasing assets ......................... $4,104.3 $3,682.5 $5,278.2 $5,298.7 $5,142.2 ======== ======== ======== ======== ========
Commercial Finance At December 31, 1998, the financing and leasing assets of our Commercial Finance segment totaled $5.0 billion, representing 21.1% of total financing and leasing assets. We conduct our Commercial Finance operations through three strategic business units, all of which focus on accounts receivable and inventories as the primary source of security for their lending transactions. o The CIT Group/Commercial Services ("Commercial Services"), which provides secured financing as well as factoring and receivable/collection management products to companies in apparel, textile, furniture, home furnishings, and other industries. o The CIT Group/Business Credit ("Business Credit"), which provides secured financing primarily to middle-market to larger-sized borrowers. o The CIT Group/Credit Finance ("Credit Finance"), which provides secured financing primarily to smaller-sized to middle-market borrowers. The following table sets forth certain information concerning the financing and leasing assets of Commercial Finance at December 31 of each of the years in the five-year period ended December 31, 1998.
December 31, -------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Dollars in Millions Commercial Services .................. $2,481.8 $2,113.1 $1,804.7 $1,743.3 $1,896.2 Business Credit ...................... 1,477.9 1,247.9 1,235.6 1,471.0 1,442.1 Credit Finance ....................... 1,036.5 889.8 797.8 758.7 719.6 -------- -------- -------- -------- -------- Total financing and leasing assets ........................... $4,996.2 $4,250.8 $3,838.1 $3,973.0 $4,057.9 ======== ======== ======== ======== ========
In October 1997, $95.0 million of small ticket commercial finance receivables were transferred from Business Credit to Credit Finance. 4 Commercial Services Commercial Services had total financing and leasing assets of $2.5 billion at December 31, 1998, which represented 10.5% of our total financing and leasing assets. Commercial Services offers a full range of domestic and international customized credit protection, lending and outsourcing services that include working capital and term loans, factoring, receivable management outsourcing, bulk purchases of accounts receivable, import and export financing and letter of credit programs. Financing is provided to clients through the purchase of accounts receivable owed to clients by their customers, as well as by guaranteeing amounts due under letters of credit issued to the clients' suppliers, which are collateralized by accounts receivable and other assets. The purchase of accounts receivable is traditionally known as "factoring" and results in the payment by the client of a factoring fee which is commensurate with the underlying degree of credit risk and recourse, and which is generally a percentage of the factored sales volume. When Commercial Services "factors" (i.e., purchases) a customer invoice from a client, it records the customer receivable as an asset and also establishes a liability for the funds due to the client ("credit balances of factoring clients"). Commercial Services also may advance funds to its clients prior to collection of receivables, typically in an amount up to 80% of eligible accounts receivable (as defined for that transaction), charging interest on such advances (in addition to any factoring fees) and satisfying such advances from receivables collections. Clients use Commercial Services' products and services for various purposes, including improving cash flow, mitigating or reducing the risk of bad debt charge offs, increasing sales, improving management information and converting the high fixed cost of operating a credit and collection department into a lower and variable expense based on sales volume. Commercial Services generates business regionally from a variety of sources, including direct calling efforts and referrals from existing clients and other sources. Business Credit Financing and leasing assets of Business Credit totaled $1.5 billion at December 31, 1998 and represented 6.2% of our total financing and leasing assets. Business Credit offers senior revolving and term loans secured by accounts receivable, inventories and fixed assets to middle-market and larger-sized companies. Clients use such loans primarily for growth, expansion, acquisitions, refinancings and debtor-in-possession and turnaround financings. Business Credit sells and purchases participation interests in such loans to and from other lenders. Through its variable interest rate senior revolving and term loan products, Business Credit meets its customers' financing needs for working capital, growth, acquisition and other financing situations otherwise not met through bank or other unsecured financing alternatives. Business Credit typically structures financings on a fully secured basis, though, from time to time, it may look to a customer's cash flow to support a portion of the credit facility. Revolving and term loans are made on a variable interest rate basis based on published indexes such as LIBOR or a prime rate of interest. Business is originated through direct calling efforts and intermediary and referral sources. Business Credit has focused on increasing the proportion of direct business origination to improve its ability to capture or retain refinancing opportunities and to enhance finance income. Credit Finance Financing and leasing assets of Credit Finance totaled $1.0 billion at December 31, 1998 and represented 4.4% of our total financing and leasing assets. Credit Finance offers revolving and term loans to smaller-sized and middle-market companies secured by accounts receivable, inventories and fixed assets. Such loans are used by clients for working capital, refinancings, acquisitions, leveraged buyouts, reorganizations, restructurings, turnarounds and Chapter 11 financing and confirmation plans. Credit Finance sells participation interests in such loans to other lenders and purchases participation interests in such loans originated by other lenders. Credit Finance borrowers are generally smaller and cover a wider range of credit quality than those of Business Credit. While both Business Credit and Credit Finance offer financing secured by accounts receivable, inventories and fixed assets, Credit Finance places a higher degree of reliance on collateral and is generally more focused on credit monitoring in its business. 5 Business is originated through the sales and regional offices as well as intermediaries and referral relationships and through direct calling efforts. Credit Finance has developed long-term relationships with selected finance companies, banks and other lenders and with many diversified referral sources. Consumer At December 31, 1998, our consumer segment financing and leasing assets totaled $5.3 billion, representing 22.2% of total financing and leasing assets. Total consumer managed assets were $7.8 billion at December 31, 1998, representing 29.6% of our total managed assets. In addition to on balance sheet receivables, leases, consumer finance receivables held for sale, and certain investments, managed assets include consumer loans previously securitized and still serviced by us. Our consumer business is focused primarily on home equity lending and on retail sales financing secured by recreation vehicles, manufactured housing and recreational boats. Home equity lending is performed by The CIT Group/Consumer Finance ("Consumer Finance") business unit. Sales financing for consumer products sold through dealers is performed by The CIT Group/Sales Financing ("Sales Financing") business unit. Sales Financing began providing wholesale inventory financing to manufactured housing and recreational boat dealers utilizing its dealer and manufacturer relationships in 1997, and to recreation vehicle dealers in 1998. Sales Financing also provides contract servicing for securitization trusts and other third parties through a centralized Asset Service Center ("ASC"). Additionally, in the ordinary course of business, Consumer Finance and Sales Financing purchase loans and portfolios of loans from banks, thrifts and other originators of consumer loans. The following table sets forth certain information regarding our consumer business segment at December 31 for each of the years in the five-year period ended December 31, 1998.
December 31, -------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Dollars in Millions Consumer Finance Financing and leasing assets ........ $2,244.4 $1,992.3 $2,005.5 $1,039.0 $ 570.8 Finance receivables previously securitized and currently managed by us .................... 607.6 453.8 -- -- -- -------- -------- -------- -------- ------- Managed assets ................ $2,852.0 $2,446.1 $2,005.5 $1,039.0 $ 570.8 ======== ======== ======== ======== ======== Sales Financing Financing and leasing assets ........ $3,009.9 $1,940.7 $1,349.8 $1,416.9 $1,471.2 Finance receivables previously securitized and currently managed by us .................... 1,909.3 1,931.8 1,437.4 916.5 306.7 -------- -------- -------- -------- ------- Managed assets ................ $4,919.2 $3,872.5 $2,787.2 $2,333.4 $1,777.9 ======== ======== ======== ======== ======== Total financing & leasing assets ....... $5,254.3 $3,933.0 $3,355.3 $2,455.9 $2,042.0 Consumer finance receivables previously securitized and currently managed by us ............. 2,516.9 2,385.6 1,437.4 916.5 306.7 -------- -------- -------- -------- ------- Total managed assets ................... $7,771.2 $6,318.6 $4,792.7 $3,372.4 $2,348.7 ======== ======== ======== ======== ========
Consumer Finance Financing and leasing assets of Consumer Finance aggregated $2.2 billion at December 31, 1998 and represented 9.5% of our total financing and leasing assets. The managed assets of Consumer Finance were $2.9 billion at December 31, 1998, or 10.9% of our total managed assets. Consumer Finance commenced operations in December 1992. Its products include both fixed and variable rate closed-end loans and variable rate lines of credit. Consumer Finance primarily originates, purchases and sells loans secured by first or second liens on detached, single family residential properties. Customers borrow for the purpose of consolidating debts, refinancing an existing mortgage, funding home improvements, paying education expenses and, to a lesser extent, purchasing a home, among other reasons. Consumer Finance primarily originates loans through brokers, as well on a direct marketing basis and through correspondents. 6 We believe that the network of Consumer Finance offices, located in most major U.S. markets, enables us to provide a competitive, extensive product offering complemented by high levels of service delivery. Through experienced lending professionals and automation, Consumer Finance provides rapid turnaround time from application to loan funding, a characteristic considered to be critical by its broker relationships. Sales Financing The financing and leasing assets of Sales Financing, which aggregated $3.0 billion at December 31, 1998, represented 12.7% of our total financing and leasing assets. The managed assets of Sales Financing were $4.9 billion at December 31, 1998, or 18.8% of total managed assets. Sales Financing provides nationwide retail financing for the purchase of new and used recreation vehicles, manufactured housing and recreational boats. During 1997, Sales Financing began providing wholesale manufactured housing and recreational boat inventory financing directly to dealers, and to recreation vehicle dealers in 1998. Sales Financing originates loans predominantly through recreation vehicle, manufactured housing and recreational boat dealer, manufacturer and broker relationships. The following table sets forth certain information with respect to the managed assets of Sales Financing at December 31 for each of the years in the five-year period ended December 31, 1998.
December 31, -------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Dollars in Millions Retail finance receivables Recreation vehicles ................. $1,884.6 $1,596.5 $1,256.9 $1,144.2 $1,016.3 Manufactured housing ................ 1,695.9 1,471.9 1,202.5 1,032.3 690.0 Recreational boat ................... 1,038.6 682.5 327.8 156.9 71.6 Wholesale inventory financing ......... 300.1 121.6 -- -- -- -------- -------- -------- -------- -------- Total managed assets .................. $4,919.2 $3,872.5 $2,787.2 $2,333.4 $1,777.9 ======== ======== ======== ======== ========
Servicing The ASC centrally services and collects substantially all of our consumer finance receivables including loans originated or purchased by Sales Financing or Consumer Finance, as well as loans originated or purchased and subsequently securitized with servicing retained. The servicing portfolio also includes loans owned by third parties that are serviced by Sales Financing for a fee on a "contract" basis. At December 31, 1998, the consumer finance servicing portfolio included $1.0 billion of finance receivables serviced for third parties. Securitization Program We generally fund our operations through offerings of commercial paper and medium-term and longer term notes in the capital markets. In an effort to broaden funding sources and to provide an additional source of liquidity, we established a securitization program in 1992 to supplement our funding by accessing periodically the public and private asset backed securitization markets. Current products utilized in this program include consumer loans secured by recreation vehicles, recreational boats and residential real estate. We have sold $4.1 billion of finance receivables since the inception of the asset backed securitization program, and the remaining pool balance at December 31, 1998 was $2.5 billion or 9.6% of our total managed assets. Under a typical asset backed securitization, we sell a "pool" of secured loans to a special purpose entity. The special purpose entity, in turn, issues certificates and/or notes that are collateralized by the loan pool and entitle the holders thereof to participate in certain loan pool cash flows. We retain the servicing of the securitized loans, for which we earn a servicing fee. We also participate in certain "residual" loan pool cash flows (cash flows after payment of principal and interest to certificate and/or note holders and after losses). At the date of securitization, we estimate the "residual" cash flows to be received over the life of the securitization, record the present value of these cash flows as an interest-only receivable, or I/O (a retained interest in the securitization), and recognize a gain. The I/O is then amortized through earnings over the estimated life of the related loan pool. In estimating residual cash flows and the value of the related I/Os, we make a variety of financial assumptions, including loan pool credit losses, prepayment speeds and discount rates. These assumptions are empirically supported by both our historical experience and anticipated trends relative to the particular 7 products securitized. Subsequent to recording the I/Os, we regularly review such assets for valuation impairment. These reviews are performed on a disaggregated basis. Fair values of I/Os are calculated utilizing current and anticipated credit losses, prepayment speeds and discount rates and are then compared to our carrying values. Our I/Os had a carrying value at December 31, 1998 of $153.9 million, which approximated fair value. Equity Investments The CIT Group/Equity Investments and its subsidiary The CIT Group/Venture Capital (together "Equity Investments") originate and participate in merger and acquisition transactions, purchase private equity and equity-related securities and arrange transaction financing. Equity Investments also invests in emerging growth opportunities in selected industries, including the life sciences, information technology, communications and consumer products industries. Equity Investments made its first investment in 1991 and had total investments of $81.9 million at December 31, 1998. INDUSTRY CONCENTRATION See the "Industry Composition" and "Commercial Airline Industry" sections of "Financing and Leasing Assets Composition" in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. COMPETITION Our markets are highly competitive and are characterized by competitive factors that vary based upon product and geographic region. Competitors include captive and independent finance companies, commercial banks and thrift institutions, industrial banks, leasing companies, manufacturers and vendors. Substantial national financial services networks have been formed by insurance companies and bank holding companies that compete with us. On a local level, community banks and smaller independent finance and/or mortgage companies are a competitive force. Some competitors have substantial local market positions. Many of our competitors are large companies that have substantial capital, technological and marketing resources. Some of these competitors are larger than us and may have access to capital at a lower cost than us. Also, our competitors include businesses that are not related to bank holding companies and, accordingly, may engage in activities, for example, short-term equipment rental and servicing, which currently are prohibited to us. Competition has been enhanced in recent years by a strong economy and growing marketplace liquidity. The markets for most of our products are characterized by a large number of competitors. However, with respect to some of our products, competition is more concentrated. We compete primarily on the basis of pricing, terms and structure. From time to time, our competitors seek to compete aggressively on the basis of these factors and we may lose market share to the extent we are unwilling to match competitor pricing and terms in order to maintain interest margins and/or credit standards. Other primary competitive factors include industry experience and client service and relationships. In addition, demand for our products with respect to certain industries, such as the commercial airline industry, will be affected by demand for such industry's services and products and by industry regulations. REGULATION DKB is a bank holding company within the meaning of the Bank Holding Company Act of 1956 (the "Act"), and is registered as such with the Board of Governors of the Federal Reserve. As a result, we are subject to certain provisions of the Act and are subject to examination by the Federal Reserve System (the "Federal Reserve"). In general, the Act limits the activities in which a bank holding company and its subsidiaries may engage to those of banking or managing or controlling banks or performing services for their subsidiaries and to continuing activities which the Federal Reserve has determined to be "so closely related to banking or managing or controlling banks as to be a proper incident thereto." Our current principal business activities constitute permissible activities for a nonbank subsidiary of a bank holding company. In addition to being subject to the Act, DKB is subject to Japanese banking laws, regulations, guidelines and orders that affect our permissible activities. We have entered into an agreement with DKB in order to facilitate DKB's compliance with applicable U.S. and Japanese banking laws, and with the regulations, 8 interpretations, policies, guidelines, requests, directives and orders of the applicable regulatory authorities or their staffs thereof or a court (collectively, the "Banking Laws"). That agreement prohibits us from engaging in any new activity or entering into any transaction for which prior approval, notice or filing is required under Banking Laws, unless the required prior approval is obtained, prior notice is given or made by DKB and accepted or such filings are made. We are also prohibited from engaging in any activity that would cause DKB, CIT or any affiliate of DKB or CIT to violate any Banking Laws. If, at any time, it is determined by DKB that any of our activities is prohibited by any Banking Law, we are required to take all reasonable steps to cease such activities. Under the terms of that agreement, DKB is responsible for making all determinations as to compliance with applicable Banking Laws. Two of our subsidiaries are investment companies organized under Article XII of the New York Banking Law. The activities of these subsidiaries are restricted by state banking laws and these subsidiaries are subject to examination by state banking examiners. Also, any person or entity seeking to purchase "control" of the company would be required to apply for and obtain the prior approval of the Superintendent of Banks of the State of New York. "Control" is presumed to exist if a person or entity would, directly or indirectly, own, control or hold (with power to vote) 10% or more of our voting stock. Our operations are subject, in certain instances, to supervision and regulation by state and federal governmental authorities and may be subject to various laws and judicial and administrative decisions imposing various requirements and restrictions, which, among other things, (i) regulate credit granting activities, (ii) establish maximum interest rates, finance charges and other charges, (iii) regulate customers' insurance coverages, (iv) require disclosures to customers, (v) govern secured transactions and (vi) set collection, foreclosure, repossession and claims handling procedures and other trade practices. Our consumer finance business is subject to detailed enforcement and supervision by state authorities under legislation and regulations which generally require licensing of the lender. Licenses are renewable and may be subject to suspension or revocation for violations of such laws and regulations. Applicable state laws generally regulate interest rates and other charges and require certain disclosures. In addition, most states have other laws, public policies and general principles of equity relating to the protection of consumers, unfair and deceptive practices and practices that may apply to the origination, servicing and collection of consumer finance loans. Depending on the provision of the applicable law and the specific facts and circumstances involved, violations of these laws, policies and principles may limit our ability to collect all or part of the principal of or interest on consumer finance loans, may entitle the borrower to a refund of amounts previously paid and, in addition, could subject us to damages and administrative sanctions. Federal laws preempt state usury ceilings on first mortgage loans and state laws which restrict various types of alternative dwelling secured receivables, except in those states which have specifically opted out, in whole or in part, of such preemption. Loans may also be subject to other federal laws, including: (i) the Federal Truth-in-Lending Act and Regulation Z promulgated thereunder, which require certain disclosures to borrowers and other parties regarding loan terms and regulates certain practices with respect to certain types of loans; (ii) the Real Estate Settlement Procedures Act and Regulation X promulgated thereunder, which require certain disclosures to borrowers and other parties regarding certain loan terms and regulates certain practices with respect to such loans; (iii) the Equal Credit Opportunity Act and Regulation B promulgated thereunder, which prohibit discrimination in the extension of credit and administration of loans on the basis of age, race, color, sex, religion, marital status, national origin, receipt of public assistance or the exercise of any right under the Consumer Credit Protection Act; (iv) the Fair Credit Reporting Act, which regulates the use and reporting of information related to a borrower's credit experience; and (v) the Fair Housing Act, which prohibits discrimination on the basis of, among other things, familial status or handicap. Depending on the provisions of the applicable law and the specific facts and circumstances involved, violations of these laws may limit our ability to collect all or part of the principal of or interest on applicable loans, may entitle the borrower to rescind the loan and any mortgage or to obtain a refund of amounts previously paid and, in addition, could subject us to damages and administrative sanctions. The above federal and state regulation and supervision could limit our discretion in operating our businesses. For example, state laws often establish maximum allowable finance charges for certain consumer and commercial loans. Noncompliance with applicable statutes or regulations could result in the suspension 9 or revocation of any license or registration at issue, as well as the imposition of civil fines and criminal penalties. No assurance can be given that applicable laws or regulations will not be amended or construed differently, that new laws and regulations will not be adopted or that interest rates we charge will not rise to state maximum levels, the effect of any of which could be to adversely affect our business or results of operations. Under certain circumstances, the Federal Reserve has the authority to issue orders which could restrict our ability to engage in new activities or to acquire additional businesses or to acquire assets outside of the normal course of business. Item 2. Properties The operations of CIT and its subsidiaries are generally conducted in leased office space located in numerous cities and towns throughout the United States. Such leased office space is suitable and adequate for our needs. We utilize, or plan to utilize in the foreseeable future, substantially all of our leased office space. Item 3. Legal Proceedings We are a defendant in various lawsuits arising in the ordinary course of our business. We aggressively manage our litigation and evaluate appropriate responses to our lawsuits in light of a number of factors, including the potential impact of the actions on the conduct of our operations. In the opinion of management, none of the pending matters is expected to have a material adverse effect on our financial condition or results of operations. However, there can be no assurance that an adverse decision in one or more of such lawsuits will not have a material adverse effect. Item 4. Submission of Matters to a Vote of Security Holders We did not submit any matters to a vote of security holders during the fourth quarter of 1998. 10 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Our Class A Common Stock was priced at $27.00 per share and was listed on the New York Stock Exchange on November 13, 1997. There are no shares of the Class B Common Stock of CIT issued and outstanding. The following table sets forth the high and low last reported sale prices for the Class A Common Stock for the periods indicated. 1998 1997 --------------------- -------------------- Common Stock Prices High Low High Low - ------------------- ---- ---- ---- ---- First Quarter ............... $33 $29 7/16 -- -- Second Quarter .............. $37 1/2 $31 1/4 -- -- Third Quarter ............... $36 1/4 $25 3/8 -- -- Fourth Quarter .............. $31 13/16 $19 1/8 $32 5/8 $29 3/4 The declaration and payment of dividends by us is subject to the discretion of the Board of Directors, which seeks to pay a reasonable dividend rate while retaining sufficient capital to support foreseeable growth. Prior to our IPO, we operated under a policy requiring the payment of dividends equal to and not exceeding 30% of net operating earnings on a quarterly basis to our two principal shareholders. Such dividends were paid to DKB and Chase based upon their respective stock ownership in CIT. In connection with the IPO in November 1997, we terminated our dividend policy. By agreement with DKB and Chase, the final cash dividend under our terminated dividend policy was paid to DKB and Chase for the fourth quarter of 1997 (based upon net operating earnings through October 31, 1997) prior to the consummation of the IPO. Below are the dividends paid during the past two years: Dividends Paid 1998 1997 ------------- ---- ---- (per share) (Millions) First Quarter .............................. * $ 21.0 Second Quarter ............................. $ 0.10 27.6 Third Quarter .............................. 0.10 23.2 Fourth Quarter ............................. 0.10 7.5 ------ ------ Year ..................................... $ 0.30 $ 79.3 ====== ====== As of February 16, 1999, there were approximately 16,500 stockholders of CIT, including both record holders and individual participants holding through a registered clearing agency. - ---------- * No dividends were paid to stockholders. 11 Item 6. Selected Financial Data The following table sets forth selected consolidated financial information regarding our results of operations and balance sheet. This data presented below should be read in conjunction with Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data.
Years Ended December 31, ------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Dollars in Millions, except per share data Results of Operations Net finance income ..................... $ 974.3 $ 887.5 $ 797.9 $ 697.7 $ 649.8 Operating revenue ...................... 1,229.7 1,193.3(1) 1,042.0 882.4 824.2 Salaries and general operating expenses .................. 417.8 428.4 393.1 345.7 337.9 Provision for credit losses ............ 99.4 113.7 111.4 91.9 96.9 Net income ............................. 338.8 310.1 260.1 225.3 201.1 Net income per diluted share ........... 2.08 1.95 1.64 1.43 1.28 At December 31, ------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Dollars in Millions Balance Sheet Data Finance receivables: Commercial ............................. $15,589.1 $14,054.9 $13,757.6 $13,451.5 $12,821.2 Consumer ............................... 4,266.9 3,664.8 3,239.0 2,344.0 1,973.2 --------- --------- --------- --------- --------- Total finance receivables .............. $19,856.0 $17,719.7 $16,996.6 $15,795.5 $14,794.4 Reserve for credit losses .............. 263.7 235.6 220.8 206.0 192.4 Operating lease equipment, net ......... 2,774.1 1,905.6 1,402.1 1,113.0 867.9 Total assets ........................... 24,303.1 20,464.1 18,932.5 17,420.3 15,959.7 Commercial paper ....................... 6,144.1 5,559.6 5,827.0 6,105.6 5,660.2 Variable rate senior notes ............. 4,275.0 2,861.5 3,717.5 3,827.5 3,812.5 Fixed rate senior notes ................ 8,032.3 6,593.8 4,761.2 3,337.0 2,619.4 Subordinated fixed rate notes .......... 200.0 300.0 300.0 300.0 300.0 Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the Company. ........... 250.0 250.0 -- -- -- Stockholders' equity ................... 2,701.6 2,432.9 2,075.4 1,914.2 1,793.0 At or for the Years Ended December 31, ---------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Selected Data and Ratios Profitability Net interest margin as a percentage of average earning assets ("AEA") (2) .......................... 4.75% 4.87% 4.82% 4.54% 4.77% Return on average stockholders' equity ............................... 13.2% 14.0%(5) 13.0% 12.1% 11.5% Return on AEA (2) ...................... 1.65% 1.70%(5) 1.57% 1.46% 1.48% Ratio of earnings to fixed charges ..... 1.49x 1.51x 1.49x 1.44x 1.52x Salaries and general operating expenses as a percentage of average managed assets ("AMA")(3) .... 1.82% 2.16%(5) 2.22% 2.16% 2.44% Efficiency ratio (4) 40.1% 41.6%(5) 42.7% 43.1% 44.5%
12
At or for the Years Ended December 31, ----------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Credit Quality 60+ days contractual delinquency as a percentage of finance receivables ............................ 1.75% 1.67% 1.72% 1.67% 1.20% Net credit losses as a percentage of average finance receivables ............ 0.42% 0.59% 0.62% 0.50% 0.61% Reserve for credit losses as a percentage of finance receivables ...... 1.33% 1.33% 1.30% 1.30% 1.30% Ratio of reserve for credit losses to trailing 12 months net credit losses ... 3.35x 2.33x 2.18x 2.67x 2.29x Leverage Total debt to stockholders' equity and Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the Company .............. 6.32x 5.71x 7.04x 7.09x 6.91x Total debt to stockholders' equity (6) ... 7.00x 6.40x 7.04x 7.09x 6.91x Other Total managed assets (in millions) (7) ... $26,216.3 $22,344.9 $20,005.4 $17,978.6 $16,072.1 Employees ................................ 3,230 3,025 2,950 2,750 2,700
- -------------------------------------------------------------------------------- (1) Includes a 1997 gain of $58.0 million on the sale of an equity interest acquired in connection with a loan workout. (2) "AEA" means the average of finance receivables, operating lease equipment, consumer finance receivables held for sale and certain investments, less credit balances of factoring clients. (3) "AMA" means average earning assets plus the average of consumer finance receivables previously securitized and currently managed by us. (4) Efficiency ratio reflects the ratio of salaries and general operating expenses to the sum of operating revenue less depreciation of operating lease equipment and minority interest in subsidiary trust holding solely debentures of the Company. (5) Excluding the gain of $58.0 million on the sale of an equity interest acquired in a loan workout and certain nonrecurring expenses, (i) the return on average stockholders' equity would have been 13.1% for the year ended December 31, 1997, (ii) the return on AEA would have been 1.58% for the year ended December 31, 1997, (iii) the efficiency ratio would have been 42.0% for the year ended December 31, 1997 and (iv) salaries and general operating expenses as a percentage of AMA would have been 2.06% for the year ended December 31, 1997. (6) Total debt includes, and stockholders' equity excludes, $250.0 million of Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the Company issued in February 1997. (7) "Managed assets" include (i) financing and leasing assets and (ii) off-balance sheet consumer finance receivables previously securitized and currently managed by us. 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. and Item 7A. Quantitative and Qualitative Disclosures about Market Risk Overview For the year ended December 31, 1998, our net income totaled $338.8 million, increasing from $310.1 million in 1997 and $260.1 million in 1996. The 1998 earnings represented the eleventh consecutive increase in annual earnings, and the eighth consecutive year of record earnings. The 1998 results reflect continued significant portfolio growth, lower commercial credit losses and further improvements in operating efficiency. The improvements in 1997 over 1996 resulted from stronger revenues from a higher level of financing and leasing assets and the 1997 special items described below. The following table summarizes our net income and related data, excluding the 1997 special items: 1998 1997 1996 ------ ------ ------ Net income (Dollars in Millions) .................. $338.8 $287.5 $260.1 Earnings per diluted share (EPS) .................. $ 2.08 $ 1.81 $ 1.64 Return of average stockholders' equity (ROE) ...... 13.2% 13.1% 13.0% Return on average earning assets (ROA) ............ 1.65% 1.58% 1.57% 1997 Special Items -- The 1997 earnings included a one-time $58.0 million pretax gain on the sale of an equity interest acquired in a loan workout partially offset by certain non-recurring expenses which principally related to our 1997 fourth quarter IPO. Including these special items, net income was $310.1 million, with EPS of $1.95, ROE of 14.0% and an ROA of 1.70%. Managed assets totaled $26.2 billion in 1998, $22.3 billion in 1997, and $20.0 billion in 1996. The 1998 increase of 17.3% over 1997 reflects record internally generated new business, with strong performances across all three segments. The 1997 increase of 11.7% over 1996 was principally the result of strong growth in consumer receivables and operating leases. See "--Financing and Leasing Assets" for additional information. Net Finance Income We earn finance income on the loans and leases we provide to our borrowers and equipment users. The interest expense is the cost to us of borrowing funds used to make loans and purchase equipment to lease to customers. The excess of finance income over interest expense is net margin or "Net Finance Income." Growing net finance income is a key to increasing our earnings and profitability. A comparison of the components of 1998, 1997, and 1996 net finance income is set forth below. Years Ended December 31, -------------------------------------- 1998 1997 1996 -------- ----------- ----------- Dollars in Millions Finance income ........................ $ 2,015.1 $ 1,824.7 $ 1,646.2 Interest expense ...................... 1,040.8 937.2 848.3 --------- --------- --------- Net finance income .................... $ 974.3 $ 887.5 $ 797.9 ========= ========= ========= Average earning assets ("AEA") ........ $20,495.8 $18,224.5 $16,543.1 Net finance income as a % of AEA ...... 4.75% 4.87% 4.82% Net finance income increased 9.8% in 1998 from 1997, and 11.2% in 1997 from 1996. The increases primarily reflect growth in our loans and leases, which we refer to as earning assets, slightly offset by lower margins as a result of the highly competitive environment. Finance income totaled $2,015.1 million in 1998, $1,824.7 million in 1997, and $1,646.2 million in 1996. As a percentage of AEA (excluding interest income relating to short-term interest bearing deposits), finance income was 9.69% in 1998, 9.92% in 1997 and 9.90% in 1996. The decline in yield in 1998 is principally due to the 1998 decline in market interest rates and the highly competitive marketplace. 14 Interest expense totaled $1,040.8 million in 1998, $937.2 million in 1997 and $848.3 million in 1996. As a percentage of AEA, interest expense (excluding interest expense relating to short-term interest-bearing deposits and dividends related to preferred capital securities) was 4.94% in 1998, 5.05% in 1997 and 5.08% in 1996, reflecting lower market interest rates. We seek to mitigate interest rate risk by matching the repricing characteristics of our assets with our liabilities, which is in part done through the use of interest rate swaps. For further discussion, see "--Asset Liability Management." Fees and Other Income Fees and other income improved to $255.4 million during 1998, from $247.8 million during 1997, and $244.1 million during 1996 as set forth in the following table. Years Ended December 31, ------------------------------------ 1998 1997 1996 -------- -------- ------- Dollars in Millions Factoring commissions ................... $ 95.7 $ 95.2 $ 91.0 Fees and other income ................... 90.7 73.8 83.6 Gains on sales of leasing equipment ............................ 45.2 30.1 36.6 Gains on securitizations ................ 12.5 32.0 14.9 Gains on sales of venture capital investments .................. 11.3 16.7 18.0 ------ ------ ------ $255.4 $247.8 $244.1 ====== ====== ====== The 1998 increase reflects higher fees from servicing and commercial businesses and improved gains on the sale of equipment coming off lease. We realized in excess of 100% of equipment residual book value in 1998, 1997 and 1996. These increases were offset by sharply lower gains on reduced securitization activity. Our fees and other income increased in 1997 from 1996 primarily due to higher factoring commissions and gains from higher levels of securitization activity, offset by lower gains on the sale of equipment coming off lease. Gain On Sale of Equity Interest Acquired in Loan Workout We originated a loan in the 1980's to a telecommunications company that subsequently went into default. Pursuant to a workout agreement, the stock of that company was transferred to us and a co-lender. In 1991, we received all amounts due and retained an equity interest in such telecommunications company, which we sold in the second quarter of 1997 at a pretax gain of $58.0 million. Salaries and General Operating Expenses Salaries and general operating expenses were $417.8 million in 1998, $428.4 million in 1997, and $393.1 million in 1996. The 1997 expense included a $10.0 million pretax charge relating to the termination of a long-term incentive plan in connection with the IPO, higher performance based incentive accruals, and a provision for vacant leased space. Without these items, 1997 salaries and general operating expenses would have been $408.4 million. Our personnel increased to 3,230 at December 31, 1998, from 3,025 at December 31, 1997 and 2,950 at December 31, 1996. Management monitors productivity via the analysis of efficiency ratios and the ratio of salaries and general operating expenses to AMA. AMA is comprised of average earning assets plus the average of consumer finance receivables previously securitized and currently managed by us. These ratios, excluding the non-recurring pretax gain and expenses previously described, are set forth in the following table. Years Ended December 31, ----------------------------- 1998 1997 1996 ------ ------ ------ Efficiency ratio ............................ 40.1% 42.0% 42.7% Salaries and general operating expenses as a percentage of AMA ........... 1.82% 2.06% 2.22% The improvement in the ratios reflects our continuing focus on cost containment and ability to leverage our existing operating structure and investments in technology. 15 We manage expenditures using a comprehensive budgetary process. Expenses are monitored closely by business unit management and are reviewed monthly with our senior management. To ensure overall project cost control, an approval and review procedure is in place for major capital expenditures, such as purchases of computer equipment, including post-implementation evaluations. Reserve and Provision for Credit Losses/Credit Quality Our consolidated reserve for credit losses increased to $263.7 million (1.33% of finance receivables) at December 31, 1998, from $235.6 million (1.33% of finance receivables) at December 31, 1997, and from $220.8 million (1.30% of finance receivables) at December 31, 1996. These increases primarily reflect growth in finance receivables in each year. The relationship of the consolidated reserve for credit losses to nonaccrual finance receivables was 124.7% for 1998, 143.3% for 1997, and 133.3% for 1996. Another measure of reserve adequacy and strength used by us and in our industry is the ratio of the balance sheet reserve for credit losses to trailing twelve month net credit losses (recent credit loss experience). This ratio improved to 3.35 times at December 31, 1998, from 2.33 times at December 31, 1997 and 2.18 times at December 31, 1996. Our consolidated reserve for credit losses is periodically reviewed for adequacy considering economic conditions, collateral values and credit quality indicators, including charge-off experience and levels of past due loans and nonperforming assets. It is management's judgment that the consolidated reserve for credit losses is adequate to provide for potential credit losses. We review finance receivables periodically to determine the probability of loss, and take charge-offs after considering such factors as the obligor's financial condition and the value of underlying collateral and guarantees. Automatic charge-offs are recorded on consumer finance receivables at intervals beginning at 180 days of contractual delinquency, based upon historical loss severity, with charge-offs finalized upon disposition of the foreclosed property. The consolidated reserve for credit losses is intended to provide for future events, which by their nature are uncertain. Therefore, changes in economic conditions or other events affecting specific obligors or industries may necessitate additions or deductions to the consolidated reserve for credit losses. The provision for credit losses was $99.4 million for 1998, $113.7 million for 1997, and $111.4 million for 1996. Net credit losses were $78.8 million for 1998, $101.0 million for 1997, and $101.5 million for 1996. Our net credit loss experience is provided in the following table. Years Ended December 31, ------------------------------- 1998 1997 1996 ------ ------ ------ Net credit losses as a percentage of average finance receivables excluding consumer finance receivables held for sale Equipment Financing and Leasing .............. 0.18% 0.50% 0.56% Commercial Finance ........................... 0.31% 0.41% 0.67% Consumer ..................................... 1.18% 1.09% 0.75% ---- ---- ---- Total ...................................... 0.42% 0.59% 0.62% ==== ==== ==== The decrease in our commercial segments' net credit losses reflects continued improvement in credit quality in our commercial portfolio, sustained strength of the United States economy, and higher recoveries. The increase in our consumer net credit losses is primarily the result of portfolio seasoning and changes in product mix, including an increase in wholesale inventory financing losses. As a percentage of average managed finance receivables, consumer net credit losses were 0.92% for 1998, 0.91% for 1997, and 0.70% for 1996. 16 Past Due and Nonperforming Assets The following table sets forth certain information concerning our past due and nonperforming assets (and the related percentages of finance receivables) at December 31, 1998, 1997 and 1996.
At December 31, --------------------------------------------------------- 1998 1997 1996 --------------- --------------- --------------- Dollars in Millions Finance receivables, past due 60 days or more Equipment Financing and Leasing ................ $149.9 1.41% $127.3 1.30% $150.8 1.52% Commercial Finance ............................. 32.1 0.64% 41.6 0.98% 69.0 1.80% Consumer ....................................... 166.0 3.89% 127.7 3.48% 72.5 2.24% ------ ---- ------ ---- ------ ---- Total ........................................ $348.0 1.75% $296.6 1.67% $292.3 1.72% ====== ==== ====== ==== ====== ==== Nonperforming assets Equipment Financing and Leasing ................ $135.2 1.27% $ 81.6 0.83% $112.0 1.13% Commercial Finance ............................. 14.5 0.29% 23.9 0.56% 48.4 1.26% Consumer ....................................... 129.0 3.02% 101.9 2.78% 53.1 1.64% ------ ---- ------ ---- ------ ---- Total ........................................ $278.7 1.40% $207.4 1.17% $213.5 1.26% ====== ==== ====== ==== ====== ====
Nonperforming assets reflect both finance receivables on nonaccrual status and assets received in satisfaction of loans. The increase in consumer delinquencies and nonperforming assets from 1997 to 1998 primarily relates to the seasoning of home equity receivables and the growth and expansion of the wholesale inventory financing product line. During 1998, Equipment Financing and Leasing nonperforming assets increased to a more normal level from the particularly low 1997 year-end balance. From time to time, financial or operational difficulties may adversely affect future payments relating to operating lease equipment. Such operating lease equipment is not included in the totals for past due and nonperforming assets. At December 31, 1998, operations at an oil refinery were subject to such difficulties. The carrying value of this asset was $27.0 million at December 31, 1998. We do not believe these difficulties will have a material effect on our consolidated financial position or results of operations. Depreciation on Operating Lease Equipment The operating lease equipment portfolio was $2.8 billion at December 31, 1998, up from $1.9 billion at December 31, 1997 (a 45.6% increase), and $1.4 billion at December 31, 1996 (a 35.9% increase from 1996 to 1997). As a result of this growth, depreciation on operating lease equipment was $169.5 million in 1998, $146.8 million in 1997, and $121.7 million in 1996. See "--Financing and Leasing Assets" for further discussion on growth of our operating lease portfolio. Income Taxes The provision for federal and state and local income taxes totaled $185.0 million in 1998, compared with $178.0 million in 1997, and $155.7 million in 1996. The effective income tax rate for 1998 declined to 35.3%, compared with 36.5% in 1997, and 37.4% in 1996, primarily as a result of lower state and local taxes. 17 Financing and Leasing Assets Our managed assets grew $3.9 billion (17.3%) to $26.2 billion in 1998, and $2.3 billion (11.7%) to $22.3 billion in 1997. Financing and leasing assets grew $3.7 billion (18.7%) to $23.7 billion in 1998, and grew $1.4 billion (7.5%) to $20.0 billion in 1997. Managed assets include finance receivables, operating lease equipment, consumer finance receivables held for sale, certain investments, and consumer finance receivables previously securitized and still serviced by us. The managed assets of our business segments and the corresponding strategic business units are presented in the following table.
At December 31, % Change ------------------------------------- -------- 1998 1997 1996 '98 vs.'97 '97 vs.'96 ---- ---- ---- ---------- ---------- Dollars in Millions Equipment Financing: Finance receivables (1) .................... $ 8,497.6 $ 7,403.4 $ 5,616.8 14.8% 31.8% Operating lease equipment, net (1) ......... 765.1 623.8 426.6 22.7% 46.2% ---------- ---------- ---------- ---- ---- Total .................................... 9,262.7 8,027.2 6,043.4 15.4% 32.8% ---------- ---------- ---------- ---- ---- Capital Finance: Finance receivables (1) .................... 1,655.4 1,755.5 3,413.5 (5.7%) (48.6%) Operating lease equipment, net (1) (2) ..... 1,982.0 1,251.8 912.0 58.3% 37.3% ---------- ---------- ---------- ---- ---- 3,637.4 3,007.3 4,325.5 21.0% (30.5%) Liquidating portfolio (2) (3) .............. 466.9 675.2 952.7 (30.9%) (29.1%) ---------- ---------- ---------- ---- ---- Total .................................... 4,104.3 3,682.5 5,278.2 11.5% (30.2%) ---------- ---------- ---------- ---- ---- Total Equipment Financing and Leasing .............................. 13,367.0 11,709.7 11,321.6 14.2% 3.4% ---------- ---------- ---------- ---- ---- Commercial Services .......................... 2,481.8 2,113.1 1,804.7 17.4% 17.1% Business Credit (4) .......................... 1,477.9 1,247.9 1,235.6 18.4% 1.0% Credit Finance (4) ........................... 1,036.5 889.8 797.8 16.5% 11.5% ---------- ---------- ---------- ---- ---- Total Commercial Finance ................... 4,996.2 4,250.8 3,838.1 17.5% 10.8% ---------- ---------- ---------- ---- ---- Total Commercial Segments .................. 18,363.2 15,960.5 15,159.7 15.1% 5.3% ---------- ---------- ---------- ---- ---- Other - Equity Investments ................... 81.9 65.8 53.0 24.5% 24.2% ---------- ---------- ---------- ---- ---- Consumer Finance ............................. 2,244.4 1,992.3 2,005.5 12.7% (0.7%) Sales Financing .............................. 3,009.9 1,940.7 1,349.8 55.1% 43.8% ---------- ---------- ---------- ---- ---- Total Consumer Segment ..................... 5,254.3 3,933.0 3,355.3 33.6% 17.2% ---------- ---------- ---------- ---- ---- Total Financing and Leasing Assets ......... 23,699.4 19,959.3 18,568.0 18.7% 7.5% ---------- ---------- ---------- ---- ---- Finance receivables previously securitized: Consumer Finance ........................... 607.6 453.8 -- 33.9% 100.0% Sales Financing ............................ 1,909.3 1,931.8 1,437.4 (1.2%) 34.4% ---------- ---------- ---------- ---- ---- Total ...................................... 2,516.9 2,385.6 1,437.4 5.5% 66.0% Total Managed Assets - Consumer Segment .................................. 7,771.2 6,318.6 4,792.7 23.0% 31.8% ---------- ---------- ---------- ---- ---- Total Managed Assets ....................... $ 26,216.3 $ 22,344.9 $ 20,005.4 17.3% 11.7% ========== ========== ========== ==== ====
- -------------------------------------------------------------------------------- (1) On January 1, 1997, $1,519.2 million of financing and leasing assets were transferred from Capital Finance to Equipment Financing. (2) Operating lease equipment, net, of $27.0 million, $30.0 million and $63.5 million are included in the liquidating portfolio for 1998, 1997, and 1996, respectively. (3) Consists primarily of ocean going maritime and project finance. We discontinued marketing to these sectors in 1997. (4) In October 1997, $95.0 million of finance receivables were transferred from Business Credit to Credit Finance. Total commercial segments grew 15.1% from 1997 to 1998. Excluding the liquidating portfolio, the equipment financing and leasing segment grew 16.9%. Growth in finance receivables was principally due to increases in transportation ($.3 billion), and construction ($.1 billion), and the purchase of a telecommunications leasing portfolio ($.2 billion). The operating lease portfolio grew primarily in railroad equipment ($.4 billion) and commercial aircraft ($.3 billion). The commercial finance segment growth (17.5%) was primarily due to higher new business generation, moderated by high customer paydowns. 18 The consumer segment managed assets grew 23.0% in 1998 reflecting strong home equity originations and strong growth in Sales Financing new business volume, particularly in recreation vehicle, recreational boat, and wholesale inventory financing. Total commercial financing and leasing assets grew 5.3% in 1997, as compared to 1996, due to strong growth in the operating lease portfolio and commercial finance receivables. The operating lease portfolio grew primarily in commercial aircraft ($.2 billion), railroad equipment ($.2 billion), and business aircraft ($.1 billion). Commercial finance receivable growth was attributable to an improved 1997 retail sales environment and strong new business signings. These increases were partially offset by high customer paydowns in the commercial financing sector due to the strong economy and the availability of alternative sources of capital. Portfolio growth was moderated because we decided in 1997 to liquidate the oceangoing maritime and power generation project portfolios. We determined that the discontinued portfolios do not generate sufficient returns to justify their risk profile. Consumer managed assets increased $1.5 billion to $6.3 billion in 1997 from $4.8 billion in 1996. This increase reflects strong originations in home equity, recreation vehicle, and recreational boat products and the introduction of wholesale inventory financing. Financing and Leasing Assets Composition Our ten largest financing and leasing asset accounts in the aggregate represented 4.5% of our total financing and leasing assets at December 31, 1998, and 4.2% at December 31, 1997. All ten accounts were commercial accounts and were secured by equipment, accounts receivable and/or inventory. Geographic Composition The following table presents our financing and leasing assets by customer location. At December 31, ---------------------------------------------- 1998 1997 --------------------- ------------------- Amount Percent Amount Percent -------- ------- ------- ------- Dollars in Millions United States West ....................... $ 5,583.2 23.6% $ 4,642.1 23.3% Northeast .................. 5,143.9 21.7 4,501.9 22.6 Midwest .................... 4,895.3 20.7 4,290.0 21.5 Southeast .................. 3,492.3 14.7 2,802.9 14.0 Southwest .................. 2,993.3 12.6 2,360.7 11.8 Foreign (principally commercial aircraft) ....... 1,591.4 6.7 1,361.7 6.8 --------- ----- --------- ----- Total ...................... $23,699.4 100.0% $19,959.3 100.0% ========= ===== ========= ===== Our managed asset geographic diversity does not differ significantly from our owned asset geographic diversity. Additionally, our financing and leasing asset portfolio is diversified by state. At December 31, 1998, with the exception of California (12.5%), Texas (8.7%), and New York (8.1%), no state represented more than 4.6% of financing and leasing assets. Our 1996 managed and owned asset geographic composition did not significantly differ from our 1997 managed and owned asset geographic composition. 19 Industry Composition The following table presents our financing and leasing assets by major industry class. At December 31, ---------------------------------------- 1998 1997 ------------------ ------------------ Amount Percent Amount Percent ------ ------- ------ ------- Dollars in Millions Manufacturing(1) (none greater than 4.4%) .......... $ 5,117.0 21.6% $ 4,440.4 22.2% Commercial airlines (2) ............. 2,325.4 9.8 2,077.6 10.4 Home mortgage (3) ................... 2,244.4 9.5 1,992.3 10.0 Construction equipment .............. 1,947.4 8.2 1,791.4 9.0 Retail .............................. 1,882.1 7.9 1,807.5 9.1 Transportation (4) .................. 1,777.6 7.5 1,283.7 6.4 Manufactured housing (5) ............ 1,417.5 6.0 1,125.7 5.6 Other (none greater than 4.1%) (6) ......................... 6,988.0 29.5 5,440.7 27.3 --------- ----- --------- ----- Total ............................... $23,699.4 100.0% $19,959.3 100.0% ========= ===== ========= ===== - -------------------------------------------------------------------------------- (1) Includes manufacturers of steel and metal products, textiles and apparel, printing and paper products, and other industries. (2) See "Concentrations" for a discussion of the commercial airline portfolio. (3) On a managed asset basis, home mortgage outstandings were $2.9 billion, or 10.9% of managed assets at December 31, 1998, compared to $2.4 billion or 10.9% at December 31, 1997. (4) Includes rail, bus, and over-the-road trucking industries, and business aircraft. (5) On a managed asset basis, manufactured housing outstandings were $1.7 billion or 6.5% of managed assets at December 31, 1998, compared to $1.5 billion or 6.5% at December 31, 1997. (6) On a managed asset basis, recreation vehicle outstandings were $1.9 billion or 7.2% of managed assets at December 31, 1998, compared to $1.6 billion or 7.2% at December 31, 1997. On a managed asset basis, recreational boat outstandings were $1.0 billion or 4.0% of managed assets at December 31, 1998, compared to $682.5 million or 3.1% of managed assets at December 31, 1997. Our 1996 managed and owned asset industry composition did not differ significantly from our 1997 managed and owned asset industry composition. Concentrations Commercial Airline Industry Commercial airline financing and leasing assets totaled $2.3 billion (9.8% of our total financing and leasing assets) at December 31, 1998, compared with $2.1 billion (10.4%) in 1997. This portfolio is secured by commercial aircraft and related equipment. From 1992 through mid-1997, we limited the growth of the aerospace portfolio due to weakness in the commercial airline industry, industry overcapacity and declining equipment values. In 1997, we decided to resume growing the aerospace portfolio, but will continue to monitor this growth relative to our total financing and leasing assets. We continue to reduce our Stage II exposure so that 96.6% of our portfolio at December 31, 1998 consists of Stage III aircraft versus 93.1% at December 31, 1997. 20 The following table presents information about the commercial airline industry portfolio. See also "--Operating Lease Equipment." At December 31, ---------------------- 1998 1997 -------- --------- Dollars in Millions Finance receivables Amount outstanding(1) ........................... $1,230.7 $1,254.9 Number of obligors .............................. 54 54 Operating lease equipment, net Net carrying value .............................. $1,094.7 $ 822.7 Number of obligors .............................. 33 33 Total ............................................ $2,325.4 $2,077.6 Number of obligors(2) .............................. 65 67 Number of aircraft(3) .............................. 206 225 - -------------------------------------------------------------------------------- (1) Includes accrued rents on operating leases that are classified as finance receivables in the Consolidated Balance Sheets. (2) Certain obligors are obligors under both finance receivable and operating lease transactions. (3) Regulations established by the Federal Aviation Administration (the "FAA") limit the maximum permitted noise an aircraft may make. A Stage III aircraft meets a more restrictive noise level requirement than a Stage II aircraft. The FAA has issued rules that phase out the use of Stage II aircraft in the United States by the year 2000. Similar restrictions in Europe phase out the use of Stage II aircraft by the year 2001. At year-end 1998, the portfolio consisted of Stage III aircraft of $2,246.0 million (96.6%) and Stage II aircraft of $55.9 million (2.4%) versus Stage III aircraft of $1,933.5 million (93.1%) and Stage II aircraft of $115.7 million (5.6%) at year-end 1997. We continue to shift our commercial aircraft product mix from secured financings to operating lease equipment, relying on our strong industry and equipment management and remarketing expertise to compete effectively in commercial aircraft operating lease transactions. Operating lease transactions accounted for 47.1% of the total commercial airline portfolio outstandings at December 31, 1998, 39.6% at December 31, 1997, and 32.7% at December 31, 1996. Foreign Outstandings We are primarily a domestic lender, with foreign exposure limited mainly to the commercial airline industry. Financing and leasing assets to foreign obligors were all U. S. dollar denominated and totaled $1.6 billion at December 31, 1998. The largest exposures at December 31, 1998 were to obligors in Belgium, $142.4 million (0.60% of financing and leasing assets), France, $136.4 million (0.58%), Mexico, $104.1 million (0.44%), the Republic of Ireland, $103.9 million (0.44%), Canada, $100.5 million (0.42%), Brazil, $93.9 million (0.40%), England, $93.0 million (0.39%), and the Netherlands, $90.3 million (0.38%). Our remaining foreign exposure was geographically dispersed, with no other individual country exposure greater than $90.0 million. At December 31, 1997, financing and leasing assets to foreign obligors totaled $1.4 billion. The largest exposures at December 31, 1997 were to obligors in Mexico, $128.2 million (0.64%), France, $125.9 million (0.63%), the Republic of Ireland, $108.9 million (0.55%), England, $91.7 million (0.46%), and Australia, $90.6 million (0.46%). The remaining foreign exposure was geographically dispersed with no other individual country exposure greater than $90.0 million of financing and leasing assets. At December 31, 1996, foreign exposure was geographically dispersed with no individual country exposure greater than 0.76% of financing and leasing assets. Highly Leveraged Transactions ("HLTs") We use the following criteria to classify a buyout financing or recapitalization which equals or exceeds $20 million as an HLT: o The transaction at least doubles the borrower's liabilities and results in a leverage ratio (as defined) higher than 50%, or o The transaction results in a leverage ratio higher than 75%, or o The transaction is designated as an HLT by a syndication agent. HLTs that we originated or in which we participated totaled $561.1 million (2.4% of financing and leasing assets) at December 31, 1998, up from $341.1 million (1.7%) at December 31, 1997. The increase in HLT outstandings during the year ended December 31, 1998 was due to new originations. Our HLT outstandings are generally secured by collateral, as distinguished from HLTs that rely primarily on cash flows 21 from operations. Our unfunded commitments to lend in secured HLT transactions were $287.6 million at December 31, 1998, compared with $165.5 million at year-end 1997. At December 31, 1996, HLT's that we originated or in which we participated totaled less than 2.0% of financing and leasing assets. Risk Management Our business activities contain elements of risk. We consider the principal types of risk to be credit risk (including credit, collateral and equipment risk) and asset/liability risk (including interest rate and liquidity risk). We consider the management of risk essential to conducting our commercial and consumer businesses and to maintaining profitability. Accordingly, our risk management systems and procedures are designed to identify and analyze risks, to set appropriate policies and limits and to continually monitor these risks and limits by means of reliable administrative and information systems and other policies and programs. Credit Risk Management We have developed systems specifically designed to manage credit risk in our commercial and consumer business segments. We evaluate financing and leasing assets for credit and collateral risk during the credit granting process and periodically after the advancement of funds. Our Executive Credit Committee ("ECC") delegates credit authority to each of our strategic business units. The ECC is comprised of members of senior management, including the Chief Executive Officer, Vice Chairman, Executive Vice President-Credit Administration, Senior Executive Vice President and Executive Vice President-Multi-National Marketing Group. Generally, members of the ECC must approve all transactions above the strategic business units' credit authority and all transactions outside of certain established target market definitions and risk acceptance criteria. Each of our strategic business units has developed and implemented a formal credit management process in accordance with formal uniform guidelines established by the ECC. These ECC guidelines set forth risk acceptance criteria for: o Acceptable maximum credit line; o Selected target markets and products; o Creditworthiness of borrowers, including credit history, financial condition, adequacy of cash flow and quality of management; and o The type and value of underlying collateral and guarantees (including recourse from dealers and manufacturers.) We also employ a risk adjusted pricing process where the perceived credit risk is a factor in determining the interest rate and/or fees charged for our financing and leasing products. As economic and market conditions change, credit risk management practices are reviewed and modified, if necessary, to seek to minimize the risk of credit loss. Compliance with established corporate policies and procedures and the credit management processes at each strategic business unit are reviewed by the credit audit group of our internal audit department. The credit audit group examines adherence with established credit policies and procedures and tests for inappropriate credit practices, including whether potential problem accounts are being detected and reported on a timely basis. The General Auditor, who oversees the credit audit group, reports to the Chief Executive Officer of CIT and to the Audit Committee. Commercial. We have developed systems specifically designed to effectively manage credit risk in our two commercial segments. The process starts with the initial evaluation of credit risk and underlying collateral at the time of origination and continues over the life of the finance receivable or operating lease, including collecting past due balances and liquidating underlying collateral. Credit personnel of the applicable strategic business unit review each potential borrower's financial condition, results of operations, management, industry, customer base, operations, collateral and other data, such as third party credit reports, to thoroughly evaluate the customer's borrowing and repayment ability. 22 Borrowers are graded according to credit quality based upon our uniform credit grading system, which grades both the borrower's financial condition and the underlying collateral. Credit facilities are subject to approval within our overall credit approval and underwriting guidelines and are issued commensurate with the credit evaluation performed on each borrower. We review and monitor credit exposures on an ongoing basis to identify, as early as possible, those customers that may be experiencing declining creditworthiness or financial difficulty. We periodically evaluate our commercial segments' finance receivables based upon credit criteria developed under our uniform credit grading system. We monitor concentrations by borrower, industry, geographic region and equipment type and management adjusts limits as conditions warrant to seek to minimize the risk of credit loss. Our Asset Quality Review Committee is comprised of members of senior management, including the Vice Chairman, the Executive Vice President-Credit Administration and the Chief Financial Officer. Periodically, the Committee will meet with the President and CEO of CIT to review, among other topics, levels of geographic, industry and customer concentrations. In addition, the Committee periodically meets with senior executives of our strategic business units, and reviews the status of financing and leasing assets greater than $500,000 to obligors with higher risk profiles. Consumer. For consumer loans, our management has developed and implemented proprietary automated credit scoring models for each loan type (e.g., recreation vehicles, manufactured housing, recreational boat and home equity) that include both customer demographics and credit bureau characteristics. The profiles emphasize, among other things, occupancy status, length of residence, length of employment, debt to income ratio (ratio of total installment debt and housing expenses to gross monthly income), bank account references, credit bureau information and combined loan to value ratio. The models are used to assess a potential borrower's credit standing and repayment ability considering the value or adequacy of property offered as collateral. Our credit criteria includes reliance on credit scores, including those based upon both our proprietary internal credit scoring model and external credit bureau scoring, combined with judgment. The credit scoring models are regularly reviewed for effectiveness utilizing statistical tools. We regularly evaluate the consumer loan portfolio using past due, vintage curve and other statistical tools to analyze trends and credit performance by loan type, including analysis of specific credit characteristics and other selected subsets of the portfolios. Adjustments to credit scorecards and lending programs are made when deemed appropriate. Individual underwriters are assigned credit authority based upon their experience, performance and understanding of the underwriting policies and procedures of our consumer operations and a credit approval hierarchy exists to ensure that all applications are reviewed by an underwriter with the appropriate level of authority. See "--Reserve and Provision for Credit Losses/Credit Quality". Asset/Liability Management Management strives to manage interest rate and liquidity risk and optimize net finance income under formal policies established and monitored by the Capital Committee. The Capital Committee is comprised of members of senior management, including the Chief Executive Officer, the Vice Chairman, and the Chief Financial Officer. Three members of the Capital Committee are also members of our Board of Directors. The Capital Committee establishes and regularly reviews interest rate sensitivity, funding needs, liquidity, and asset-pricing to determine short-term and long-term funding strategies, including the use of off-balance sheet derivative financial instruments. We use off-balance sheet derivatives for hedging purposes only, and do not enter into derivative financial instruments for trading or speculative purposes. To ensure both appropriate use as a hedge and hedge accounting treatment, all derivatives entered into are designated, according to the applicable hedge objective, against commercial paper, a specifically underwritten debt issue, or a specific pool of assets. Our primary hedge objectives include the conversion of variable rate liabilities to fixed rates, the conversion of fixed rate liabilities to variable rates, the fixing of spreads on variable rate liabilities to various market indices and the elimination of interest rate risk on finance receivables classified as held for sale prior to securitization. 23 We manage our derivative positions so that the exposure to interest rate, credit or foreign exchange risk is in accordance with the overall operating goals established by our Capital Committee. There is an approved, diversified list of creditworthy counterparties used for derivative financial instruments, each of whom has specific credit exposure limits, which are based on market value. The Executive Credit Committee approves each counterparty and its related market value and credit exposure limit annually, or more frequently if any changes are recommended. Credit exposures for each counterparty are measured based upon market value of the outstanding derivative instruments. Market values are calculated periodically for each swap contract, summarized by counterparty and reported to the Capital Committee. For additional information regarding our derivative portfolio, refer to "Note 7--Derivative Financial Instruments" in Item 8. Financial Statements and Supplementary Data. Interest Rate Risk Management. Changes in market interest rates, or in the relationships between short-term and long-term market interest rates, or in the relationships between different interest rate indices (i.e., basis risk), can affect the interest rates charged on interest-earning assets differently than the interest rates paid on interest-bearing liabilities, which can result in an increase in interest expense relative to finance income. Our Capital Committee actively manages interest rate risk by changing the proportion of fixed and floating rate debt and by utilizing primarily interest rate swaps and, to a lesser extent, other derivative instruments to modify the repricing characteristics of existing interest-bearing liabilities. Issuing new debt or hedging the interest rate on existing debt through the use of interest rate swaps and other derivative instruments are both tools in managing interest rate risk. The decision to use one or the other or a combination of both is driven by the relationship between the relative interest rate costs and effectiveness of the alternatives, and our liquidity needs. For example, a fixed rate, fixed term loan transaction may initially be funded by commercial paper, resulting in interest rate risk. To reduce this risk, we may enter into a hedge that has an inverse correlation to the interest rate sensitivity created, whereby we would pay a fixed interest rate and receive a commercial paper interest rate, thereby matching the fixed rate, fixed term loan with fixed rate, fixed term debt. Basis risk is similarly managed through the issuance of new debt or the utilization of interest rate swaps or other derivative instruments. We continuously monitor and simulate through computer modeling our degree of interest rate sensitivity by measuring the repricing characteristics of interest-sensitive assets, liabilities, and off-balance sheet derivatives. The Capital Committee reviews the results of this modeling monthly. The interest rate sensitivity modeling techniques employed by us essentially include the creation of prospective twelve month "baseline" and "rate shocked" net interest income simulations. At the date that interest rate sensitivity is modeled, "baseline" net interest income is derived considering the current level of interest-sensitive assets and related run-off (including both contractual repayment and historical prepayment experience), the current level of interest-sensitive liabilities and related maturities and the current level of off-balance sheet derivatives. The "baseline" simulation assumes that, over the next successive twelve months, market interest rates (as of the date of simulation) are held constant and that no new loans are extended. Once the "baseline" net interest income is calculated, market interest rates, which were previously held constant, are raised 100 basis points instantaneously and parallel across the entire yield curve, and a "rate shocked" simulation is run. Interest rate sensitivity is then measured as the difference between calculated "baseline" and "rate shocked" net interest income. Utilizing our computer modeling, if no new fixed rate loans or leases were extended and no actions to alter the existing interest rate sensitivity were taken subsequent to December 31, 1998, an immediate hypothetical 100 basis point parallel rise in the yield curve on January 1, 1999 would increase net income by an estimated $3.4 million after-tax over the next twelve months. Although management believes that this measure provides a meaningful estimate of our interest rate sensitivity, it does not adjust for potential changes in the credit quality, size, composition and prepayment characteristics of the balance sheet and other business developments that could affect net income. Accordingly, no assurance can be given that actual results would not differ materially from the potential outcome simulated by our computer modeling. Further, it does not necessarily represent management's current view of future market interest rate movements. 24 We periodically enter into structured financings (involving both the issuance of debt and an interest rate swap with corresponding notional principal amount and maturity) that not only improve liquidity and reduce interest rate risk, but result in a lower overall funding cost than could be achieved by solely issuing debt. For example, in order to fund fixed rate assets, a medium-term variable rate note based upon the U. S. federal funds rate can be issued and coupled with an interest rate swap exchanging the U. S. federal funds rate for a fixed interest rate. This creates, in effect, a lower cost fixed rate medium-term obligation. Interest rate swaps with notional principal amounts of $4.3 billion at December 31, 1998 and $3.6 billion at December 31, 1997 were designated as hedges against outstanding debt and were principally used to, in effect, convert the interest rate on variable rate debt to a fixed rate that sets our fixed rate term debt borrowing cost over the life of the swap. These hedges reduce our exposure to rising interest rates, but also reduce the benefits from lower interest rates. A comparative analysis of the weighted average principal outstanding and interest rates paid on our debt before and after the effect of interest rate swaps is shown in the following table.
At December 31, ---------------------------------------------------------- Before Swaps ---------------------------------------------------------- 1998 1997 1996 ----------------- ----------------- --------------- Dollars in Millions Commercial paper and variable rate senior notes ............................ $ 9,672.6 5.53% $ 9,574.2 5.61% $ 9,952.2 5.48% Fixed rate senior and subordinated notes ........................................ 7,476.5 6.31% 5,497.6 6.52% 3,917.0 6.83% --------- --------- --------- Composite ...................................... $17,149.1 5.87% $15,071.8 5.94% $13,869.2 5.86% ========= ========= ========= At December 31, ---------------------------------------------------------- After Swaps ---------------------------------------------------------- 1998 1997 1996 ----------------- ----------------- --------------- Dollars in Millions Commercial paper and variable rate senior notes ............................ $ 7,069.9 5.47% $ 6,443.2 5.54% $ 6,774.3 5.42% Fixed rate senior and subordinated notes ........................................ 10,079.2 6.39% 8,628.6 6.52% 7,094.9 6.68% -------- -------- -------- Composite ...................................... $17,149.1 6.01% $15,071.8 6.10% $13,869.2 6.06% ======== ======== ========
Our interest rate swaps principally convert floating rate debt to fixed rate debt. The weighted average composite interest rate after swaps increased from the composite interest rate before swaps in each period, primarily because a larger proportion of our debt, after giving effect to interest rate swaps, was subject to a fixed interest rate. However, the weighted average interest rates before swaps do not necessarily reflect the interest expense that would have been incurred had we chosen to manage interest rate risk without the use of such swaps. Interest rate swaps are further discussed in "Note 7--Derivative Financial Instruments" in Item 8. Financial Statements and Supplementary Data. Liquidity We manage liquidity risk by monitoring the relative maturities of assets and liabilities and by borrowing funds, primarily in the U. S. money and capital markets. We use such cash to fund asset growth (including the bulk purchase of finance receivables and the acquisition of other finance-related businesses) and to meet debt obligations and other commitments on a timely and cost-effective basis. The primary sources of funding are commercial paper borrowings, medium-term notes, other debt securities, and asset-backed securitizations. Commercial paper outstanding increased $584.5 million to $6.1 billion at December 31, 1998 from $5.6 billion at December 31, 1997. During 1998, we issued $3.9 billion of variable rate term debt and $3.0 billion of fixed rate term debt. Repayments of debt totaled $4.1 billion for 1998. At December 31, 1998, $4.8 billion of registered, but unissued, debt securities remained available under shelf registration statements, including $2.0 billion of European Medium-Term Notes. 25 Our commercial paper, publicly issued variable rate and fixed rate senior debt, and senior subordinated long-term notes and debentures are rated by Moody's Investors Service, Duff & Phelps Credit Rating Company and Standard & Poor's Corporation. At December 31, 1998, commercial paper borrowings were supported by $5.0 billion of committed revolving credit-line facilities. At December 31, 1998, such credit-line facilities represented 81% of operating commercial paper outstanding (commercial paper outstanding less interest-bearing deposits), as compared to 91% at December 31, 1997. As part of our continuing program of accessing the public and private asset-backed securitization markets as an additional liquidity source, recreation vehicle, recreational boat, and home equity finance receivables of $866.0 million were securitized during 1998. We securitized recreation vehicle, home equity and recreational boat finance receivables of $1.4 billion in 1997. The decrease in securitization activity from 1997 to 1998 was primarily due to less attractive market conditions. At December 31, 1998, we had $2.0 billion of registered, but unissued, securities available under shelf registration statements relating to our asset-backed securitization program. In February 1999, we securitized $424.3 million of recreational boat receivables included in assets held for sale at December 31, 1998. Capitalization The following table presents information regarding our capital structure. At December 31, ----------------------- 1998 1997 --------- --------- Dollars in Millions Commercial paper ..................................... $ 6,144.1 $ 5,559.6 Term debt ............................................ 12,507.3 9,755.3 Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the Company ........... 250.0 250.0 Stockholders' equity ................................. 2,701.6 2,432.9 --------- --------- Total capitalization ................................. $21,603.0 $17,997.8 ========= ========= Total debt to stockholders' equity and Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the Company ........................................ 6.32x 5.71x Total debt and Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the Company to stockholders' equity ............................... 7.00x 6.40x The Company-obligated mandatorily redeemable preferred securities are 7.70% Preferred Capital Securities of CIT Capital Trust I, a wholly-owned subsidiary of ours. CIT Capital Trust I invested the proceeds of that issue in Junior Subordinated Debentures of CIT having identical rates and payment dates. In November 1998, DKB sold 55,000,000 shares of Class A Common Stock in the Secondary Offering for which it received all the proceeds. Prior to the sale, DKB converted all of its Class B Common Stock into an identical number of shares of Class A Common Stock, which is now the only class of common stock outstanding. DKB held 94.4% of the combined voting power and 77.2% of the economic interest of all of our outstanding common stock prior to the sale. At December 31, 1998, DKB held 43.8% of the voting power and economic interest of our outstanding common stock. In November 1997, we issued 36,225,000 shares of Class A Common Stock in the IPO. Prior to the IPO, DKB owned 80% of our issued and outstanding stock, and Chase owned the remaining 20% common stock interest. DKB had an option expiring December 15, 2000 to purchase the remaining 20% common stock interest from Chase. In November 1997, we purchased DKB's option at its fair market value, exercised the option to purchase the stock held by Chase and recapitalized by converting the outstanding common stock to 157,500,000 shares of Class B Common Stock. Twenty percent of the Class B Common Stock shares (which had five votes per share) were converted to Class A Common Stock shares (which has one vote per share) and, in addition to an underwriter's overallotment option, were issued in the IPO. The issuance of Class A Common Stock pursuant to the underwriter's overallotment resulted in an increase in stockholders' equity of $117.7 million. 26 Recent Accounting Pronouncements In 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This statement standardizes the accounting for derivative instruments and hedging activities, including certain derivative instruments embedded in other contracts. Under the standard, entities are required to carry all derivative instruments in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding it. If certain conditions are met, entities may elect to designate a derivative instrument as a hedge of exposures to changes in fair values, cash flows, or foreign currencies. If the hedged exposure is a fair value exposure, the gain or loss on the derivative instrument is recognized in earnings in the period of change together with the offsetting gain or loss on the hedged item attributable to the risk being hedged. If the hedged exposure is a cash flow exposure, the effective portion of the gain or loss on the derivative instrument is reported initially as a component of other comprehensive income and subsequently reclassified into earnings when the forecasted transaction affects earnings. If the hedged exposure is a foreign currency exposure, the gain or loss on the derivative instrument is reported in other comprehensive income as part of the cumulative translation adjustment. For a derivative not designated as a hedging instrument, the gain or loss is recognized in earnings in the period of change. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. We have not yet determined the impact of SFAS 133. However, we anticipate that adoption of the statement will not have a material impact on our financial position or results of operations. Year 2000 Compliance Institutions around the world are reviewing and modifying their computer systems to ensure they are Year 2000 compliant. The issue, in general terms, is that many existing computer systems, both information technology systems and non-information technology systems, contain date-based functions which use only two digits to identify a year in the date field with the assumption that the first two digits of the year are always "19". Consequently, on January 1, 2000, systems that are not Year 2000 compliant may read the year as 1900. Systems that calculate, compare or sort using the incorrect date may malfunction. We continue to address the Year 2000 issue as it relates to our systems and business. We have developed a comprehensive Year 2000 project to remediate our information technology ("IT") systems and to address Year 2000 issues in our non-IT systems. The process of remediation includes the following phases: o Planning o Assessing o Designing (as necessary) o Programming (as necessary) o Testing and validation We have categorized our IT systems as high, medium or low priority with respect to our ability to conduct business. As of December 31, 1998, we had successfully completed: o the planning, assessing and designing phases for all of our IT systems o the programming phase for 97% of our high and medium priority IT systems and 96% of all our IT systems o the testing and validation phase for 96% of our high and medium priority IT systems and 92% of all our IT systems. We estimate that, at December 31, 1998, our Year 2000 project was approximately 94% completed for our high and medium priority IT systems and 91% completed with respect to all our IT systems. Our Year 2000 project remains on schedule to be completed by the end of the first quarter of 1999. A majority of the software used in our IT systems is provided by outside vendors. As of December 31, 1998, approximately 97% of our vendor provided software or software upgrades have been designated by the software vendors as Year 2000 compliant. We implemented a Year 2000 contingency plan which now addresses the 3% of our vendor provided software which has not yet met our Year 2000 compliance deadlines. 27 In addition, we continue to formulate a contingency plan for business continuation in the event of Year 2000 systems failures. This contingency plan formulation is based upon our existing disaster recovery and business continuity plans with modifications for Year 2000 risks. We expect to complete our IT systems Year 2000 contingency plan by June 30, 1999, and to test this contingency plan thereafter. Our non-IT systems used to conduct business at our facilities consist primarily of office equipment (other than computer and communications equipment) and other equipment at our leased office facilities. We have inventoried our non-IT systems and have sent Year 2000 questionnaires to our office equipment vendors and landlords to determine the status of their Year 2000 readiness. Since 1997, we have been actively communicating with third parties concerning the status of their Year 2000 readiness by, among other things, sending written Year 2000 inquiries. These third parties include our borrowers, obligors, banks, investment banks, investors, vendors, manufacturers, landlords and suppliers of telecommunication services and other utilities. As part of the process of evaluating our options and attempting to mitigate third party risks, we continue to collect and analyze information from third parties. It is difficult to predict the effect of such third party non-readiness on our business. Significant Year 2000 failures in our systems or in the systems of third parties (or third parties upon whom they depend) could have a material adverse effect on our financial condition and results of operations. We believe that our reasonably likely worst case Year 2000 scenario is (i) a material increase in our credit losses due to Year 2000 problems for our borrowers and obligors and (ii) disruption in financial markets causing liquidity stress to us. The amount of these potential credit losses or the degree of disruption cannot be determined at this time. During the first quarter of 1999, we will continue with the remediation and testing of our IT systems, further evaluate third party Year 2000 risks, continue to develop contingency plans and take further steps designed to reduce our exposure to these risks. The total cost of our Year 2000 project is expected to be approximately $8 million, of which approximately $5.5 million has been incurred through December 31, 1998. This amount includes the costs of additional hardware, software and technology consultants, as well as the cost of our systems professionals dedicated to achieving Year 2000 compliance for IT systems. We have included the cost of the Year 2000 project in our annual budgets for information technology. We have postponed some non-Year 2000 IT expenditures and initiatives until after 2000 in order to concentrate resources on the Year 2000 issue. We do not expect that this will have a material adverse effect on our financial condition and results of operations. All Year 2000 information provided herein is a "Year 2000 Readiness Disclosure" as defined in the Year 2000 Information and Readiness Disclosure Act and is subject to the terms thereof. This Year 2000 information is provided pursuant to securities law requirements and it may not be taken as a form of covenant, warranty, representation or guarantee of any kind. 28 Item 8. Financial Statements and Supplementary Data. INDEPENDENT AUDITORS' REPORT The Stockholders and Board of Directors of The CIT Group, Inc.: We have audited the accompanying consolidated balance sheets of The CIT Group, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The CIT Group, Inc. and subsidiaries at December 31, 1998 and 1997, and the results of their operations and cash flows for each of the years in the three-year period ended December 31, 1998 in conformity with generally accepted accounting principles. KPMG LLP Short Hills, New Jersey January 28, 1999 29 THE CIT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Assets December 31, -------------------- 1998 1997 ---- ---- Dollars in Millions Financing and leasing assets Loans Commercial ......................................... $11,415.5 $10,342.5 Consumer ........................................... 4,266.9 3,664.8 Lease receivables ...................................... 4,173.6 3,712.4 --------- --------- Finance receivables (Note 3) ....................... 19,856.0 17,719.7 Reserve for credit losses (Note 4) ..................... (263.7) (235.6) --------- --------- Net finance receivables ............................ 19,592.3 17,484.1 Operating lease equipment, net (Note 5) ................ 2,774.1 1,905.6 Consumer finance receivables held for sale ............. 987.4 268.2 Cash and cash equivalents .............................. 73.6 140.4 Other assets (Notes 14 and 19) ......................... 875.7 665.8 --------- --------- Total assets ................................... $24,303.1 $20,464.1 ========= ========= Liabilities and Stockholders' Equity Debt (Notes 6 and 7) Commercial paper ....................................... $ 6,144.1 $ 5,559.6 Variable rate senior notes ............................. 4,275.0 2,861.5 Fixed rate senior notes ................................ 8,032.3 6,593.8 Subordinated fixed rate notes .......................... 200.0 300.0 --------- --------- Total debt ..................................... 18,651.4 15,314.9 Credit balances of factoring clients ................... 1,302.1 1,202.6 Accrued liabilities and payables (Notes 12 and 14) .................................. 694.3 660.1 Deferred federal income taxes (Note 12) ................ 703.7 603.6 --------- --------- Total liabilities .............................. 21,351.5 17,781.2 Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the Company (Note 8) ............................... 250.0 250.0 Stockholders' equity (Notes 1 and 9) Class A common stock, par value $0.01 per share; Authorized: 700,000,000 shares Issued: 163,144,879 shares in 1998 and 37,173,527 shares in 1997 Outstanding: 162,176,949 shares in 1998 and 37,173,527 shares in 1997 ................................. 1.7 0.4 Class B common stock, par value $0.01 per share, 510,000,000 shares authorized and in 1997 126,000,000 issued and outstanding ............................. -- 1.3 Paid-in capital ........................................ 952.5 948.3 Retained earnings ...................................... 1,772.8 1,482.9 Treasury stock at cost (967,930 shares; Class A) ................................... (25.4) -- --------- --------- Total stockholders' equity ..................... 2,701.6 2,432.9 --------- --------- Total liabilities and stockholders' equity ........................ $24,303.1 $20,464.1 ========= ========= See accompanying notes to consolidated financial statements 30 THE CIT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, ----------------------------------- 1998 1997 1996 -------- -------- -------- Dollars in Millions (except per share amounts) Finance income ............................ $2,015.1 $1,824.7 $1,646.2 Interest expense .......................... 1,040.8 937.2 848.3 -------- -------- -------- Net finance income .................... 974.3 887.5 797.9 Fees and other income (Note 10) ........... 255.4 247.8 244.1 Gain on sale of equity interest acquired in loan workout .............. -- 58.0 -- -------- -------- -------- Operating revenue ..................... 1,229.7 1,193.3 1,042.0 -------- -------- -------- Salaries and general operating expenses (Notes 11, 14 and 15) ........ 417.8 428.4 393.1 Provision for credit losses (Note 4) ...... 99.4 113.7 111.4 Depreciation on operating lease equipment (Note 5) .................... 169.5 146.8 121.7 Minority interest in subsidiary trust holding solely debentures of the Company (Note 8) .... 19.2 16.3 -- -------- -------- -------- Operating expenses .................... 705.9 705.2 626.2 -------- -------- -------- Income before provision for income taxes ....................... 523.8 488.1 415.8 Provision for income taxes (Note 12) ...... 185.0 178.0 155.7 -------- -------- -------- Net income ............................ $ 338.8 $ 310.1 $ 260.1 ======== ======== ======== Net income per basic share (Note 13) ...... $ 2.09 $ 1.96 $ 1.65 Net income per diluted share (Note 13) .... $ 2.08 $ 1.95 $ 1.64 See accompanying notes to consolidated financial statements. 31 THE CIT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Class A Class B Total Common Common Common Paid-in Treasury Retained Stockholders' Stock Stock Stock Capital Stock Earnings Equity ------ ------- ------- ------- -------- -------- ------------- Dollars in Millions Balance, December 31, 1995 ........ $250.0 $408.3 $1,255.9 $1,914.2 Net income ........................ 260.1 260.1 Cash dividends - regular .......... (98.9) (98.9) Cash dividends - special .......... (165.0) (165.0) Capital contribution .............. 165.0 165.0 ------ ---- ---- ------ ------ -------- -------- Balance, December 31, 1996 ........ 250.0 573.3 1,252.1 2,075.4 Net income ........................ 310.1 310.1 Cash dividends .................... (79.3) (79.3) Recapitalization to Class B common stock shares (Note 1) ........... (250.0) $1.6 248.4 0.0 Twenty percent of Class B common shares bought pursuant to option agreement (Note 1) .............. (0.3) $(808.0) (808.3) Conversion of Class B treasury stock shares to Class A common stock shares and issuance of Class A to the public (Note 1) ........................ $0.3 808.0 808.3 Issuance of underwriter's overallotment of Class A common stock shares, net (Note 1) .................... 0.1 117.6 117.7 Restricted Class A common stock grants (Note 14) .......... 9.0 9.0 ------ ---- ---- ------ ------ -------- -------- Balance, December 31, 1997 ........ 0.0 0.4 1.3 948.3 0.0 1,482.9 2,432.9 Net income ........................ 338.8 338.8 Cash dividends .................... (48.9) (48.9) Conversion of Class B common stock to Class A common stock shares (Note 1) ........................ 1.3 (1.3) 0.0 Repurchase of 967,930 shares of Class A common stock (Note 9) .................. (25.4) (25.4) Costs relating to Class A Common Stock offering (Note 1) ............... (1.0) (1.0) Restricted Class A common stock grants (Note 14) .......... 5.2 5.2 ------ ---- ---- ------ ------ -------- -------- Balance, December 31, 1998 ........ $ 0.0 $1.7 $0.0 $952.5 $(25.4) $1,772.8 $2,701.6 ====== ==== ==== ====== ====== ======== ========
See accompanying notes to consolidated financial statements. 32 THE CIT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, ------------------------------------ 1998 1997 1996 ---- ---- ---- Dollars in Millions Cash flows from operations Net income .............................. $ 338.8 $ 310.1 $ 260.1 Adjustments to reconcile net income to net cash flows from operations: Provision for credit losses ........ 99.4 113.7 111.4 Depreciation and amortization ...... 195.9 168.6 140.3 Provision for deferred federal income taxes .................... 100.2 80.3 54.1 Gains on asset and receivable sales (75.1) (137.7) (78.9) Increase in accrued liabilities and payables .................... 34.2 66.1 108.1 Increase in other assets ........... (89.2) (54.0) (65.9) Other .............................. 11.0 8.0 (3.7) ---------- ---------- ---------- Net cash flows provided by operations .................... 615.2 555.1 525.5 ---------- ---------- ---------- Cash flows from investing activities Loans extended .......................... (35,818.9) (33,332.9) (32,647.2) Collections on loans .................... 32,463.4 31,419.7 31,132.2 Proceeds from asset and receivable sales ...................... 1,381.3 1,747.5 1,144.9 Purchases of assets to be leased ........ (1,101.7) (802.8) (431.2) Net increase in short-term factoring receivables ................. (255.4) (238.8) (0.3) Purchases of finance receivables portfolios ............................ (600.0) (176.6) (661.3) Proceeds from sales of assets received in satisfaction of loans ..... 49.2 37.7 76.7 Purchases of investment securities ...... (36.9) (27.5) (20.8) Other ................................... (31.8) (23.1) (25.5) ---------- ---------- ---------- Net cash flows used for investing activities ............... (3,950.8) (1,396.8) (1,432.5) ---------- ---------- ---------- Cash flows from financing activities Proceeds from the issuance of variable and fixed rate notes ......... 6,863.5 4,532.7 4,776.0 Repayments of variable and fixed rate notes ............................ (4,111.5) (3,556.1) (3,461.8) Net increase (decrease) in commercial paper ...................... 584.5 (267.4) (278.6) Proceeds from nonrecourse leveraged lease debt .................. 155.3 43.7 58.1 Repayments of nonrecourse leveraged lease debt .................. (148.7) (162.3) (146.2) Cash dividends paid ..................... (48.9) (79.3) (263.9) Purchase of treasury stock .............. (25.4) -- -- Proceeds from issuance of common stock, net ..................... -- 926.0 -- Purchase of Class B common stock pursuant to option agreement ...................... -- (808.3) -- Proceeds from the issuance of Company-obligated manditorily redeemable preferred securities of subsidiary trust holding solely debentures of the Company ........................ -- 250.0 -- Capital contribution from stockholders .. -- -- 165.0 ---------- ---------- ---------- Net cash flows provided by financing activities ............... 3,268.8 879.0 848.6 ---------- ---------- ---------- Net (decrease) increase in cash and cash equivalents .................. (66.8) 37.3 (58.4) Cash and cash equivalents, beginning of year ..................... 140.4 103.1 161.5 ---------- ---------- ---------- Cash and cash equivalents, end of year ........................... $ 73.6 $ 140.4 $ 103.1 ========== ========== ========== Supplemental disclosures Interest paid ........................... $ 1,021.3 $ 917.5 $ 842.6 Federal and state and local income taxes paid ..................... $ 81.4 $ 102.1 $ 102.5 See accompanying notes to consolidated financial statements. 33 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1--The Company The CIT Group, Inc. (the "Company"), formerly known as The CIT Group Holdings, Inc., engages in secured commercial and consumer financing and leasing activities through a nationwide distribution network. In November 1998, The Dai-Ichi Kangyo Bank, Limited ("DKB") sold 55,000,000 shares of Class A Common Stock in a secondary public offering (the "Secondary Offering") for which it received all the proceeds. Prior to the sale, DKB converted all of its Class B Common Stock into an identical number of shares of Class A Common Stock, which is now the only class of common stock outstanding. DKB held 94.4% of the combined voting power and 77.2% of the economic interest of all of the Company's outstanding common stock prior to the sale. At December 31, 1998, DKB held 43.8% of the voting power and economic interest of the Company's outstanding common stock. In November 1997, the Company issued 36,225,000 shares of Class A Common Stock in an initial public offering (the "IPO"). Prior to the IPO, DKB owned 80% of the Company's issued and outstanding stock, and The Chase Manhattan Corporation ("Chase") owned the remaining 20% of the issued and outstanding stock. DKB had an option expiring December 15, 2000 to purchase the remaining 20% common stock interest from Chase. In November 1997, the Company purchased DKB's option at its fair market value, exercised the option to purchase the stock held by Chase and recapitalized the Company by converting the outstanding common stock to 157,500,000 shares of Class B Common Stock. Twenty percent of the Class B Common Stock shares (which had five votes per share) were converted to Class A Common Stock shares (which has one vote per share) and, in addition to an underwriter's overallotment option, were issued in the IPO. The issuance of Class A Common Stock pursuant to the underwriter's overallotment resulted in an increase to the Company's stockholders' equity of $117.7 million. Note 2--Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements and accompanying notes include the accounts of The CIT Group, Inc. and its subsidiaries. All significant intercompany transactions have been eliminated. Prior period amounts have been reclassified to conform to the current presentation. Financing and Leasing Assets The Company provides funding for a variety of financing arrangements, including term loans, lease financing and operating leases. The amounts outstanding on loans and leases are referred to as finance receivables and, when combined with consumer finance receivables held for sale, net book value of operating lease equipment, and certain investments, represent financing and leasing assets. Income Recognition Finance income includes interest on loans, the accretion of income on direct financing leases, and rents on operating leases. Related origination and other nonrefundable fees and direct origination costs are deferred and amortized as an adjustment of finance income over the contractual life of the transactions. Income on finance receivables other than leveraged leases is recognized on an accrual basis commencing in the month of origination using methods that generally approximate the interest method. Leveraged lease income is recognized on a basis calculated to achieve a constant after-tax rate of return for periods in which the Company has a positive investment in the transaction, net of related deferred tax liabilities. Rental income on operating leases is recognized on an accrual basis. The accrual of finance income on commercial finance receivables is suspended and an account is placed on nonaccrual status when payment of principal or interest is contractually delinquent for 90 days or more, or earlier when, in the opinion of management, full collection of all principal and interest due is doubtful. Given the nature of revolving credit facilities, including those combined with term loan facilities (advances and interest accruals increase revolving loan balances and payments reduce revolving loan balances), the 34 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) placement of revolving credit facilities on nonaccrual status includes the review of other qualitative and quantitative factors, and generally does not result in the reversal of significant amounts of accrued interest. To the extent the estimated fair value of collateral does not satisfy both the principal and accrued income outstanding, accrued but uncollected income at the date an account is placed on nonaccrual status is reversed and charged against income, though such amounts are generally not significant. Subsequent income received is applied to the outstanding principal balance until such time as the account is collected, charged-off or returned to accrual status. The accrual of finance income on consumer loans is suspended, and all previously accrued but uncollected income is reversed, when payment of principal and/or interest on consumer finance receivables is contractually delinquent for 90 days or more. Fees and other income includes: (1) factoring commissions, (2) commitment, facility, letters of credit, and syndication fees, (3) servicing fees, and (4) gains and losses from the sales of leasing equipment, venture capital investments, and the sales and securitizations of finance receivables. Lease Financing Direct financing leases are recorded at the aggregate future minimum lease payments plus estimated residual values less unearned finance income. Operating lease equipment is carried at cost less accumulated depreciation and is depreciated to estimated residual value using the straight-line method over the lease term or projected economic life of the asset. Equipment acquired in satisfaction of loans and subsequently placed on operating lease is recorded at the lower of carrying value or estimated fair value when acquired. Lease receivables include leveraged leases, for which a major portion of the funding is provided by third party lenders on a nonrecourse basis, with the Company providing the balance and acquiring title to the property. Leveraged leases are recorded at the aggregate value of future minimum lease payments plus estimated residual value, less nonrecourse third party debt and unearned finance income. Management performs periodic reviews of the estimated residual values, with other than temporary impairment, if any, being recognized in the current period. Reserve for Credit Losses on Finance Receivables The consolidated reserve for credit losses is periodically reviewed for adequacy considering economic conditions, collateral values and credit quality indicators, including charge-off experience and levels of past due loans and nonperforming assets. It is management's judgment that the consolidated reserve for credit losses is adequate to provide for potential credit losses. The Company reviews finance receivables periodically to determine the probability of loss, and takes charge-offs after considering such factors as the obligor's financial condition and the value of underlying collateral and guarantees. The consolidated reserve for credit losses is intended to provide for future events, which by their nature are uncertain. Therefore, changes in economic conditions or other events affecting specific obligors or industries may necessitate additions or deductions to the consolidated reserve for credit losses. Charge-off of Finance Receivables Finance receivables are reviewed periodically to determine the probability of loss. Charge-offs are taken after considering such factors as the borrower's financial condition and the value of underlying collateral and guarantees (including recourse to dealers and manufacturers). Such charge-offs are deducted from the carrying value of the related finance receivables. To the extent that an unrecovered balance remains due, a final charge-off is taken at the time collection efforts are no longer deemed useful. Automatic charge-offs are recorded on consumer finance receivables beginning at 180 days of contractual delinquency based upon historical loss severity, with charge-offs finalized upon disposition of foreclosed assets. Impaired Loans Impaired loans are measured based upon 1) the present value of expected future cash flows discounted at the loan's effective interest rate, or 2) the fair value of the collateral, if the loan is collateral dependent. Impaired loans include any loan transaction on nonaccrual status or any troubled debt restructuring entered into after December 31, 1994, subject to periodic review by the Company's Asset Quality Review Committee 35 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) ("AQR"). The AQR is comprised of members of senior management, which reviews finance receivables of $500,000 or more meeting certain credit risk grading parameters. Excluded from impaired loans are: 1) certain individual small dollar commercial nonaccrual loans (under $500,000) for which the collateral value supports the outstanding balance, 2) consumer loans, which are subject to automatic charge-off procedures, and 3) short-term factoring customer receivables, generally having terms of no more than 30 days. In general, the impaired loans are collateral dependent. Any shortfall between the value and the recorded investment in the loan is recognized by recording a provision for credit losses. Long-Lived Assets A review for impairment of long-lived assets, such as operating lease equipment, is performed whenever events or changes in circumstances indicate that the carrying amount of long-lived assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Other Assets The Company adopted Statement of Financial Accounting Standards No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125"), as amended, on January 1, 1997. SFAS 125 uses a "financial components" approach that focuses on control to determine the proper accounting for financial asset transfers and addresses the accounting for servicing rights on financial assets in addition to mortgage loans. Securitizations of finance receivables are accounted for as sales when legal and effective control over the related receivables is surrendered. Servicing assets or liabilities are recognized when the servicing rights are retained by the seller. In accordance with the transition rules set forth in SFAS 125, the Company, on January 1, 1997, reclassified as servicing assets the portion of previously recognized excess servicing assets that did not exceed contractually specified servicing fees. The remaining balances of previously recognized excess servicing assets are included in other assets and are classified as available-for-sale investment securities subject to the provisions of Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities". The adoption of SFAS 125 did not have a significant impact on the Company's financial position or results of operations. At the time management decides to proceed with a securitization of loans, such loans are considered available for sale, classified as other assets and carried at the lower of aggregate cost or market value. Certain consumer loans are originated and sold to trusts which, in turn, issue asset-backed securities to investors. The Company retains the servicing rights and participates in certain cash flows from the loans. The present value of expected net cash flows which exceeds the estimated cost of servicing is recorded at the time of sale as "interest-only receivables" with any related gain recognized. The Company, in its estimation of residual cash flows and interest-only receivables, inherently employs a variety of financial assumptions, including loan pool credit losses, prepayment speeds and discount rates. These assumptions are empirically supported by both the Company's historical experience, market trends and anticipated trends relative to the particular products securitized. Subsequent to the recording of interest-only receivables, the Company regularly reviews such assets for valuation impairment. These reviews are performed on a disaggregated basis. Fair values of interest-only receivables are calculated utilizing current and anticipated credit losses, prepayment speeds and discount rates and are then compared to the Company's carrying values. Carrying value of the Company's interest-only receivables at December 31, 1998 and 1997 approximated fair value. The excess of purchase price over fair market value of assets acquired (goodwill) in connection with business acquisitions is amortized on a straight line basis over a period not to exceed 25 years. 36 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Assets received in satisfaction of loans are carried at the lower of carrying value or estimated fair value less selling costs, with write-downs at the time of receipt recognized by recording a charge-off. Subsequent write-downs of such assets, which may be required due to a decline in estimated fair market value after receipt, are reflected in general operating expenses. Fixed assets such as computer equipment, furniture, and leasehold improvements are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed principally using the straight-line method over the estimated useful lives of the related assets. Derivative Financial Instruments The Company uses interest rate swap agreements as part of its overall interest rate risk management. These transactions are entered into as hedges against the effects of future interest rate fluctuations and, accordingly, are not carried at fair value. The Company does not enter into derivative financial instruments for trading or speculative purposes. The net interest differential, including premiums paid or received, if any, on interest rate swaps, is recognized on an accrual basis as an adjustment to finance income or as interest expense to correspond with the hedged asset or liability position, respectively. If early termination of a derivative instrument occurs, the net proceeds paid or received are deferred and amortized over the shorter of the remaining original contract life of the interest rate swap or the maturity of the hedged asset or liability position. The Company also uses derivative instruments to hedge the interest rate associated with the anticipated securitization of loans. Such transactions are designated as hedges against a securitization that is probable and for which the significant characteristics and terms have been identified but for which there is no legally binding obligation. The loans to be securitized are considered held for sale and are included in consumer finance receivables held for sale in the accompanying balance sheets. The net interest differential on the derivative instrument, including premium paid or received, if any, is recognized as an adjustment to the basis of the corresponding assets at the time of sale. If the anticipated securitization does not occur, the related hedge position would be liquidated with any gain or loss recognized at such time, and the related assets would be reclassified to finance receivables. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are determined using enacted tax rates expected to apply in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities is recognized in income at the time of enactment of a change in tax rates. Federal investment tax credits realized for income tax purposes on lease financing transactions have been deferred for financial statement purposes and are included in deferred federal income taxes. Such credits are amortized as a reduction of the provision for income taxes using an actuarial method over the related lease term. Segment Reporting The Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") in 1998. SFAS 131 supersedes SFAS 14, "Financial Reporting for Segments of a Business Enterprise," replacing the "industry segment" approach with the "management" approach. The management approach is based on the way management organizes the segments for making operating decisions and assessing performance. SFAS 131 also requires disclosure about products and services, significant account balances, and geographic areas. The adoption of SFAS 131 did not affect results of operations or financial position but did affect the disclosure of segment information. See Note 21 -- Business Segment Information. 37 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Comprehensive Income The Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" in 1998. This statement does not change the reporting of net income. However, it requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a separate financial statement that is displayed with the same prominence as other financial statements. This statement also requires that an enterprise display the accumulated balance of other comprehensive income separately from retained earnings and paid-in-capital in the equity section of a statement of financial position. There were no significant comprehensive income items at December 31, 1998, 1997 or 1996. Consolidated Statements of Cash Flows Cash and cash equivalents includes cash and interest-bearing deposits, which generally represent overnight money market investments of excess cash borrowed in the commercial paper market and maintained for liquidity purposes. Cash inflows and outflows from commercial paper borrowings and most factoring receivables are presented on a net basis in the Statements of Cash Flows, as their term is generally less than 90 days. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Note 3--Finance Receivables Included in lease receivables at December 31, 1998 and 1997 are leveraged lease receivables of $792.2 million and $716.5 million, respectively. Leveraged lease receivables exclude the portion of lease receivables offset by related nonrecourse debt payable to third party lenders of $1.9 billion at both December 31, 1998 and 1997, including amounts owed to affiliates of DKB that totaled $431.0 million in 1998 and $459.0 million in 1997. Finance receivables exclude $2.5 billion of consumer finance receivables at December 31, 1998 ($2.4 billion in 1997) previously securitized and currently managed by the Company. Commercial and consumer loans are presented net of unearned income of $557.0 million and $584.3 million at December 31, 1998 and 1997, respectively. Lease receivables are presented net of unearned income of $1.1 billion at both December 31, 1998 and 1997. The following table sets forth the contractual maturities of finance receivables. At December 31, --------------------------------------------- 1998 1997 ------------------ ------------------- Amount Percent Amount Percent -------- ------- -------- ------- Dollars in Millions Due within one year ............. $ 7,948.8 40.0% $ 6,540.9 36.9% Due within one to two years ..... 3,146.0 15.9 2,797.1 15.8 Due within two to four years .... 3,458.3 17.4 3,288.0 18.6 Due after four years ............ 5,302.9 26.7 5,093.7 28.7 --------- ----- --------- ----- Total .......................... $19,856.0 100.0% $17,719.7 100.0% ========= ===== ========= ===== Information about concentrations of credit risk is set forth in "Geographic Composition", "Industry Composition" and "Concentrations" in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 38 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table sets forth the information regarding total nonperforming assets. At December 31, -------------------- 1998 1997 ---- ---- Dollars in Millions Nonaccrual finance receivables ................. $211.4 $164.4 Assets received in satisfaction of loans ....... 67.3 43.0 ------ ------ Total nonperforming assets ................... $278.7 $207.4 ====== ====== Percent to finance receivables ................. 1.40% 1.17% ====== ====== At December 31, 1998 and 1997, the recorded investment in impaired loans, which are generally collateral dependent, totaled $74.1 million and $53.2 million, respectively. No SFAS 114 reserve for credit losses was required because the fair value of the collateral or the present value of expected future cash flows equaled or exceeded the recorded investment for such impaired loans. The average monthly recorded investment in the impaired loans was $73.2 million, $71.6 million and $89.4 million for the years ended December 31, 1998, 1997 and 1996, respectively. Cash collected on impaired loans is applied to the carrying amount. There was no finance income recorded on these loans during 1998, 1997 or 1996 after being classified as impaired. The amount of finance income that would have been recorded under contractual terms for year-end impaired loans would have been $16.1 million, $19.9 million, and $24.7 million in 1998, 1997, and 1996, respectively. Note 4--Reserve for Credit Losses The following table presents changes in the reserve for credit losses. At December 31, ----------------------------- 1998 1997 1996 ---- ---- ---- Dollars in Millions Balance, January 1 ........................... $ 235.6 $ 220.8 $ 206.0 ------- ------- ------- Provision for credit losses .................. 99.4 113.7 111.4 Portfolio acquisitions, net .................. 7.5 2.1 4.9 ------- ------- ------- Net addition to the reserve for credit losses ........................ 106.9 115.8 116.3 ------- ------- ------- Finance receivables charged-off .............. (103.7) (123.5) (122.2) Recoveries on finance receivables previously charged-off ..................... 24.9 22.5 20.7 ------- ------- ------- Net credit losses .......................... (78.8) (101.0) (101.5) ------- ------- ------- Balance, December 31 ......................... $ 263.7 $ 235.6 $ 220.8 ======= ======= ======= Reserve for credit losses as a percentage of finance receivables .......... 1.33% 1.33% 1.30% ======= ======= ======= 39 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 5--Operating Lease Equipment The following table provides an analysis of operating lease equipment by equipment type, net of accumulated depreciation of $457.2 million in 1998 and $375.6 million in 1997. At December 31, ---------------------- 1998 1997 ---- ---- Dollars in Millions Commercial aircraft ................................... $1,094.7 $ 822.7 Railroad equipment .................................... 806.0 429.0 Business aircraft ..................................... 318.7 295.6 Trucks, trailers and buses ............................ 187.0 172.2 Manufacturing ......................................... 147.2 101.3 Other ................................................. 220.5 84.8 -------- -------- Total ............................................... $2,774.1 $1,905.6 ======== ======== Included in the preceding table is equipment not currently subject to lease agreements of $27.2 million and $2.4 million at December 31, 1998 and 1997, respectively. Commitments to purchase equipment from manufacturers to be placed on operating lease totaled $449.9 million at December 31, 1998. Agreements to lease this equipment to third parties have been entered into for $157.0 million at December 31, 1998. There were no commitments to purchase equipment from manufacturers to be placed on operating lease at December 31, 1997. Rental income on operating leases, which is included in finance income, totaled $314.1 million in 1998, $231.8 million in 1997, and $182.4 million in 1996. The following table presents future minimum lease rentals on non-cancelable operating leases as of December 31, 1998. Excluded from this table are variable rentals calculated on the level of asset usage, re-leasing rentals, and expected sales proceeds from remarketing operating lease equipment at lease expiration, all of which are important components of operating lease profitability. Years Ended December 31, ------------------------ Dollars in Millions 1999 ...................................................... $ 353.2 2000 ...................................................... 288.6 2001 ...................................................... 237.0 2002 ...................................................... 170.4 2003 ...................................................... 120.3 Thereafter ................................................ 208.1 -------- Total .................................................. $1,377.6 ======== 40 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 6--Debt The following table presents data on commercial paper borrowings. At December 31, -------------------------------- 1998 1997 1996 ---- ---- ---- Dollars in Millions Borrowings outstanding ..................... $6,144.1 $5,559.6 $5,827.0 Weighted average interest rate ............. 5.35% 5.86% 5.45% Weighted average maturity .................. 38 days 43 days 32 days For the Years ended December 31, --------------------------------- 1998 1997 1996 ---- ---- ---- Dollars in Millions Daily average borrowings ................... $6,572.1 $6,320.7 $5,892.7 Maximum amount outstanding ................. $7,655.9 $7,039.4 $6,666.3 Weighted average interest rate ............. 5.51% 5.56% 5.44% (excluding amounts related to interest bearing deposits) The following tables present the contractual maturities of total debt at December 31, 1998.
At December 31, --------------------- Commercial Variable rate 1998 1997 paper senior notes Total Total ----- ------------ ----- ----- Dollars in Millions Due in 1998 (rates ranging from 5.58% to 5.90%) ...................... $ -- $ -- $ -- $8,021.1 Due in 1999 (rates ranging from 4.40% to 5.88%) ...................... 6,144.1 3,705.0 9,849.1 380.0 Due in 2000 (rates ranging from 4.91% to 5.76%) ...................... -- 550.0 550.0 -- Due in 2003 (rates ranging from 5.81% to 5.96%) ...................... -- 20.0 20.0 20.0 -------- -------- --------- -------- Total .............................. $6,144.1 $4,275.0 $10,419.1 $8,421.1 ======== ======== ========= ======== At December 31, --------------------- Fixed rate notes 1998 1997 Senior Subordinated Total Total ------ ------------ ----- ----- Due in 1998 (rates ranging from 5.63% to 8.75%) ...................... $ -- $ -- $ -- $1,650.0 Due in 1999 (rates ranging from 5.38% to 6.63%) ...................... 1,881.0 -- 1,881.0 1,881.0 Due in 2000 (rates ranging from 5.00% to 6.80%) ...................... 2,222.0 -- 2,222.0 1,095.0 Due in 2001 (rates ranging from 5.50% to 9.25%) ...................... 1,475.0 200.0 1,675.0 700.0 Due in 2002 (rates ranging from 5.92% to 7.13%) ...................... 1,050.0 -- 1,050.0 950.0 Due in 2003 (rates ranging from 5.57% to 6.00%) ...................... 755.0 -- 755.0 -- Due after 2003 (rates ranging from 5.69% to 6.63%) ...................... 658.6 -- 658.6 628.6 -------- ------ -------- -------- Face amount of maturities .............. 8,041.6 200.0 8,241.6 6,904.6 Issue discount ......................... (9.3) -- (9.3) (10.8) -------- ------ -------- -------- Total .............................. $8,032.3 $200.0 $8,232.3 $6,893.8 ======== ====== ======== ========
41 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Fixed rate senior and subordinated debt outstanding at December 31, 1998 matures at various dates through 2008 at interest rates ranging from 5.00% to 9.25%. The consolidated weighted average interest rates on fixed rate senior and subordinated debt at December 31, 1998 and 1997 were 6.11% and 6.39%, respectively. Variable rate senior notes outstanding at December 31, 1998 with interest rates ranging from 4.40% to 5.81% mature at various dates through 2003. The consolidated weighted average interest rates on variable rate senior notes at December 31, 1998 and 1997 were 4.93% and 5.66%, respectively. The following table represents information on unsecured revolving lines of credit with 53 banks that support commercial paper borrowings at December 31, 1998. Maturity Amount ---------------- Dollars in Millions April 1999 ..................................................... $1,240.0 April 2002 ..................................................... 3,720.0 -------- Total credit lines ........................................... $4,960.0 ======== The credit line agreements contain clauses that allow the Company to extend the termination dates upon written consent from the participating banks. Note 7--Derivative Financial Instruments As part of managing the exposure to changes in market interest rates, the Company, as an end-user, enters into various interest rate swap transactions, all of which are transacted in over-the-counter (OTC) markets, with other financial institutions acting as principal counterparties. The Company uses off-balance sheet derivatives for hedging purposes only, and does not enter into derivative financial instruments for trading or speculative purposes. To ensure both appropriate use as a hedge and hedge accounting treatment, all derivatives entered into are designated, according to hedge objective, against commercial paper, a specifically underwritten debt issue or a specific pool of assets. The Company's primary hedge objectives include the conversion of variable rate liabilities to fixed rates, the conversion of fixed rate liabilities to variable rates, the fixing of spreads on variable rate liabilities to various market indices and the elimination of interest rate risk on finance receivables classified as held for sale prior to securitization. The notional amounts, rates, indices and maturities of the Company's off-balance sheet derivatives are required to closely match the related terms of the Company's hedged assets and liabilities. The following table presents the notional principal amounts, weighted average interest rates expected to be received or paid and the contractual maturities of interest rate swaps at December 31, 1998.
Years ending Floating to Fixed to Floating to December 31, Fixed Rate Floating Rate Floating Rate - ------------ ----------------------------- ---------------------------- ---------------------------- Notional Amounts in Millions Notional Receive Pay Notional Receive Pay Notional Receive Pay Amount Rate Rate Amount Rate Rate Amount Rate Rate -------- ------- ---- -------- ------- ---- -------- ------ ---- 1999 ............ $ 925.0 5.42% 6.15% $ -- -- -- $130.0 4.43% 5.71% 2000 ............ 760.0 5.48% 6.95% 20.0 6.15% 5.07% -- -- -- 2001 ............ 1,021.7 5.48% 6.12% 200.0 5.82% 5.22% -- -- -- 2002 ............ 560.0 5.35% 5.69% -- -- -- -- -- -- 2003 ............ 269.7 5.57% 6.03% -- -- -- -- -- -- 2004-2008 ....... 204.1 5.62% 5.98% 200.0 5.92% 5.09% -- -- -- -------- ---- ---- ------- ---- ---- ------ ---- ---- $3,740.5 $ 420.0 $130.0 ======== ======= ====== Weighted average rate .... 5.46% 6.22% 5.88% 5.15% 4.43% 5.71% ==== ==== ==== ==== ==== ====
All rates were those in effect at December 31, 1998. Variable rates are based on the contractually determined rate or other market rate indices and may change significantly, affecting future cash flows. 42 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table presents the notional principal amounts of interest rate swaps by class and the corresponding hedged liability position. Notional Amounts Interest Rate Swaps in Millions Comments - ------------------ --------------- --------- Floating to fixed rate swaps Hedging commercial paper $2,940.5 Effectively converts the interest rate on an equivalent amount of commercial paper to a fixed rate. Hedging variable rate notes 800.0 Effectively converts the interest rate on an equivalent amount of variable rate notes with matched terms to a fixed rate. -------- -------------------------------------- Total floating to fixed rate swaps 3,740.5 -------- Fixed to floating rate swaps Hedging fixed rate notes 420.0 Effectively converts the interest rate on an equivalent amount of fixed rate notes to a variable rate. Basis swaps Hedging variable rate debt 130.0 Effectively fixes the spread between the rates on an equivalent amount of variable rate notes and various market interest rate indices. -------- -------------------------------------- Total interest rate swaps $4,290.5 ======== The Company's hedging activity increased interest expense by $23.4 million, $24.2 million and $27.8 million in 1998, 1997 and 1996, respectively, over the interest expense that would have been incurred with an identical debt structure but without the Company's hedging activity. However, this calculation of interest expense does not take into account any actions the Company could have taken to reduce interest rate risk in the absence of hedging activity, such as issuing more fixed rate debt that would also tend to increase interest expense. Basis swap agreements involve the exchange of two different floating rate interest payment obligations and are used to manage the basis risk between floating rate indices. The Company is party to cross-currency interest rate swaps with a notional principal amount of $218.6 million paying interest at a weighted average rate of 5.15% at December 31, 1998, that effectively converted yen denominated fixed rate debt into variable rate U.S. dollar obligations. These swaps have maturities ranging from 1999 to 2006 that correspond with the terms of the debt. The Company is exposed to credit risk to the extent a counterparty fails to perform under the terms of an interest rate swap. This risk is measured as the market value of interest rate swaps with a positive fair value, which totaled $37.2 million at December 31, 1998, reduced by the effects of master netting agreements as presented in Note 18 -- Fair Values of Financial Instruments. However, due to the investment grade credit ratings of counterparties and limits on the exposure with any individual counterparty, the Company's actual counterparty credit risk is not considered significant. Note 8--Preferred Capital Securities In February 1997, CIT Capital Trust I (the "Trust"), a wholly-owned subsidiary of the Company, issued $250.0 million of 7.70% Preferred Capital Securities (the "Capital Securities") in a private offering. The Trust subsequently invested the offering proceeds in Junior Subordinated Debentures (the "Debentures") of the Company, having identical rates and payment dates. The Debentures of the Company represent the sole assets of the Trust. Holders of the Capital Securities are entitled to receive cumulative distributions at an annual rate of 7.70% through either the redemption date or maturity of the Debentures (February 15, 2027). Both the Capital Securities issued by the Trust and the Debentures of the Company owned by the Trust are 43 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) redeemable in whole or in part on or after February 15, 2007 or at any time in whole upon changes in specific tax legislation, bank regulatory guidelines or securities law. Distributions by the Trust are guaranteed by the Company to the extent that the Trust has funds available for distribution. The Company records distributions payable on the Capital Securities as an operating expense in the Consolidated Statements of Income. Note 9--Stockholders' Equity Under the most restrictive provisions of agreements relating to outstanding debt, the Company may not, without the consent of the holders of such debt, permit stockholders' equity to be less than $200.0 million. During 1998, the Company's Board of Directors authorized the purchase of up to 2,000,000 shares of its common stock to provide shares for its employee compensation programs. Stock repurchases are authorized to take place over a twelve month period ending August 1999, and may be made from time to time in the open market or in privately negotiated transactions. Through December 31, 1998, the Company repurchased 967,930 shares. Note 10--Fees and Other Income The following table sets forth the components of fees and other income. Years Ended December 31, ------------------------------ 1998 1997 1996 ------ ------ ------ Dollars in Millions Factoring commissions ...................... $ 95.7 $ 95.2 $ 91.0 Fees and other income ...................... 90.7 73.8 83.6 Gains on sales of leasing equipment ........ 45.2 30.1 36.6 Gains on securitizations ................... 12.5 32.0 14.9 Gains on sales of venture capital investments .............................. 11.3 16.7 18.0 ------ ------ ------ Total .................................... $255.4 $247.8 $244.1 ====== ====== ====== Note 11--Salaries and General Operating Expenses The following table sets forth the components of salaries and general operating expenses. Years Ended December 31, ------------------------------ 1998 1997 1996 ------ ------ ------ Dollars in Millions Salaries and employee benefits ............. $245.4 $253.5 $223.0 General operating expenses ................. 172.4 174.9 170.1 ------ ------ ------ Total .................................... $417.8 $428.4 $393.1 ====== ====== ====== 44 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 12--Income Taxes The effective tax rate of the Company varied from the statutory federal corporate income tax rate as follows: Years Ended December 31, ---------------------------- 1998 1997 1996 ---- ---- ---- Percentage of Pretax Income Federal income tax rate ....................... 35.0% 35.0% 35.0% Increase (decrease) due to: State and local income taxes, net of federal income tax benefit ........ 3.0 3.7 4.5 Investment tax credits ...................... (0.2) (0.2) (0.3) Other ....................................... (2.5) (2.0) (1.8) ---- ---- ---- Effective tax rate ............................ 35.3% 36.5% 37.4% ==== ==== ==== The provision for income taxes is comprised of the following: Years Ended December 31, ---------------------------- 1998 1997 1996 ---- ---- ---- Dollars in Millions Current federal income tax provision ....... $ 60.4 $ 70.0 $ 72.9 Deferred federal income tax provision ...... 100.2 80.3 54.1 ------ ------ ------ Total federal income taxes ................. 160.6 150.3 127.0 State and local income taxes ............... 24.4 27.7 28.7 ------ ------ ------ Total provision for income taxes ......... $185.0 $178.0 $155.7 ====== ====== ====== The tax effects of temporary differences that give rise to significant portions of the deferred federal income tax assets and liabilities are presented below. At December 31, ---------------------- 1998 1997 ---- ---- Dollars in Millions ASSETS Provision for credit losses ................... $ (88.9) $ (93.3) Loan origination fees ......................... (11.3) (9.2) Other ......................................... (24.3) (47.1) ------- ------- Total deferred tax assets .................. (124.5) (149.6) ------- ------- LIABILITIES Leasing transactions .......................... 778.3 679.0 Market discount income ........................ 33.7 55.8 Amortization of intangibles ................... 8.7 9.9 Depreciation of fixed assets .................. 0.7 1.5 Prepaid pension costs ......................... 0.6 1.0 Other ......................................... 3.1 1.8 ------- ------- Total deferred tax liabilities ............. 825.1 749.0 ------- ------- Net deferred tax liability ....................... $ 700.6 $ 599.4 ======= ======= Also, included in deferred federal income taxes on the Consolidated Balance Sheets are unamortized investment tax credits of $3.1 million and $4.2 million at December 31, 1998 and 1997, respectively. Included in the accrued liabilities and payables caption in the Consolidated Balance Sheets are state and local deferred tax liabilities of $124.7 million and $103.6 million at December 31, 1998 and 1997, respectively, arising from the temporary differences shown in the above tables. 45 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 13--Earnings Per Share In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS 128"). SFAS 128 establishes standards for the presentation and disclosure for earnings per share ("EPS"). It also simplifies the standards for computing EPS and makes them comparable to international EPS standards. SFAS 128 replaces the presentation of primary and fully diluted EPS with basic and diluted EPS, respectively, and requires the reconciliation of the numerator and denominator of basic EPS with that of diluted EPS. Basic EPS is computed by dividing net income by the weighted-average number of common shares outstanding for the period. The diluted EPS computation includes the potential impact of dilutive securities including stock options and restricted stock grants. The dilutive effect of stock options is computed using the treasury stock method, which assumes the repurchase of common shares by the Company at the average market price for the period. In accordance with SFAS 128, options which have an anti-dilutive effect are not included in the denominator and were not significant at December 31, 1998. The reconciliation of the numerator and denominator of basic EPS with that of diluted EPS is presented for the years ended December 31, 1998, 1997, and 1996. For the Year Ended December 31, 1998 ------------------------------------- Income Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- ------ Dollars in Millions (except per share amounts) Basic EPS: Income available to common shareholders ..................... $338.8 161,987,897 $ 2.09 Effect of Dilutive Securities: Restricted shares .................. -- 936,250 (0.01) Stock options ...................... -- 264,592 -- ------ ----------- ------ Diluted EPS ........................... $338.8 163,188,739 $ 2.08 ====== =========== ====== For the Year Ended December 31, 1997 ------------------------------------- Income Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- ------ Dollars in Millions (except per share amounts) Basic EPS: Income available to common shareholders ..................... $310.1 158,134,315 $ 1.96 Effect of Dilutive Securities: Restricted shares .................. -- 948,527 (0.01) Stock options ...................... -- 71,440 -- ------ ----------- ------ Diluted EPS ........................... $310.1 159,154,282 $ 1.95 ====== =========== ====== For the Year Ended December 31, 1996 ------------------------------------- Income Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- ------ Dollars in Millions (except per share amounts) Basic EPS: Income available to common shareholders ..................... $260.1 157,500,000 $ 1.65 Effect of Dilutive Securities: Restricted shares .................. -- 948,527 (0.01) ------ ----------- ------ Diluted EPS ........................... $260.1 158,448,527 $ 1.64 ====== =========== ====== 46 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 14 -- Postretirement and Other Benefit Plans Retirement and Postretirement Medical and Life Insurance Benefit Plans Substantially all employees of the Company who have completed one year of service and are 21 years of age participate in The CIT Group Holdings, Inc. Retirement Plan (the "Plan"). The retirement benefits under the Plan are based on the employee's age, years of benefit service, and a percentage of qualifying compensation during the final years of employment. Plan assets consist of marketable securities, including common stock and government and corporate debt securities. The Company funds the Plan to the extent it qualifies for an income tax deduction. Such funding is charged to salaries and employee benefits expense. The Company also provides certain health care and life insurance benefits to eligible retired employees. Salaried participants generally become eligible for retiree health care benefits after reaching age 55 with 10 years of benefit service and 11 years of medical plan participation. Generally, the medical plans pay a stated percentage of most medical expenses reduced by a deductible as well as by payments made by government programs and other group coverage. The plans are unfunded. During 1998, the Company adopted Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Post Retirement Benefits" ("SFAS 132"). SFAS 132 revises employers' disclosures about pension and other post retirement benefit plans but does not change the measurement or recognition of those plans. SFAS 132 also standardizes the disclosure requirements to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer useful. The following tables set forth the change in obligations, plan assets, and funded status of the plans as well as the net periodic benefit cost.
At or for the Years Ended December 31, --------------------------------------------------------------- Retirement Benefits Postretirement Benefits ------------------------------- --------------------------- 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- Dollars in Millions Change in Benefit Obligations Benefit obligation at beginning of year ................................ $100.4 $ 84.0 $79.9 $35.0 $34.9 $40.4 Service cost ............................. 6.3 5.2 5.3 1.5 1.3 1.1 Interest cost ............................ 6.9 6.2 5.7 2.3 2.3 2.4 Actuarial (gain)/loss .................... 7.0 7.8 (4.1) 1.2 (1.3) (7.3) Benefits paid ............................ (2.5) (2.8) (2.8) (2.8) (2.2) (1.7) ------- ------- ----- ----- ----- ----- Benefit obligation at end of year ........ $ 118.1 $ 100.4 $84.0 $37.2 $35.0 $34.9 ======= ======= ===== ===== ===== ===== At or for the Years Ended December 31, ------------------------------------------------------- Retirement Benefits Postretirement Benefits --------------------- ----------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Dollars in Millions Change in Plan Assets Fair value of plan assets at beginning of year ............................ $128.5 $109.9 $ 0.0 $ 0.0 Actual return on plan assets ................... 6.8 21.4 -- -- Employer contributions ......................... -- -- 2.8 2.2 Benefits paid .................................. (2.5) (2.8) (2.8) (2.2) ------ ------ ------ ------ Fair value of plan assets at end of year .................................. $132.8 $128.5 $ 0.0 $ 0.0 ====== ====== ====== ====== Reconciliation of Funded Status at End of Year Funded status .................................. $ 14.7 $ 28.1 $(37.2) $(35.0) Unrecognized prior service cost ................ (1.5) (1.6) -- -- Unrecognized net (gain)/loss ................... (4.7) (18.2) (6.2) (8.3) Unrecognized net transition obligation ......... -- -- 22.9 24.6 ------ ------ ------ ------ Prepaid/(accrued) benefit cost ................. $ 8.5 $ 8.3 $(20.5) $(18.7) ====== ====== ====== ======
47 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, -------------------------------------------------------------- Retirement Benefits Postretirement Benefits ------------------------------ ---------------------------- 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- Weighted Average Assumptions Discount rate ............................... 6.50% 7.00% 7.50% 6.50% 7.00% 7.50% Rate of compensation increase ............... 4.25% 4.50% 4.50% 4.25% 4.50% 4.50% Expected return on plan assets .............. 10.00% 10.00% 10.00% -- -- --
For 1998, the assumed health care cost trend rates decline to an ultimate level of 4.50% in 2005 for all retirees; for 1997, 4.50% in 2004 for all retirees; and for 1996, 4.75% in 2001 for employees prior to reaching age 65 and 4.75% in 1998 for retirees older than 65.
For the Years Ended December 31, ---------------------------------------------------------------- Retirement Benefits Postretirement Benefits ------------------------------ ------------------------------ 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- Dollars in Millions Components of Net Periodic Benefit Cost Service cost ................................ $ 6.3 $ 5.2 $ 5.3 $ 1.5 $ 1.3 $ 1.1 Interest cost ............................... 6.9 6.2 5.7 2.3 2.3 2.4 Expected return on plan assets .............. (12.8) (10.8) (10.1) -- -- -- Amortization of prior service cost .......... (0.2) (0.2) (0.2) -- -- -- Amortization of transition obligation ................................ -- -- -- 1.6 1.7 1.7 Amortization of gains ....................... (0.5) (0.4) -- (0.8) (0.8) (0.6) ------ ----- ----- ----- ----- ----- Total net periodic (benefit)/expense ........ $ (0.3) $ -- $ 0.7 $ 4.6 $ 4.5 $ 4.6 ====== ===== ===== ===== ===== =====
Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plans. A one-percentage point change in assumed health care cost trend rates would have the following effects: For the Years Ended ------------------------- Postretirement Benefits 1998 1997 ---- ---- Dollars in Millions Effect of One-Percentage Point Increase on: Year-end benefit obligation ....................... $ 2.6 $ 2.4 Total of service and interest cost components ..... 0.4 0.3 Effect of One-Percentage Point Decrease on: Year-end benefit obligation ....................... $(2.4) $(2.2) Total of service and interest cost components ..... (0.3) (0.3) Savings Incentive Plan Certain employees of the Company participate in The CIT Group Holdings, Inc. Savings Incentive Plan. This plan qualifies under section 401(k) of the Internal Revenue Code. The Company's expense is based on specific percentages of employee contributions and plan administrative costs and aggregated $9.6 million, $9.0 million and $9.1 million, for 1998, 1997, and 1996, respectively. Corporate Annual Bonus Plan The CIT Group Bonus Plan ("Bonus Plan") is an annual bonus plan covering certain executive officers and other employees. The amount of awards depends on a variety of factors, including corporate performance and individual performance during the calendar year for which awards are made. All or part of a cash award for a particular year may be paid currently or deferred and paid upon retirement in up to five annual installments at the option of the participant. All awards are subject to appropriate taxes and deferred amounts are credited annually with interest. For the years ended December 31, 1998, 1997, and 1996, expenses for the Bonus Plan amounted to $18.6 million, $18.5 million, and $17.4 million, respectively. 48 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Long-Term Equity Compensation Plan The Company sponsors a Long-Term Equity Compensation Plan (the "ECP"). The ECP allows the Company to issue to employees up to 12,503,000 shares of Class A Common Stock through grants of annual incentive awards, incentive and non-qualified stock options, stock appreciation rights, restricted stock, performance shares, and performance units. Class A Common Stock issued under the ECP may be either authorized but unissued shares, treasury shares, or any combination thereof. All options granted have 10 year terms. Options granted in 1997 vest at various anniversary dates through 2002. Options granted in 1998 vest one-third on the first anniversary of the date of grant (1999), an additional one-third on the second anniversary of the date of grant (2000), and in full on the third anniversary of the date of grant (2001). Common stock data for the stock option plans is summarized as follows:
1998 1997 -------------------------- -------------------------- Average Option Average Option Shares Price Per Share Shares Price Per Share ------ --------------- ------ --------------- Outstanding at beginning of year ........................... 4,038,298 $27.00 -- -- Granted ............................. 892,120 $29.08 4,047,816 $27.00 Exercised ........................... (921) $27.00 -- -- Forfeited ........................... (163,388) $27.01 (9,518) $27.00 --------- ------ --------- ------ Outstanding at end of year .......... 4,766,109 $27.39 4,038,298 $27.00 --------- ------ --------- ------ Options exercisable at year end ..... 903,438 $27.00 1,062 $27.00 --------- ====== --------- ====== Weighted average fair value of options granted during the year .......................... $ 9.41 $ 8.32 ====== ======
Fair value was determined at the date of grant using the Black-Scholes option pricing model which assumed the following:
Option Expected Average Expected Risk Free Issuance Option Life Range Dividend Yield Volatility Range Interest Rate Range - -------- ----------------- -------------- ---------------- ------------------- 1998 ................... 3-5 years 1.37% 29.39%-40.93% 4.54%-5.63% 1997 ................... 3-7 years 1.33% 29.48%-31.39% 5.76%-5.90%
The following table summarizes information about stock options outstanding and options exercisable at December 31, 1998:
Options Outstanding Options Exercisable ---------------------------------------------- ---------------------------- Range of Remaining Weighted Weighted Exercise Number Contractual Average Number Average Price Outstanding Life Exercise Price Exercisable Exercise Price - ----------------- ----------- ----------- -------------- ----------- -------------- $27.00 - $33.06 4,766,109 9.12 years $27.39 903,438 $27.00
Restricted Stock In November 1997, the Company issued 948,527 shares of restricted Class A Common Stock in connection with the termination of the CIT Career Incentive Plan. Restricted shares of 919,879 and 948,527 were outstanding at December 31, 1998 and 1997, respectively. Such shares were issued at fair market value, which was $27.00 per share on the issue date. These shares vest on the third anniversary of the date of grant. The holder of restricted stock generally has the rights of a stockholder of the Company, including the right to vote and to receive cash dividends. For the years ended December 31, 1998 and 1997, expenses in connection with restricted stock amounted to $5.2 million and $9.0 million, respectively. 49 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CIT Career Incentive Plan Prior to the termination of the CIT Career Incentive Plan in conjunction with the IPO, phantom shares granted under the plan entitled the participant to receive, at the end of the three year performance period, a specified amount of cash. Following the end of the performance period, one-third of the phantom shares vested immediately and one-third vested at the end of each of the next two years. The Company terminated the CIT Career Incentive Plan as of November 13, 1997 and extinguished all phantom shares of stock, by making a cash payment and granting restricted shares of Class A Common Stock and stock options. At the employee's option, all or part of the cash component of the termination could either be paid in 1998 in cash or deferred in up to five annual installments. For the years ended December 31, 1997 and 1996, amounts charged to expense for the CIT Career Incentive Plan amounted to $20.1 million and $9.5 million, respectively. All charges relating to the termination of the Career Incentive Plan are included in 1997 expense. Employee Stock Purchase Plan In 1998, the Company adopted an Employee Stock Purchase Plan (the "ESPP"). Under the ESPP, the Company is authorized to issue up to 500,000 shares of common stock to eligible employees. Under the terms of the ESPP, employees can choose to have between 1% and 10% of their base salary withheld to purchase the Company's stock at 85% of the fair market value. During 1998, the Company sold 21,214 shares to employees under the ESPP. Accounting for Stock-Based Compensation Plans The Company has elected to apply Accounting Principles Board Opinion 25 ("APB 25") rather than the optional provisions of Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") in accounting for its stock-based compensation plans. Under APB 25, the Company does not recognize compensation expense on the issuance of its stock options because the option terms are fixed and the exercise price equals the market price of the underlying stock on the grant date. As required by SFAS 123, the Company has determined the pro forma information as if the Company had accounted for stock options granted under the fair value method of SFAS 123. Had the compensation cost of the Company's stock-based compensation plans been determined based on the operational provisions of SFAS 123, the Company's net income for 1998 and net income per diluted share would have been $333.4 million and $2.04, compared to $338.8 million and $2.08, as reported. For 1997, net income and net income per diluted share would have been $288.7 million and $1.81, compared to $310.1 million and $1.95, as reported. Note 15--Lease Commitments The Company has entered into noncancellable long-term lease agreements for premises and equipment. The following table presents future minimum rentals under such noncancellable leases that have initial or remaining terms in excess of one year at December 31, 1998. Years Ended December 31, ------------------------ Dollars in Millions 1999 ............................................... $ 22.8 2000 ............................................... 19.7 2001 ............................................... 17.4 2002 ............................................... 15.9 2003 ............................................... 21.2 Thereafter ......................................... 28.0 ------ Total ........................................... $125.0 ====== 50 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In addition to fixed lease rentals, leases require payment of maintenance expenses and real estate taxes, both of which are subject to escalation provisions. Minimum payments have not been reduced by minimum sublease rentals of $13.9 million due in the future under noncancellable subleases. Rental expense, net of sublease income on premises and equipment, was as follows. Years Ended December 31, --------------------------- 1998 1997 1996 ---- ---- ---- Dollars in Millions Premises ......................................... $ 17.1 $ 19.6 $ 18.0 Equipment ........................................ 6.5 6.0 6.3 Less sublease income ............................. (1.3) (1.2) (1.2) ------ ------ ------ Total ......................................... $ 22.3 $ 24.4 $ 23.1 ====== ====== ====== Note 16--Legal Proceedings In the ordinary course of business, there are various legal proceedings pending against the Company. Management believes that the aggregate liabilities, if any, arising from such actions will not have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company. Note 17--Credit-Related Commitments In the normal course of meeting the financing needs of its customers, the Company enters into various credit-related commitments. These financial instruments generate fees and involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the Consolidated Balance Sheets. To minimize potential credit risk, the Company generally requires collateral and other credit-related terms and conditions from the customer. At the time credit-related commitments are granted, management believes the fair value of the underlying collateral and guarantees approximates or exceeds the contractual amount of the commitment. In the event a customer defaults on the underlying transaction, the maximum potential loss to the Company will be the contractual amount outstanding less the value of all underlying collateral and guarantees. The accompanying table summarizes the contractual amounts of credit-related commitments.
At December 31 ----------------------------------------------------------- Due to expire ------------------------ Total Total Within After Outstanding Outstanding one year one year 1998 1997 -------- -------- ----------- ----------- Dollars in Millions Unused commitments to extend credit Financing and leasing assets ................ $ 1,684.9 $ 192.0 $ 1,876.9 $ 1,608.2 Letters of credit and acceptances Standby letters of credit ................... 152.2 4.2 156.4 209.6 Other letters of credit ..................... 189.5 10.6 200.1 181.1 Acceptances ................................. 12.2 -- 12.2 24.0 Guarantees ..................................... 169.9 68.9 238.8 200.9 Foreign exchange contracts ..................... 2.2 -- 2.2 1.1
Note 18--Fair Values of Financial Instruments Statement of Financial Accounting Standards No. 107 "Disclosures About Fair Value of Financial Instruments" ("SFAS 107") requires disclosure of the estimated fair value of the Company's financial instruments, excluding leasing transactions accounted for under SFAS 13. The fair value estimates are made at a discrete point in time based on relevant market information and information about the financial instrument. Since no established trading market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current 51 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involving uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions or estimation methods may significantly affect the estimated fair values. Because of these limitations, management provides no assurance that the estimated fair values presented would necessarily be realized upon disposition or sale. Actual fair values in the marketplace are affected by other significant factors, such as supply and demand, investment trends, and the motivations of buyers and sellers, which are not considered in the methodology used to determine the estimated fair values presented. In addition, fair value estimates are based on existing on-and off-balance sheet financial instruments without attempting to estimate the value of future business transactions and the value of assets and liabilities that are part of the Company's overall value but are not considered financial instruments. Significant assets and liabilities that are not considered financial instruments include customer base, operating lease equipment, premises and equipment, assets received in satisfaction of loans, and deferred tax balances. In addition, tax effects relating to the unrealized gains and losses (differences in estimated fair values and carrying values) have not been considered in these estimates and can have a significant effect on fair value estimates. The carrying amounts for cash and cash equivalents approximate fair value because they have short maturities and do not present significant credit risks. Credit-related commitments, as disclosed in Note 17, are primarily short term floating rate contracts whose terms and conditions are individually negotiated, taking into account the creditworthiness of the customer and the nature, accessibility and quality of the collateral and guarantees. Therefore, the fair value of credit-related commitments, if exercised, would approximate their contractual amounts. Estimated fair values, recorded carrying values, and various assumptions used in valuing the Company's financial instruments, excluding leasing transactions accounted for under SFAS 13, at December 31, 1998 and 1997 are set forth below.
1998 1997 ---------------------------- ------------------------------ Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value Asset Asset Asset Asset (Liability) (Liability) (Liability) (Liability) ------------- ------------ ------------- ------------- Dollars in Millions Finance receivables - loans (a) ................ $15,474.0 $15,772.2 $13,821.1 $14,028.2 Consumer finance receivables held for sale ..... 987.4 987.4 268.2 268.2 Other assets (b) ............................... 469.3 480.9 383.9 420.9 Commercial paper (c) ........................... (6,144.1) (6,144.1) (5,559.6) (5,559.6) Fixed rate senior notes and subordinated fixed rate notes (d) ........................ (8,232.3) (8,365.5) (6,893.8) (6,924.1) Variable rate notes (d) ........................ (4,275.0) (4,272.3) (2,861.5) (2,856.5) Credit balances of factoring clients & accrued liabilities and payables (e) ........ (1,833.6) (1,833.6) (1,714.0) (1,714.0) Company--obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the Company (f) ................................. (250.0) (263.4) (250.0) (253.8) Derivative financial instruments (g) Interest rate swaps Off--balance sheet assets ...................... -- 11.6 -- 1.2 Off--balance sheet liabilities -- (79.0) -- (46.6) Cross currency assets .......................... -- 25.6 -- 5.2 Cross currency liabilities ..................... -- (2.7) -- (12.0)
- -------------------------------------------------------------------------------- (a) The fair value of performing fixed-rate loans was estimated based upon a present value discounted cash flow analysis, using interest rates that were being offered at the end of the year for loans with similar terms to borrowers of similar credit quality. Discount rates used in the present value calculation range from 7.59% to 8.67% for 1998 and 8.21% to 9.20% for 1997. The maturities used represent the average contractual maturities adjusted for prepayments. For floating rate loans that reprice frequently and have no significant change in credit quality, fair value approximates carrying value. The net carrying value of lease finance receivables not subject to fair value disclosure totaled $4.1 billion in 1998 and $3.7 billion in 1997. 52 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (b) Other assets subject to fair value disclosure include accrued interest receivable and investment securities. The carrying amount of accrued interest receivable approximates fair value. Investment securities actively traded in a secondary market were valued using quoted available market prices. Investments not actively traded in a secondary market were valued based upon recent selling price or present value discounted cash flow analysis. The carrying value of other assets not subject to fair value disclosure totaled $406.4 million in 1998 and $281.9 million in 1997. (c) The estimated fair value of commercial paper approximates carrying value due to the relatively short maturities. (d) Fixed rate notes were valued using a present value discounted cash flow analysis with a discount rate approximating current market rates for issuances by the Company of similar term debt at the end of the year. Discount rates used in the present value calculation ranged from 4.83% to 6.04% in 1998 and 5.23% to 6.60% in 1997. The estimated fair value for variable rate notes differs from carrying value as a result of a foreign denominated issuance. (e) The estimated fair value of credit balances of factoring clients approximates carrying value due to their short settlement terms. Accrued liabilities and payables with no stated maturities have an estimated fair value that approximates carrying value. The carrying value of other liabilities not subject to fair value disclosure totaled $866.5 million in 1998 and $752.3 million in 1997. (f) Company-obligated mandatorily redeemable preferred capital securities of subsidiary trust holding solely debentures of the Company were valued using a present value discounted cash flow analysis with a discount rate approximating current market rates of similar issuances at the end of the year. (g) As previously disclosed in Note 7--Derivative Financial Instruments, the notional principal amount of interest rate swaps designated as hedges against the Company's debt totaled $4.3 billion at December 31, 1998 ($0.7 billion of which related to interest rate swaps whose fair market value represented an asset and $3.6 billion related to interest rate swaps whose fair market value represented a liability, after adjusting for master netting agreements) and $3.6 billion at December 31, 1997 ($0.8 billion of assets and $2.8 billion of liabilities). The notional principal amount of cross currency interest rate swaps totaled $218.6 million at December 31, 1998 and 1997. The estimated fair values of derivative financial instruments are obtained from dealer quotes and represent the net amount receivable or payable to terminate the agreement, taking into account current market interest rates and counterparty credit risk. Note 19--Investments in Debt and Equity Securities The Company has decided to adopt early the provisions of Statement of Financial Accounting Standards No. 134, "Accounting for Mortgaged-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" ("SFAS 134"). Among other provisions, SFAS 134 requires that after the securitization of mortgage loans held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed securities or other retained interests based on its ability and intent to sell or hold those investments. At December 31, 1998 and 1997, the Company's investments in debt and equity securities designated as available for sale and subject to the provisions of Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities," as amended by SFAS 134, totaled $238.6 million and $233.6 million, respectively. Included in the 1997 balance is $38.2 million relating to securitized home equity loans which were classified as trading. Unrealized gains and losses, representing the difference between carrying value and current fair market value, were not significant. Included in the Company's investments in debt and equity securities are retained interests in securitized assets of $222.8 million at December 31, 1998 and $214.5 million at December 31, 1997. Retained interests include interest-only receivables, retained subordinated securities, and cash reserve accounts related to fifteen securitizations from 1992 through 1998. The carrying value of the retained interests in securitized assets is reviewed periodically for valuation impairment. Ranges of key economic assumptions used in calculating the fair value of the retained interests in securitized assets by type of product at December 31, 1998 were as follows:
Manufactured Recreation Home Recreational Housing Vehicle Equity Boat -------------- ------------- ----------------- ----------------- Prepayment speed ..................... 225%-290%(1) 21.5%-24.4%(2) 23.6%-29.9%(2)(3) 21.0%-21.5%(2)(3) Expected credit losses (4) ........... 0.90%-1.75% 0.21%-1.15% 0.87%-0.95% 0.71%-0.92% Weighted average discount rate ....... 8.00% 8.00% 12.00% 8.50%
- -------------------------------------------------------------------------------- (1) Based upon MHP, prepayment ramp commonly used in the manufactured housing sector. MHP assumes a CPR (constant prepayment rate) for a newly originated loan equal to 3.7% in month one, increasing to 6% in month 24, then remaining constant at 6%. (2) Based upon CPR. CPR expresses prepayments as a function of the declining amount of loans at a compound annual rate. (3) Implied cumulative remaining CPR based upon prepayment ramps developed for each individual collateral pool. (4) Annualized rate based upon average outstanding loan balances. 53 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 20--Certain Relationships and Related Transactions The Company has in the past and may in the future enter into certain transactions with affiliates of the Company. It is anticipated that such transactions will be entered into at a fair market value for the transaction. The Company's interest-bearing deposits generally represent overnight money market investments of excess cash that are maintained for liquidity purposes. From time to time, the Company may maintain such deposits with DKB or Chase. At December 31, 1998 and December 31, 1997, the Company's credit line coverage with 53 banks totaled $5.0 billion of committed facilities. DKB was a committed bank under a $1.2 billion revolving credit facility and a $3.7 billion revolving credit facility with commitments of $67.5 million and $210.0 million, respectively, at December 31, 1998, and with commitments of $71.2 million and $213.8 million, respectively, at December 31, 1997. Additional information regarding these credit lines can be found in Note 6--Debt. The Company has entered into interest rate swap and cross currency interest rate swap agreements with financial institutions acting as principal counterparties, including affiliates of DKB. The notional principal amount outstanding on interest rate swap agreements with DKB totaled $220.0 million at both December 31, 1998 and 1997. The notional principal amount outstanding on foreign currency swaps with DKB totaled $168.6 million at year-end 1998 and 1997, respectively. The Company has entered into leveraged leasing arrangements with third party loan participants, including affiliates of DKB. Amounts owed to affiliates of DKB are discussed in Note 3--Finance Receivables. At December 31, 1998 and 1997, the Company had entered into credit-related commitments with DKB in the form of letters of credit totaling $12.2 million and $15.2 million, respectively, equal to the amount of the single lump sum premium necessary to provide group life insurance coverage to certain eligible retired employees and an amount to fund certain overseas finance receivables. The Company has entered into cash collateral loan agreements with DKB pursuant to which DKB made four loans to separate cash collateral trusts in order to provide additional security for payments on the certificates of the related contract trusts. These contract trusts were formed for the purpose of securitizing certain recreation vehicle and recreational marine finance receivables. During 1998, the Company replaced DKB's position in two cash collateral loan agreements with a total payment made to DKB of $5.9 million. At December 31, 1998 and 1997, the principal amount outstanding on the cash collateral loans with DKB was $34.3 million and $45.8 million, respectively. Prior to November 1997, Chase had owned 20% of the Company. At December 31, 1997, Chase was both the agent and a committed bank under the $1.2 billion revolving credit facility and $3.7 billion revolving credit facility referred to above, with commitments of $63.8 million and $191.2 million, respectively. The Company has entered into interest rate and cross currency swap agreements with Chase acting as principle counterparties. At December 31, 1997, the notional principal outstanding on interest rate swap agreements with Chase totaled $475.0 million. At December 31, 1997, the Company held a $9.0 million letter of credit from Chase as additional collateral on a $20.8 million business aircraft loan to a third party. Chase was also indebted to the Company in the amount of $6.7 million for financing relating to the purchase of a business aircraft by Chase, at December 31, 1997. The Company has also entered into various noncancellable long-term facility lease agreements with Chase. Rental expense paid to Chase totaled $0.5 million in 1997. During 1997, the Company purchased finance receivables totaling $39.6 million from Chase, and entered into an arrangement with Chase pursuant to which the Company provides servicing for Chase's recreation vehicle and recreational boat finance receivables portfolio, which had a remaining balance of $1.1 billion at December 31, 1997. 54 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 21--Business Segment Information In 1998, the Company adopted SFAS 131. The prior years' segment information has been restated to conform to the current presentation. Management's Policy in Identifying Reportable Segments The Company's reportable segments are comprised of strategic business units aggregated into segments based upon the commonality of their products, customers, distribution methods, operations and servicing, and the nature of their regulatory environment. Types of Products and Services CIT has three reportable segments, Equipment Financing and Leasing, Commercial Finance and Consumer. Equipment Financing and Leasing offers secured lending and leasing products to midsize and larger companies across a variety of industries including aerospace, construction, rail, machine tool, business aircraft, technology, manufacturing, and transportation. The Commercial Finance segment offers secured lending and receivables collection/management products to small and midsize companies. These include secured revolving lines of credit and term loans, credit protection, accounts receivable collection, import and export financing and factoring, and debtor-in-possession and turnaround financing. The Company's Consumer segment offers retail installment sale products to consumers focused primarily on home equity and retail sales financing secured by recreation vehicles, manufactured housing and recreational boats. Segment Profit and Assets The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies. Since the Company generates a majority of its revenue from interest, fees, and asset gains, management relies primarily on net revenues to assess the performance of the segment. The Company evaluates segment performance based on profit after income taxes, as well as asset growth, credit risk management, and other factors. The Company considers significant long lived assets as equipment on operating lease. 55 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table presents reportable segment information and the reconciliation of segment balances to the consolidated financial statement total as of December 31, 1998, 1997 and 1996.
Equipment Financing Commercial Total Corporate Consolidated and Leasing Finance Consumer Segments and Other Total ----------- ---------- -------- -------- --------- ------------ Dollars in Millions December 31, 1998 Operating revenue .................. $ 616.8 $ 348.7 $ 222.4 $ 1,187.9 $ 41.8 $ 1,229.7 Depreciation on operating leases ... 169.5 -- -- 169.5 -- 169.5 Income taxes ....................... 93.3 84.7 27.2 205.2 (20.2) 185.0 Net income ......................... 193.9 119.1 44.3 357.3 (18.5) 338.8 Total managed assets. .............. 13,367.0 4,996.2 7,771.2 26,134.4 81.9 26,216.3 Expenditures for operating leases .. 1,101.7 -- -- 1,101.7 -- 1,101.7 December 31, 1997 Operating revenue .................. 561.6 343.5 210.9 1,116.0 77.3 1,193.3 Depreciation on operating leases ... 146.8 -- -- 146.8 -- 146.8 Income taxes ....................... 82.9 83.4 31.6 197.9 (19.9) 178.0 Net income ......................... 163.4 112.7 49.6 325.7 (15.6) 310.1 Total managed assets. .............. 11,709.7 4,250.8 6,318.6 22,279.1 65.8 22,344.9 Expenditures for operating leases .. 802.8 -- -- 802.8 -- 802.8 December 31, 1996 Operating revenue .................. 510.5 346.0 169.0 1,025.5 16.5 1,042.0 Depreciation on operating leases ... 121.7 -- -- 121.7 -- 121.7 Income taxes ....................... 69.1 84.5 26.4 180.0 (24.3) 155.7 Net income ......................... 145.4 109.6 40.1 295.1 (35.0) 260.1 Total managed assets. .............. 11,321.6 3,838.1 4,792.7 19,952.4 53.0 20,005.4 Expenditures for operating leases .. 431.2 -- -- 431.2 -- 431.2
Revenues derived from United States based financing and leasing assets were $2,129.9 million, $2,001.6 million, and $1,788.6 million for the years ending December 31, 1998, 1997 and 1996, respectively. Revenues derived from foreign based financing and leasing assets were $140.6 million, $128.9 million, and $101.7 million for the years ending December 31, 1998, 1997, and 1996, respectively. United States based operating lease equipment, net, was $1,960.7 million, $1,397.5 million, and $1,107.9 million at December 31, 1998, 1997, and 1996, respectively. Foreign based operating lease equipment, net, was $813.4 million, $508.1 million, and $294.2 million at December 31, 1998, 1997, and 1996, respectively. 56 THE CIT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 22--Selected Quarterly Financial Data (Unaudited)
1998 ---------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter Year ------- ------- ------- ------- ---- Dollars in Millions (except per share data) Net finance income ............................ $228.0 $240.4 $246.8 $259.1 $974.3 Fees and other income ......................... 66.4 60.7 69.0 59.3 255.4 Salaries and general operating expenses ....... 101.7 104.0 105.3 106.8 417.8 Provision for credit losses ................... 22.5 21.9 30.6 24.4 99.4 Depreciation on operating lease equipment ..... 38.3 40.4 42.7 48.1 169.5 Minority interest in subsidiary trust holding solely debentures of the Company ... 4.8 4.8 4.8 4.8 19.2 Provision for income taxes .................... 45.4 46.3 46.3 47.0 185.0 Net income .................................... $ 81.7 $ 83.7 $ 86.1 $ 87.3 $338.8 Net income per diluted share .................. $ 0.50 $ 0.51 $ 0.53 $ 0.54 $ 2.08 1997 ---------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter Year ------- ------- ------- ------- ---- Dollars in Millions (except per share data) Net finance income $214.0 $218.3 $226.0 $229.2 $887.5 Fees and other income 57.7 49.4 78.9 61.8 247.8 Gain on sale of equity interest acquired in loan workout -- 58.0 -- -- 58.0 Salaries and general operating expenses 99.9 110.6 103.6 114.3 428.4 Provision for credit losses 27.0 29.0 35.8 21.9 113.7 Depreciation on operating lease equipment 32.1 33.9 42.3 38.5 146.8 Minority interest in subsidiary trust holding solely debentures of the Company 1.9 4.8 4.8 4.8 16.3 Provision for income taxes 40.7 53.7 43.1 40.5 178.0 Net income $ 70.1 $ 93.7 $ 75.3 $ 71.0 $310.1 Net income per diluted share $ 0.44 $ 0.59 $ 0.48 $ 0.44 $ 1.95
Note 23--Subsequent Event (Unaudited) On March 8, 1999, the Company announced that it would acquire Newcourt Credit Group, Inc. ("Newcourt") in an exchange of common stock. Under the terms of the transaction, which will be accounted for on a purchase basis, 0.92 shares of the Company's common stock will be exchanged for each outstanding share of Newcourt common stock. The transaction is expected to close during the third quarter of 1999, and is conditioned upon, among other things, regulatory and shareholder approval. Newcourt is headquartered in Toronto, Canada and its stock is traded on the New York, Toronto, and Montreal Stock Exchanges. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 57 PART III Item 10. Directors and Executive Officers of the Registrant. Board of Directors We list below the names and ages, followed by a biographical summary, of all members of our Board of Directors as of March 15, 1999. This information was given to us by each Director. No family relationship exists among these persons. Certain Directors are also directors or trustees of privately held businesses or not-for-profit entities that are not referred to below. Name Age Current Position/Offices - ---- --- ------------------------ Hisao Kobayashi ............ 63 Senior Advisor, DKB Chairman of the Board of Directors of CIT Albert R. Gamper, Jr. (1) .. 57 President & Chief Executive Officer of CIT Daniel P. Amos ............. 47 President and Chief Executive Officer of AFLAC Incorporated and American Family Life Assurance Company of Columbus Yoshiro Aoki ............... 53 Managing Director and General Manager, New York Branch, DKB Anthea Disney .............. 52 Chairman and Chief Executive Officer of News America Publishing Group Takasuke Kaneko ............ 56 Deputy President, DKB Joseph A. Pollicino (1) .... 59 Vice Chairman of CIT Paul N. Roth ............... 59 Partner, Schulte Roth & Zabel LLP Peter J. Tobin ............. 55 Dean, College of Business Administration, St. John's University Tohru Tonoike (1) .......... 48 Senior Executive Vice President of CIT Alan F. White .............. 61 Senior Associate Dean, Massachusetts Institute of Technology, Alfred P. Sloan School of Management - -------------------------------------------------------------------------------- (1) Messrs. Gamper, Pollicino, and Tonoike, who are listed above as Directors, are also Executive Officers of CIT. Hisao Kobayashi has served as a Director of CIT since December 1989 and as Chairman of the Board of Directors since July 1992. Since May 1995, Mr. Kobayashi has served as a Senior Advisor of DKB, where he had been an employee since 1959. Prior to his appointment as a Senior Advisor, Mr. Kobayashi served in a number of executive positions at DKB, including most recently as Senior Managing Director from May 1993 and Managing Director from June 1991. Mr. Kobayashi is a director of AFLAC Incorporated, a life insurance company, and Nippon Light Metal Co., Limited, a Japanese corporation. Albert R. Gamper, Jr. has served as President and Chief Executive Officer since December 1989 and as a Director since May 1984. From May 1987 to December 1989, Mr. Gamper served as Chairman and Chief Executive Officer. Prior to December 1989, Mr. Gamper also held a number of executive positions at Manufacturers Hanover Corporation, where he had been employed since 1962. Daniel P. Amos has served as a Director of CIT since January 1998. Mr. Amos has served as President and Chief Executive Officer of AFLAC Incorporated, a life insurance company, and of its principal subsidiary, American Family Life Assurance Company of Columbus, since August 1990. Mr. Amos is a director of AFLAC Incorporated and Georgia Power Company. Yoshiro Aoki has served as a Director of CIT since July 1997. Mr. Aoki has been Managing Director and General Manager of the New York Branch of DKB since May 1998, Director and General Manager of the New York Branch since June 1997, and General Manager of the New York Branch since May 1997. Prior to such time, Mr. Aoki served as General Manager of the Kabutocho Branch of DKB since May 1995 and as Assistant General Manager of the Personnel Division of DKB since February 1991. Anthea Disney has served as Director of CIT since December 1998. Ms. Disney has served as Chairman and Chief Executive Officer of News America Publishing Group, a division of News Corporation Ltd., since October 1997. Ms. Disney has held a number of other positions with News Corporation Ltd. since 1973, including President and Chief Executive Officer of Harper Collins Publishers and Editor-in-Chief of I-Guide. 58 Takasuke Kaneko has served as a Director of CIT since June 1995. He also was a Director and Senior Executive Vice President of CIT from December 1989 to May 1993. Mr. Kaneko is Deputy President of DKB, a position he has held since June 1997. Previously, Mr. Kaneko served as Senior Managing Director of DKB from May 1997 and as Managing Director since May 1995. Prior to such time, Mr. Kaneko served in a number of other positions at DKB, including Director and General Manager of the International Planning and Coordination Division since August 1994, Director and General Manager of the International Planning Division since June 1994 and General Manager of the International Finance Division since May 1993. Joseph A. Pollicino has served as a Director of CIT since August 1986 and as Vice Chairman of its Board of Directors since December 1989. Prior to December 1989, Mr. Pollicino held a number of executive positions at CIT and at Manufacturers Hanover Corporation, where he had been employed since 1957. Paul N. Roth has served as a Director of CIT since December 1989. Mr. Roth has been a partner in the New York law firm of Schulte Roth & Zabel LLP since it was founded in 1969. Peter J. Tobin has served as a Director of CIT since May 1984. Mr. Tobin has been Dean of the College of Business Administration at St. John's University since August 1998. From April 1996 to December 1997, Mr. Tobin was the Chief Financial Officer of The Chase Manhattan Corporation. From January 1992 to April 1996, Mr. Tobin served as Chief Financial Officer of both Chemical Bank and Chemical Banking Corporation, and prior to that he served in a number of executive positions at Manufacturers Hanover Corporation. Tohru Tonoike has served as Senior Executive Vice President and as a Director of CIT since April 1997. Prior to April 1997, Mr. Tonoike was employed by DKB since April 1973, where he served in a number of executive positions including, most recently, Head of the Americas Office in the International Planning and Coordination Division since September 1996, Assistant General Manager of Corporate Finance Division I since September 1993 and Head of the CIT Office in the Americas Division since October 1992. Alan F. White has served as a Director of CIT since March 1998. Mr. White has served as Senior Associate Dean of the Alfred P. Sloan School of Management, Massachusetts Institute of Technology, since 1991. Mr. White has held a number of other positions with the Sloan School of Management since 1973, including responsibility for MIT programs in Asia, Europe, and Latin America and Director of Executive Education at MIT. He is a director of SBS Technologies, Inc. and Celerity Solutions, Inc. Executive Officers We list the names and ages and provide a biographical summary below of all of our executive officers, in addition to Messrs. Gamper, Pollicino and Tonoike, who are listed above as Directors, as of March 15, 1999. No family relationship exists among our executive officers or with any Director. The executive officers were appointed by and hold office at the discretion of the Board of Directors. Name Age Current Position/Offices (1) - ---- --- ---------------------------- Joseph M. Leone ........ 45 Executive Vice President and Chief Financial Officer William M. O'Grady ..... 59 Executive Vice President - Administration Ernest D. Stein ........ 59 Executive Vice President, General Counsel and Secretary - -------------------------------------------------------------------------------- (1) Certain Executive Officers are also directors or trustees of privately held or not-for-profit organizations that are not discussed below. Joseph M. Leone has served as our Executive Vice President and Chief Financial Officer since July 1995. Previously, Mr. Leone served as Executive Vice President of Sales Financing, a business unit of CIT, from June 1991, and in a number of other executive positions with CIT and Manufacturers Hanover Corporation since May 1982. William M. O'Grady has served as our Executive Vice President of Administration since January 1986 and previously served in a number of other executive positions with CIT and with RCA Corporation, a prior owner of CIT, from July 1965. Ernest D. Stein has served as our Executive Vice President, General Counsel and Secretary since February 1994. Previously, Mr. Stein served as Senior Vice President and Deputy General Counsel since April 1993, as Senior Vice President and Assistant General Counsel since March 1992, and in a number of executive positions with Manufacturers Hanover Corporation, including Executive Vice President and General Counsel since December 1985. 59 Item 11. Executive Compensation. COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS Compensation of Directors Directors who are not employees or officers of DKB or CIT or of any subsidiary of either of them are paid an annual Board membership fee of $30,000, an attendance fee of $1,000 for each meeting of the Board of Directors, and an annual membership fee of $5,000 for service on any committee of the Board of Directors. In addition, such Directors are eligible for grants under our Long-Term Equity Compensation Plan. Executive Compensation The table below sets forth the annual and long-term compensation, including bonuses and deferred compensation, of Messrs. Gamper, Pollicino, Leone, O'Grady, and Stein (the "Named Executive Officers") for services rendered in all capacities to CIT during the fiscal years ended December 31, 1998, 1997, and 1996. SUMMARY COMPENSATION TABLE
Long-Term Compensation ---------------------------------------------- Annual Compensation Payouts ------------------------------------------ ---------------------------------- Other Annual Restricted Securities All Other Name and Compen- Stock Underlying LTIP Compen- Principal Positions Year Salary Bonus(1) sation(2) Awards(3) Options(4) Payouts(5) sation (6) ------------------- ---- ------ -------- --------- --------- ---------- ---------- --------- Albert R. Gamper, Jr. .. 1998 $663,471 $467,500 $37,778 $584,394 0 0 $32,939 President and Chief 1997 $632,320 $845,000 $79,531 $3,400,000 619,200 $4,122,261 $79,697 Executive Officer 1996 $600,002 $785,000 $74,319 $0 0 $ 722,369 $30,000 Joseph A. Pollicino .... 1998 $482,127 $312,500 $23,333 $390,645 0 0 $25,685 Vice Chairman 1997 $461,560 $580,000 $47,720 $2,100,000 337,800 $2,533,400 $24,795 1996 $439,998 $550,000 $44,775 $0 0 $ 433,400 $23,600 Joseph M. Leone ........ 1998 $237,000 $120,000 $7,813 $150,023 0 0 $15,880 Executive Vice 1997 $212,962 $200,000 $18,579 $703,150 114,600 $ 829,486 $14,851 President and Chief 1996 $203,231 $170,000 $11,109 $0 0 $ 126,444 $14,129 Financial Officer William M. O'Grady ..... 1998 $240,000 $100,000 $7,051 $125,014 0 0 $16,000 Executive Vice 1997 $220,769 $175,000 $16,826 $634,550 108,700 $ 742,900 $15,164 President 1996 $209,769 $150,000 $ 9,801 $0 0 $ 108,350 $14,391 Administration Ernest D. Stein ........ 1998 $220,000 $75,000 $5,145 $93,777 0 0 $15,200 Executive Vice 1997 $200,769 $130,000 $12,461 $463,050 79,200 $ 538,895 $14,364 President, General 1996 $192,692 $115,000 $ 6,744 $0 0 $ 75,845 $13,708 Counsel and Secretary
- -------------------------------------------------------------------------------- (1) The amounts shown in the Bonus column for 1998 represent the cash amounts paid under CIT's annual bonus plan. All Named Executive Officers elected to receive 50% (the maximum allowable amount) of their bonus for 1998 in restricted stock rather than cash. Pursuant to the ECP, executive officers may elect to receive some or all of their annual bonus plan awards in common stock rather than cash. The restricted stock awarded included a 25% premium in recognition of the election to forego cash compensation. The shares awarded will vest annually in one-third increments commencing in January 2000. For all Named Executive Officers, the amounts shown in the Restricted Stock Awards column for 1998 represent the fair market value on January 28, 1999 (the date of the grant) of the shares of Class A Common Stock awarded at $32.4375 per share. CIT will pay dividends on the restricted stock awarded to each Named Executive Officer to the extent and on the same basis as paid to all other stockholders. (2) The payments set forth in 1998 under Other Annual Compensation represents the dividends paid on restricted stock awarded in 1997. The shares issued in 1997 were as follows: Mr. Gamper - 125,926 shares; Mr. Pollicino - 77,778 shares; Mr. Leone - 26,043 shares; Mr. O'Grady - 23,502 shares; and Mr. Stein - 17,150 shares. Compensation reported for 1997 and 1996 includes dividends paid under The CIT Group Holdings, Inc. Career Incentive Plan (the "CIT Career Incentive Plan"). For the performance period 1993- 60 1995, Mr. Gamper was awarded 20,000 phantom shares, Mr. Pollicino was awarded 12,000 phantom shares, Mr. Leone was awarded 3,500 phantom shares, Mr. O'Grady was awarded 3,000 phantom shares and Mr. Stein was awarded 2,100 phantom shares. The shares awarded for the performance period 1993 - 1995 were vested in one-third increments commencing January 1996. For the performance period 1996 - 1998 under the CIT Career Incentive Plan, Mr. Gamper was awarded 20,000 phantom shares, Mr. Pollicino was awarded 12,000 phantom shares, Mr. Leone was awarded 4,100 phantom shares, Mr. O'Grady was awarded 3,700 phantom shares and Mr. Stein was awarded 2,700 phantom shares. We terminated the CIT Career Incentive Plan in conjunction with our initial public offering in 1997. (3) The number and value at December 31, 1998 of restricted stock awarded in 1997 based upon the closing market price of $31.8125 per share for CIT's Class A Common Stock was as follows: Mr. Gamper - 125,926 shares ($4,006,021); Mr. Pollicino - 77,778 Shares ($2,474,313); Mr. Leone - 26,043 shares ($828,493); Mr. O'Grady - 23,502 ($747,657); and Mr. Stein - 17,150 ($545,584). (4) Stock options to purchase Class A Common Stock awarded under the ECP. (5) The payments set forth under LTIP Payouts represent the payout of shares vested under the CIT Career Incentive Plan. The payouts in 1996 and 1997 were for shares awarded for the performance period 1993 - 1995. Also included under LTIP Payouts for 1997 is the one-time cash payout related to the termination of the CIT Career Incentive Plan for the 1996 - 1998 performance period. (6) The payments set forth under "All Other Compensation" include the matching employer contribution to each participant's account and the employer flexible retirement contribution to each participant's flexible retirement account under The CIT Group Holdings, Inc. Savings Incentive Plan (the "CIT Savings Plan"). We made the matching employer contribution pursuant to a compensation deferral feature of the CIT Savings Plan under Section 401(k) of the Internal Revenue Code of 1986. Each of the Named Executive Officers received a contribution of $6,400 under the employer match and a contribution of $6,400 under the employer flexible retirement account. The payments set forth under "All Other Compensation" also included contributions to each participant's account under The CIT Group Holdings, Inc. Supplemental Savings Plan ("the "CIT Supplemental Savings Plan"), which is an unfunded non-qualified plan. For 1998, they are as follows: Mr. Gamper - $20,139, Mr. Pollicino - $12,885, Mr Leone - $3,080, Mr. O'Grady - $3,200 and Mr. Stein - $2,400. In 1997, Mr. Gamper received payments designed to cover the 1.45% Medicare tax liability created by vesting in our deferred retirement benefits. Stock Option Awards During 1998 Stock options and other rights related to Class A Common Stock may be awarded to executives under the ECP. There were no stock options awarded to the Named Executive Officers in 1998. The following table gives additional information on options exercised in 1998 by the Named Executive Officers and on the number and value of options held by the Named Executive Officers at December 31, 1998. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
Number of Securities Value Underlying Unexercised Unexercised In-the-Money Options at Options at 12/31/98 12/31/98 Shares ------------- ------------- Acquired Value Exercisable/ Exercisable/ Name on Exercise Realized Unexercisable Unexercisable ---- ----------- -------- ------------- ------------- Albert R. Gamper, Jr. ......... 0 $0 117,933/501,267 $567,553/$2,412,347 President and Chief Executive Officer Joseph A. Pollicino ........... 0 $0 64,333/273,467 $309,603/$1,316,060 Vice Chairman Joseph M. Leone ............... 0 $0 19,333/95,267 $93,040/$458,472 Executive Vice President and Chief Financial Officer William M. O'Grady ............ 0 $0 18,033/90,667 $86,784/$436,335 Executive Vice President Administration Ernest D. Stein ............... 0 $0 13,133/66,067 $63,203/$317,947 Executive Vice President, General Counsel and Secretary
61 The options reported are non-qualified stock options to purchase shares of Class A Common Stock awarded under the ECP. The exercise price of the options is $27.00 per share and the closing trading price on the NYSE of Class A Common Stock at December 31, 1998 was $31.8125. Benefit Plans Employee Stock Purchase Plan Subject to approval by the stockholders, the Board of Directors has adopted The CIT Group, Inc. Employee Stock Purchase Plan (the "ESPP"), which offers our employees the opportunity to purchase Class A Common Stock at a discount through payroll deductions. The ESPP is intended to meet the requirements of Section 423 of the Code. All of our regular full-time and part-time employees are eligible to participate in the ESPP beginning with the first Offering Period that starts following their employment. Employees desiring to purchase stock through the ESPP may elect to contribute 1% to 10% in any payroll period. These payroll deductions accumulate during the three-month "Offering Period". At the end of each Offering Period, the payroll deductions are used to purchase Class A Common Stock at a price equal to 85% of the lower of the fair market value of the Class A Common Stock at the beginning or end of the Offering Period. (Prior to the amendment of the ESPP on January 28, 1999, effective for the Offering Period commencing on October 1, 1998, the option price per share equaled 85% of the fair market value of a share of Common Stock on the last day of the Offering Period, and effective for the Offering Period commencing on January 1, 1999, the option price per share equaled the lesser of (i) 85% of the fair market value of a share of Common Stock on January 28, 1999 or (ii) 85% of the fair market value of a share of Common Stock on the last business day of the Offering Period.) An employee will recognize no taxable income or gain until he or she sells the Class A Common Stock and, if the employee meets certain holding period requirements, he or she will also be entitled to favorable tax treatment upon such sale. We will use either treasury shares, authorized but unissued shares, or publicly traded shares to satisfy purchases under the ESPP. The adoption of the ESPP by the stockholders of CIT is the subject of Proposal 3. Retirement Plans Effective January 1, 1990, The CIT Group Holdings, Inc. Retirement Plan (the "CIT Retirement Plan") was established. Assets necessary to fund the CIT Retirement Plan were transferred from the MHC Retirement Plan, Inc. (the "MHC Retirement Plan"), the predecessor plan in which our employees participated. Accumulated years of benefit service under the MHC Retirement Plan are included in the benefits formula of the CIT Retirement Plan, which covers officers and salaried employees who have one year of service and have attained age 21. Subject to certain exceptions, at the normal retirement age of 65, an employee's pension is 1.25% of final average salary, as defined below, for each of the first 20 years of benefit service as a participant and 0.75% of such salary for each year of the next 20 years of benefit service. In general, an employee who was a participant in the MHC Retirement Plan before 1985 will receive a pension of not less than 2.0% of final average salary for each of the first 20 years of benefit service as a participant and 1.0% of such salary for each of the next 20 years of benefit service, reduced by 0.4% of the participant's covered compensation for each year of such benefit service up to a maximum of 35 years and further reduced by the value of certain benefits under the CIT Savings Plan. An employee who was a participant in the former CIT Retirement Plan on June 30, 1986 will not receive a pension of less than 1.1% of final average salary up to certain Social Security limits plus 1.5% of final average salary in excess of the Social Security limits, for each year of benefit service to a maximum of 35 years, reduced by certain benefits under the CIT Savings Plan. "Final average salary" is the highest average salary received in any five consecutive years in the last ten years. "Salary" includes all wages paid by CIT, including before-tax contributions made to the CIT Savings Plan and salary reduction contributions pursuant to any Section 125 Plan, but excluding commissions, bonuses, incentive compensation, overtime, reimbursement of expenses, directors' fees, severance pay and deferred compensation. This salary is comparable to the "Salary" shown in the Summary Compensation Table. After completing five years of service, an employee whose employment with CIT has terminated is entitled to a benefit, as of the employee's normal retirement date, equal to the benefit earned to the date of termination of employment, or an actuarially reduced benefit commencing at any time after age 55 if the participant is eligible for early retirement under the CIT Retirement Plan. Certain death benefits are available to eligible surviving spouses of participants. 62 Since various laws and regulations set limits on the amounts allocable to a participant under the CIT Savings Plan and benefits under the CIT Retirement Plan, we have established the CIT Supplemental Retirement Plan. The CIT Supplemental Retirement Plan provides retirement benefits on an unfunded basis to participants who retire from CIT (whose benefits under the CIT Retirement Plan would be restricted by the limits) of an amount equal to the difference between the annual retirement benefits permitted and the amount that would have been paid but for the limitations imposed. The amounts set forth in the table are the amounts which would be paid to employees hired before 1985 pursuant to the CIT Retirement Plan and the CIT Supplemental Retirement Plan at a participants' normal retirement age assuming the indicated final average salary and the indicated years of benefit service and assuming that the straight life annuity form of benefit will be elected and that CIT Supplemental Retirement Plan benefits will be paid in the form of an annuity. The amounts may be overstated to the extent that they do not reflect the reduction for any benefits under the CIT Savings Plan. PENSION PLAN TABLE Annual Benefits Based on Years of Credited Service (1) ------------------------------------------------------ Final Average Salary of Employee 15 20 25 30 35 40 - --------- -- -- -- -- -- -- 150,000 43,016 57,355 64,194 71,033 77,872 85,372 200,000 58,016 77,355 86,694 96,033 105,372 115,372 250,000 73,016 97,355 109,194 121,033 132,872 145,372 300,000 88,016 117,355 131,694 146,033 160,372 175,372 350,000 103,016 137,355 154,194 171,033 187,872 205,372 400,000 118,016 157,355 176,694 196,033 215,372 235,372 450,000 133,016 177,355 199,194 221,033 242,872 265,372 500,000 148,016 197,355 221,694 246,033 270,372 295,372 550,000 163,016 217,355 244,194 271,033 297,872 325,372 600,000 178,016 237,355 266,694 296,033 325,372 355,372 650,000 193,016 257,355 289,194 321,033 352,872 385,372 700,000 208,016 277,355 311,694 346,033 380,372 415,372 750,000 223,016 297,355 334,194 371,033 407,872 445,372 800,000 238,016 317,355 356,694 396,033 435,372 475,372 - -------------------------------------------------------------------------------- (1) At December 31, 1998, Messrs. Gamper, Pollicino, Leone, O'Grady and Stein had 31, 34, 14, 29 and 5 years of benefit service respectively. Executive Retirement Plan The Named Executive Officers are participants under the Executive Retirement Plan. The benefit provided is life insurance equal to approximately three times salary during such participant's employment, with a life annuity option payable monthly by CIT upon retirement. The participant pays a portion of the annual premium and we pay the balance on behalf of the participant. We are entitled to recoup our payments from the proceeds of the policy in excess of the death benefit. Upon the participant's retirement, a life annuity will be payable out of our current income and we anticipate recovering the cost of the life annuity out of the proceeds of the life insurance policy payable upon the death of the participant. In addition to the table of pension benefits shown above, we are conditionally obligated to make annual payments under the Executive Retirement Plan in the amounts indicated to the Named Executive Officers at retirement: Mr. Gamper, $403,130, Mr. Pollicino, $255,642, Mr. Leone, $155,392, Mr. O'Grady, $120,053, and Mr. Stein, $72,351. Compensation Committee Interlocks and Insider Participation There are no interlocking relationships between any member of the Compensation Committee and any of our executive officers that would require disclosure under the rules of the Securities and Exchange Commission. The Compensation Committee consists entirely of independent, non-employee directors. 63 Employment Agreements Messrs. Gamper and Pollicino have employment agreements with CIT that extend until December 31, 1999. Mr. Gamper's agreement provides that he will serve as the Chief Executive Officer and President. Mr. Pollicino's agreement provides that he will serve as the Vice Chairman. Each will serve as a member of our Board of Directors. The agreements provide for the payment of an annual base salary of not less than the amount that each received prior to the date of his last extension on April 1, 1997. Pursuant to their employment agreements, each individual's base salary and performance is reviewed by the Board of Directors during the term of the agreement pursuant to our normal practices, subject to increases but not to decreases. The employment agreements provide for participation in all executive bonus and incentive compensation plans. Mr. Leone, Mr. O'Grady, and Mr. Stein also have employment agreements with CIT that extend until December 31, 2000. Mr. Leone's, Mr. O'Grady's, and Mr. Stein's respective agreements provide for the payment of an annual base salary of not less than the amount received prior to the date of their last extension on November 1, 1998, to be reviewed by the Chief Executive Officer or his designee pursuant to our normal practices, subject to increases but not to decreases. The employment agreements also provide for participation in all executive bonus and incentive compensation plans. Termination And Change-In-Control Arrangements Mr. Gamper's and Mr. Pollicino's employment agreements with CIT provide that if their employment is terminated "without Cause" (as defined in the agreement), or if they resign for "Good Reason" (as defined in the agreement) they will be entitled to receive severance payments equal to their base salary for thirty-six months provided that they do not violate the confidentiality or non-competition provisions of the agreement (the latter of which, subject to certain exceptions, extend for up to two years from the date of termination of employment), in which case we would have no obligation to make any remaining payments. Further, they will be entitled to receive, among other things, all previously earned and accrued entitlements and benefits of CIT, full employee welfare benefit coverage, outplacement services, any awards due under the ECP, and all benefits payable under our Executive Benefits Program. Each of the employment agreements of Mr. Leone, Mr. O'Grady, and Mr. Stein provide that if his employment is terminated "without Cause" (as defined in the agreement) or if he resigns for "Good Reason" (as defined in the agreement), he will be entitled to receive severance payments equal to two times his total cash compensation (as defined in the agreement) provided that he does not violate the confidentiality or non-competition provisions of the agreement, in which case we would have no obligation to make any remaining payments. The severance payments are reduced by any "special payment" received. Further, upon such termination or resignation, he will be entitled to all previously earned and accrued entitlements and benefits, continued employee welfare benefit coverage for 24 months, two years benefit service and age credit for purposes of calculating benefits under CIT's Retirement Plan and Executive Retirement Plan (as defined in the agreement), outplacement services, any awards due under the ECP, and all benefits payable under our Executive Benefits Program. If CIT terminates Messrs. Gamper, Pollicino , Leone, O'Grady, or Stein for Cause, or if they terminate their employment for any reason other than Good Reason, they will be entitled to all previously earned and accrued entitlements and benefits of CIT. If, during the term of Mr. Gamper's and Mr. Pollicino's employment agreements, a "Change of Control" (as defined in the agreement) occurs on or prior to December 31, 1999, they each will be entitled to receive a "special payment". With respect to Mr. Gamper, the amount of such a special payment shall equal the sum of his prior four years annual bonuses under the CIT Bonus Plan, and with respect to Mr. Pollicino, the amount of such special payment shall equal the sum of his prior three years annual bonuses under the CIT Bonus Plan. Notwithstanding the foregoing provision, the special payments shall be forfeited if during the one-year period following the date of a Change of Control: (i) their employment is involuntarily terminated by CIT for cause; (ii) they voluntarily terminate employment with CIT for any reason other than good reason; or (iii) they breach any non-compete or confidentiality covenant contained in their employment agreements. 64 In the event of a Change of Control during the term of employment, Mr. Gamper and Mr. Pollicino may elect, on 90 days' notice, to terminate their employment and have such termination deemed "Good Reason" upon the anniversary of the Change of Control. In the event the first anniversary of such a Change of Control occurs after the end of the term, the term shall be extended to the first anniversary of the Change of Control. If a Change of Control occurs on or prior to December 31, 2000, Mr. Leone, Mr. O'Grady, and Mr. Stein will be entitled to receive a "special payment". The amount of such special payment shall equal the sum of their respective prior two years annual bonuses under the CIT Bonus Plan. The special payment will be payable over a two year period. Notwithstanding the above, the special payment will be forfeited if during the two year period commencing on the date of such Change of Control (a) their employment is involuntarily terminated by CIT for cause, (b) they voluntarily terminate employment with CIT for any reason other than "Good Reason" as defined in their respective employment agreements, or (c) they breach the non-compete or confidentiality provisions in their agreements. In addition, if during the term of their respective employment agreements, a "Change of Control" (as defined in the agreement) occurs, the terms of their employment agreements are extended until the second anniversary of the Change of Control. In the event Messrs. Gamper, Pollicino, Leone, O'Grady, or Stein become subject to excise taxes under Section 4999 of the Internal Revenue Code, their employment agreements provide a gross up payment equal to the amount of such excise taxes. Under the ECP, if a participant's employment is terminated by CIT, or a successor to CIT, on or after a Change of Control and prior to the first anniversary of such Change of Control: (i) all options and SARs, other than options granted in consideration of the termination of the CIT Career Incentive Plan or otherwise granted in connection with the initial public offering, held by the participant, if any, shall become immediately exercisable; (ii) all restrictions and limitations imposed on restricted stock, other than restricted stock granted in consideration of the termination of the CIT Career Incentive Plan or otherwise granted in connection with the initial public offering, held by the participant, if any, shall lapse. The vesting of all Options and restricted stock granted in consideration of the termination of the CIT Career Incentive Plan or otherwise granted in connection with the initial public offering would be accelerated in the event the participant is terminated on or after the Change of Control and during the five-year period following the initial public offering. Item 12. Security Ownership of Certain Beneficial Owners and Management. PRINCIPAL SHAREHOLDERS Security Ownership of Certain Beneficial Owners The table below shows, as of February 16, 1999, the name and address of each person known to us that beneficially owns in excess of 5% of any class of Voting Stock.
Amount and Nature of Beneficial Ownership --------------------------------------------- Title of Class Name and Address of Sole Voting and Shared Voting and Percent of Stock Beneficial Owner Investment Power Investment Power of Class -------- ---------------- ---------------- ---------------- -------- Class A Common Stock The Dai-Ichi Kangyo Bank, 71,000,000 0 43.8% Limited 1-5, Uchisaiwaicho, 1-chome Chiyoda-ku, Tokyo 100 Japan Class A Common Stock Wellington Management Company, LLP 0 10,767,381 6.65% 75 State Street Boston, MA 02109
65 Security Ownership Of Directors And Executive Officers The table below shows, as of February 16, 1999, the number of shares of Class A Common Stock owned by each Director, by the Named Executive Officers, and by the Directors and Named Executive Officers as a group. Amount and Nature of Beneficial Ownership Percentage Name of Individual (Class A Common Stock)(1)(2)(3) of Class ------------------ ------------------------------- -------- Hisao Kobayashi .................... 4,100 * Albert R. Gamper, Jr. (4) .......... 279,247 * Daniel P. Amos (5) ................. 107,030 * Yoshiro Aoki ....................... 0 * Anthea Disney ...................... 0 * Takasuke Kaneko .................... 0 * Joseph A. Pollicino ................ 155,279 * Paul N. Roth ....................... 9,000 * Peter J. Tobin ..................... 10,000 * Tohru Tonoike ...................... 0 * Alan F. White ...................... 2,366 * Joseph M. Leone .................... 55,203 * William M. O'Grady ................. 50,593 * Ernest D. Stein .................... 43,361 * All Directors and executive officers as a group (14 persons) .. 716,179 * - -------------------------------------------------------------------------------- * Represents less than 1% of the total outstanding Class A Common Stock. (1) Includes shares of Restricted Stock issued in lieu of cash in connection with the 1998 CIT Bonus Plan, for which the holders have voting rights, but for which ownership has not vested, in the following amounts: Mr. Gamper - 18,016 shares, Mr. Pollicino - 12,043 shares, Mr. Leone - 4,625 shares, Mr. O'Grady - 3,854 shares, and Mr. Stein - 2,891 shares. (2) Includes shares of Restricted Stock awarded under the Long-Term Equity Compensation Plan in connection with the termination of The CIT Career Incentive Plan, for which the holders have voting rights, but for which ownership has not vested, in the following amounts: Mr. Gamper - 125,926 shares, Mr. Pollicino - 77,778 shares, Mr. Roth - 5,000 shares, Mr. Tobin - 5,000 shares, Mr. Leone - 26,043 shares, Mr. O'Grady - 23,502 shares, and Mr. Stein - 17,150 shares. (3) Includes shares of stock issuable pursuant to stock options awarded under the Long-Term Equity Compensation Plan that have vested or will vest within 60 days after March 30, 1999, in the following amounts: Mr. Gamper - 117,933 shares, Mr. Pollicino - 64,333 shares, Mr. Amos - 1,666 shares, Mr. White - 1,666 shares, Mr. Leone - 19,333 shares, Mr. O'Grady - 18,033 shares, and Mr. Stein - 13,133 shares. (4) Includes 1,100 shares owned by Mr. Gamper's daughter and 1,100 shares owned by Mr. Gamper's son, as to which Mr. Gamper disclaims beneficial ownership. (5) Includes 56,464 shares owned by the Daniel P. Amos and Shannon Amos Foundation, Inc., a Georgia nonprofit corporation, as to which Mr. Amos disclaims beneficial ownership, and 7,000 shares owned by Lapaul, Inc., a Georgia corporation, each of which is controlled by Mr. Amos. Section 16(a) Beneficial Ownership Reporting Compliance Based on our records and other information, we believe that our Directors and officers complied with all applicable SEC filing requirements for reporting beneficial ownership of our equity securities for 1998, except as noted below. Hisao Kobayashi inadvertently failed to file Form 4 for November 1998 to report that he purchased 2,000 shares of Class A Common Stock in our Secondary Offering. Mr. Kobayashi filed a Form 4 to report the purchase in March 1999. 66 Item 13. Certain Relationships and Related Transactions. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS CIT has in the past and may in the future enter into certain transactions with our affiliates. Such transactions have been, and it is anticipated that such transactions will continue to be, entered into at a fair market value for the transaction. Paul N. Roth, a director of CIT, is a partner of Schulte Roth & Zabel LLP, which provides legal services to CIT. Schulte Roth & Zabel LLP has been retained in the past and will continue in the future to serve as outside counsel for DKB. Relationship with DKB DKB beneficially owns 71,000,000 shares of Class A Common Stock of CIT, which represents approximately 43.8% of the outstanding Class A Common Stock. DKB is our largest stockholder and may be able to exercise significant influence over the election of the members of our Board of Directors and over our business and affairs, including any determinations with respect to (i) mergers or other business combinations involving us, (ii) the acquisition or disposition of assets by us, (iii) the incurrence of indebtedness by us, (iv) the issuance of any additional Common Stock or other equity securities, and (v) the payment of dividends with respect to the Common Stock. Set forth below are descriptions of certain agreements, relationships and transactions between CIT and DKB. Regulatory Compliance Agreement DKB is subject to U.S. and Japanese banking laws, regulations, guidelines, and orders that affect permissible activities of CIT. DKB and CIT have entered into a regulatory compliance agreement (the "Regulatory Compliance Agreement") in order to facilitate DKB's compliance with applicable U.S. and Japanese banking laws, or the regulations, interpretations, policies, guidelines, requests, directives, and orders of the applicable regulatory authorities or the staffs thereof or a court (collectively, the "Banking Laws"). That Agreement prohibits us from engaging in any new activity or entering into any transaction for which prior approval, notice or filing is required under Banking Laws without the required prior approval having been obtained, prior notice having been given or made by DKB and accepted or such filings having been made. We are also prohibited from engaging in any activity that would cause DKB, CIT or any affiliate of DKB or CIT to violate any Banking Laws. If, at any time, it is determined by DKB that any activity then conducted by us is prohibited by any Banking Law, we are required to take all reasonable steps to cease such activity. Under the terms of the Regulatory Compliance Agreement, DKB is responsible for making all determinations as to compliance with applicable Banking Laws. The Regulatory Compliance Agreement expires upon the earlier of the date on which DKB owns no shares of Common Stock or DKB, in its sole discretion, requests and obtains an opinion of counsel that (i) DKB will not be required to receive prior approval from or give notice to or make filings with applicable regulatory authorities under the Banking Laws as a result of CIT or any of its subsidiaries engaging in any activity and (ii) DKB and CIT are no longer subject to the jurisdiction of the Banking Laws with respect to the activities or transactions in which CIT may engage. Registration Rights Agreement DKB and CIT entered into a registration rights agreement (the "Registration Rights Agreement"), which provides that, upon the request of DKB, its subsidiaries or certain transferees of Common Stock from DKB or its subsidiaries (each, a "Qualified Transferee"), we will use our best efforts to effect the registration under the applicable federal and state securities laws of any of the shares of Class A Common Stock that DKB may hold or that are issued or issuable upon conversion of any other security that DKB may hold and of any other securities issued or issuable in respect of the Class A Common Stock, in each case for sale in accordance with 67 the intended method of disposition of the holder or holders making such demand for registration, and we will take such other actions as may be necessary to permit the sale thereof in other jurisdictions, subject to certain specified limitations. DKB, any of its subsidiaries, or any Qualified Transferee also has the right, which it may exercise at any time and from time to time, subject to certain limitations, to include any such shares and other securities in other registrations of equity securities of CIT initiated by us on our own behalf or on behalf of our other stockholders. The Company will pay all costs and expenses in connection with each such registration which DKB, any subsidiary thereof or any Qualified Transferee initiates or in which any of them participates. CIT paid such costs and expenses in connection with the Secondary Offering. The Registration Rights Agreement contains indemnification and contribution provisions: (i) by DKB and its permitted assigns for our benefit; and (ii) by us for the benefit of DKB and other persons entitled to effect registrations of Class A Common Stock (and other securities) pursuant to its terms, and related persons. Tax Allocation Agreement DKB does not include us in its consolidated group for federal income tax purposes. DKB includes us in its consolidated group for state income tax purposes only in the State of California. Pursuant to a Tax Allocation Agreement, dated as of October 23, 1991 (the "Tax Allocation Agreement"), CIT and certain other subsidiaries of DKB file a consolidated unitary California franchise tax return and have elected to file that return on a "water's edge" basis. Under the Tax Allocation Agreement, we are obligated to pay to DKB the California franchise tax that we would have paid if we were filing on the same basis we would have filed on had we not entered into the Tax Allocation Agreement, and our liability cannot exceed the tax liability we would have incurred had we not entered into the Tax Allocation Agreement. DKB absorbs any residual cost or benefit of the filing of a consolidated unitary California franchise tax return. Other Transactions At December 31, 1998, our credit line coverage with 53 banks totaled $5.0 billion of committed facilities. At December 31, 1998, DKB was a committed bank under a $1.2 billion revolving credit facility and a $3.7 billion revolving credit facility, with commitments of $67.5 million and $210.0 million, respectively. We have entered into interest rate swap and cross currency interest rate swap agreements with financial institutions acting as principal counterparties, including affiliates of DKB. At December 31, 1998, the notional principal amount outstanding on interest rate swap agreements with DKB and its affiliates totaled $220.0 million. The notional principal amount outstanding on foreign currency swaps totaled $168.6 million with DKB at year-end 1998. We have entered into leveraged leasing arrangements with third party loan participants, including affiliates of DKB. Leveraged lease receivables, which are included in lease receivables on our financial statements, exclude the portion of lease receivables offset by related nonrecourse debt payable to third party lenders, including amounts owed to affiliates of DKB that totaled $431.0 million at year-end 1998. At December 31, 1998, we had entered into credit-related commitments with DKB in the form of letters of credit totaling $12.2 million, equal to the amount of the single lump sum premium necessary to provide group life insurance coverage to certain eligible retired employees and an amount to fund certain overseas finance receivables. We have entered into cash collateral loan agreements with DKB pursuant to which DKB made loans to four separate cash collateral trusts in order to provide additional security for payments on the certificates of the related contract trusts. These contract trusts were formed for the purpose of securitizing certain recreational vehicle and recreational marine finance receivables. During 1998, we replaced DKB's position in two cash collateral loan agreements with a total payment made to DKB of $5.9 million. At December 31, 1998, the principal amount outstanding on the cash collateral loans was $34.3 million. 68 PART IV Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K. (a) The following documents are filed with the Securities and Exchange Commission as part of this report: 1. The financial statements of The CIT Group, Inc. and Subsidiaries as set forth on pages 29-57. 2. All schedules are omitted because they are not applicable or because the required information appears in the consolidated financial statements or the notes thereto. 3. The following is an index of the Exhibits required by Item 601 of Regulation S-K filed with the Securities and Exchange Commission as part of this report: 3.1 Amended and Restated Certificate of Incorporation of The CIT Group, Inc., dated November 12, 1997 (incorporated by reference to Exhibit 3.1 to Form 8-A filed by the Company on October 29, 1997). 3.2 By-Laws of The CIT Group, Inc., dated November 12, 1997 (incorporated by reference to Exhibit 3.2 to Form 8-A filed by the Company on October 29, 1997). 4.1 Form of certificate of Class A Common Stock (incorporated by reference to Exhibit 4.1 to Form 8-A filed by the Company on October 29, 1998). 4.2 Upon the request of the Securities and Exchange Commission, the Company will furnish a copy of all instruments defining the rights of holders of long-term debt of the Company. 10.1 Regulatory Compliance Agreement, dated November 18, 1997 (incorporated by reference to Exhibit 10.4 to Amendment No. 2 to Form S-2 filed by the Company on November 12, 1997). 10.2 Registration Rights Agreement, dated November 18, 1997 (incorporated by reference to Exhibit 10.5 to Amendment No. 2 to Form S-2 filed by the Company on November 12, 1997). 10.3 Employment Agreement of Albert R. Gamper, Jr., dated April 1, 1997, comparable to the agreement for Joseph A. Pollicino (incorporated by reference to Exhibit 10.6 to Amendment No. 2 to Form S-2 filed by the Company on November 12, 1997). 10.4 Employment Agreement of Joseph M. Leone, dated November 2, 1998, comparable to the agreements for William M. O'Grady and Ernest D. Stein. 10.5 The CIT Group Bonus Plan (incorporated by reference to Exhibit 10 (d) to Form 10-K filed by the Company for the fiscal year ended December 31, 1992). 10.6 The CIT Group Holdings, Inc. Supplemental Savings Plan (incorporated by reference to Exhibit 10(f) to Form 10-K filed by the Company for the fiscal year ended December 31, 1992). 10.7 The CIT Group Holdings, Inc. Supplemental Retirement Plan (incorporated by reference to Exhibit 10(g) to Form 10-K filed by the Company for the fiscal year ended December 31, 1992). 10.8 The CIT Group Holdings, Inc. Executive Retirement Plan and New Executive Retirement Plan, each effective as of January 1, 1995 (incorporated by reference to Exhibit 10.12 to Amendment No. 2 to Form S-2 filed by the Company on November 12, 1997). 10.9 The CIT Group, Inc. Long-Term Equity Compensation Plan, dated November 1, 1997 (incorporated by reference to Exhibit 10.13 to Amendment No. 2 to Form S-2 filed by the Company on November 12, 1997). 69 10.10 The CIT Group, Inc. Employee Stock Purchase Plan, dated November 1, 1998. 10.11 Agreement and Plan of Reorganization between The CIT Group, Inc. and Newcourt Credit Group, Inc., dated as of March 7, 1999 (incorporated by reference to Exhibit 99 to Form 8-K filed by the Company on March 16, 1999). 12 Computation of Ratios of Earnings to Fixed Charges. 21 Subsidiaries of the Registrant. 23 Consent of KPMG LLP. 24 Powers of Attorney 27 Financial Data Schedule (filed electronically) (b) A Current Report on Form 8-K, dated October 5, 1998 was filed with the Securities and Commission reporting the Company's announcement of results for the quarter ended September 30, 1998, the declaration of a dividend for the quarter ended September 30, 1998 and the filing of a registration statement with the Securities and Exchange Commission for 49 million shares of Class A Common Stock of the Company. A Current Report on Form 8-K, dated December 2, 1998, was filed with the Securities and Commission regarding the election of an additional director to the Board of Directors of the Company. 70 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE CIT GROUP, INC. By: /S/ ERNEST D. STEIN ----------------------------------------- Ernest D. Stein Executive Vice President, General Counsel and Secretary March 18, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signature and Title Date ------------------- ---- ALBERT R. GAMPER, JR.* - ----------------------------- Albert R. Gamper, Jr. President, Chief Executive Officer and Director (principal executive officer) HISAO KOBAYASHI* - ------------------------------ Hisao Kobayashi Director DANIEL P. AMOS* - ------------------------------ Daniel P. Amos Director YOSHIRO AOKI* - ------------------------------ Yoshiro Aoki Director - ------------------------------ Anthea Disney Director TAKASUKE KANEKO* *By: /s/ ERNEST D. STEIN March 18, 1999 - ------------------------------ ------------------- Takasuke Kaneko Ernest D. Stein Director Attorney-In-Fact JOSEPH A. POLLICINO* - ------------------------------ Joseph A. Pollicino Director - ------------------------------ Paul N. Roth Director PETER J. TOBIN* - ------------------------------ Peter J. Tobin Director TOHRU TONOIKE* - ------------------------------ Tohru Tonoike Director ALAN F. WHITE* - ------------------------------ Alan F. White Director /s/ Joseph M. Leone March 18, 1999 - ------------------------------ Joseph M. Leone Executive Vice President and Chief Financial Officer (principal accounting officer) Original powers of attorney authorizing Albert R. Gamper, Jr., Ernest D. Stein, and James P. Shanahan and each of them to sign on behalf of the above-mentioned directors are held by the Corporation and available for examination by the Securities and Exchange Commission pursuant to Item 302(b) of Regulation S-T. 71 EX-10.4 2 EMPLOYMENT AGREEMENT EXHIBIT 10.4 THE CIT GROUP, INC. November 2, 1998 Mr. Joseph M. Leone 650 CIT Drive Livingston, NJ 07039 Dear Joe: Reference is made to your employment agreement, dated December 29, 1989, with The CIT Group, Inc. (the "Company"), as amended by letter agreements dated November 16, 1992, December 20, 1994 and December 6, 1996 (the "Employment Agreement"). The Board of Directors (the "Board") of the Company is pleased to extend your Employment Agreement with the Company on the following terms and conditions, all other terms and conditions being null and void: 1. Term. This Employment Agreement will be effective as of November 2, 1998. The term of this Employment Agreement (the "Term") will be for a period of twenty-six (26) months beginning on November 2, 1998 and, except as otherwise provided in paragraph 4 below, ending on December 31, 2000. This Employment Agreement and the Term may be extended for one (1) or more additional periods by written agreement signed by you and the Company at any time prior to the end of the Term then in effect. 2. Duties. During the Term, you will serve in such capacities and devote substantially all of your business time and energies to the business of the Company and faithfully, diligently and competently perform such duties, as are assigned to you by the Chief Executive Officer of the Company (the "CEO") or pursuant to his delegation. 3. Compensation and Benefits. In full consideration for all services rendered by you in all capacities during the Term, you will receive the following compensation and benefits: (a) Base Salary. An annual base salary ("Base Salary") of not less than the amount you received immediately prior to the commencement of this current Employment Agreement payable in accordance with the customary payroll practices of the Company. Your Base Salary and performance will be reviewed by the CEO or pursuant to his delegation during the Term pursuant to normal Company practices. Your Base Salary may be increased (but not reduced) by the CEO from time to time, based upon your performance and responsibilities, pursuant to the Company's standard procedures for salary adjustments. (b) Bonuses. You will participate in all executive bonus and incentive compensation plans (collectively, "Incentive Plans") now or hereafter maintained by the Company for which your level of employment makes you eligible in accordance with the Company's policies and the terms of such Incentive Plans. (c) Expense Reimbursement. The Company will reimburse you, in accordance with applicable policies and practices of the Company in effect from time to time, for your ordinary and necessary business expenses. (d) Other Benefits. You will be eligible to participate in all employee retirement and welfare benefit plans now or hereafter maintained by or on behalf of the Company, including the Company's Executive Retirement Plan and receive all fringe benefits and vacations, for which your level of employment makes you eligible in accordance with the Company's policies and the terms of such plans. In addition, the Company will provide you with (1) a supplemental pension benefit and (2) a supplemental savings benefit, in each case in an amount equal to the value of the benefit you would be entitled to receive under the Company's Retirement Plan or Savings Incentive Plan, as the case may be, but for the limitations on the amount of such benefits imposed by Sections 415 and 401(a)(17) of the Internal Revenue Code of 1986, as amended (the "Code"). (e) Modifications. The Company may at any time or from time to time amend, modify, suspend or terminate any bonus, incentive compensation or other benefit plans or programs provided hereunder for any reason and without your consent; provided that, without your consent, the Company may not reduce the aggregate value of the benefits provided to you hereunder. 4. Termination of Your Employment. (a) By the Company. The Company may terminate your employment in its sole discretion at any time during the Term, with or without Cause, upon fifteen (15) days prior notice by the Company to you. For purposes of this Employment Agreement, "Cause" means any of the following: (1) action by you involving willful malfeasance, (2) your unreasonable neglect or refusal to perform the executive duties assigned to you under this Employment Agreement, (3) your being convicted of a crime constituting a felony under federal or applicable state or local law, (4) your engaging in any activity that is directly or indirectly in competition with the Company or any affiliate or in any activity that is inimical to the best interests of the Company or any affiliate, or (5) your violation of Company policy covering standards of corporate conduct; provided that the determination of Cause shall be made by the Company's CEO. If the Company terminates your employment for Cause, all the Company's obligations under this Employment Agreement shall thereupon cease and terminate, except for those amounts specified in paragraph 5(a)(2). (b) By You. You may terminate your employment with the Company at any time during the Term, with or without Good Reason, upon fifteen 2 (15) days prior notice by you to the Company. For purposes of this Employment Agreement, "Good Reason" means (1) the assignment to you of duties and responsibilities not commensurate with your status as a senior executive of the Company, (2) the failure of the Company to provide compensation and benefits to you at the levels required herein, (3) following a Change of Control as defined in paragraph 7(d), the requirement by the Company, or, if applicable, a Subsidiary, or a successor to the Company or a Subsidiary, without your consent, that you relocate or perform a significant portion of your duties under this Employment Agreement outside a fifty (50) mile radius from your present principal place of employment or (4) the failure of the Company to adhere in any substantial manner to any of its other covenants herein. 5. Severance Payment. (a) Without Cause and Good Reason Termination. If during the Term, the Company terminates your employment without Cause or you terminate your employment for Good Reason, all compensation payable to you under paragraph 3 hereof will cease as of the effective date of such termination (the "Termination Date") and the Company will pay to you, subject to paragraph 6, the following sums: (1) An amount equal to two (2) times your then current Base Salary plus the sum of your annual bonuses, if any, for the two (2) immediately preceding calendar years under The CIT Group, Inc. Bonus Plan plus a pro-rata annual bonus amount for that portion of the bonus year up to the Termination Date, based on the average annual bonus, if any, paid in the prior two (2) full years. This payment shall be payable fifty percent (50%) in twelve (12) equal installments at the end of each of the twelve (12) months following the Termination Date, and fifty percent (50%) in a lump sum on the anniversary of the Termination Date. If, however, prior to the anniversary of the Termination Date, you violate the noncompetition provisions of paragraph 6(b)(i), then the Company will have no obligation to make any of the payments that remain payable by the Company under this paragraph 5(a)(1) on or after the date of such violation. Notwithstanding the provisions of this paragraph 5(a)(1), if you have received, are scheduled to receive or are otherwise eligible to receive all or any portion of a "Special Payment" in accordance with paragraph 7(b) below, the amount payable to you under this paragraph 5(a)(1) shall be reduced 3 by the amount of such "Special Payment" paid or payable to you under paragraph 7(b). (2) All previously earned and accrued entitlements and benefits from the Company, including any such entitlements and benefits under the Company's pension, disability, life insurance and medical plans, policies and programs. (3) Continued benefit coverage which permits you to continue to receive, for two (2) years from the Termination Date, at the Company's expense, life insurance and medical, dental and disability benefits at least comparable to those provided by the Company to you on the Termination Date provided that such benefits shall cease if you obtain other employment with comparable benefits, as determined by the Company, Two (2) years additional benefit service and age credit under the Company's Retirement Plan and the Executive Retirement Plan. (The amount of any benefit payable as a result of such two (2) year additional service and age credit shall be paid from the applicable benefit or retirement plan as permitted by the provisions of such applicable benefit or retirement plan and the Code, or in the event not paid from the applicable benefit or retirement plan, such benefit shall be paid by the Company). (4) The reasonable costs of outplacement services until such time as you accept new employment. (5) Any awards due to you under the terms of the Company's Long-Term Equity Compensation Plan (the "ECP") or any successor plan as may have been hereafter adopted by the Company. Upon such payment, all of your rights under all such plans will then terminate. (6) All benefits payable to you under the terms and conditions of the Company's Executive Retirement Plan, if any. All of the amounts and benefits to be provided pursuant to clauses (3), (4), (5) and (6) above shall be provided without duplication for the amounts and benefits to be provided pursuant to clause (2) above. 4 (b) For Cause Termination or Termination By You Without Good Reason. Subject to paragraph 7(c), if your employment is terminated by the Company for Cause or if you terminate your employment for any reason other than Good Reason, you will receive only the amounts specified in paragraph 5(a)(2). (c) Death or Disability. In the event of your death or your disability due to physical or mental illness or other disability which renders you unable, on other than a temporary basis, to perform the duties of your employment, the Term will terminate as of the date of your death or disability and you or your beneficiary will receive the benefits specified in paragraphs 5(a)(2),(5),(6) plus an amount equal to your Base Salary on such date for one (1) year. Disability will be determined in a manner consistent with the Company's Long-Term Disability Plan. 6. Confidentiality and Competitive Activity. (a) Confidential Information. You acknowledge that you have acquired and will continue to acquire during the Term, confidential information regarding the business of the Company, Dai-Ichi Kangyo Bank ("DKB") and their respective subsidiaries and affiliates. Accordingly, you agree that, without the written consent of the Board, you will not, at any time, disclose to any unauthorized person or otherwise use any such confidential information. For this purpose, confidential information means non-public information concerning the financial data, business strategies, product development (and proprietary product data), customer lists, marketing plans, and other proprietary information concerning the Company or DKB and their respective subsidiaries and affiliates, except for specific items which have become publicly available other than as a result of your breach of this Employment Agreement. (b) Competition and Solicitation. If (1) you resign with or without Good Reason, (2) your employment is terminated by the Company with or without Cause, (3) you retire under the terms of the Company's Retirement Plan, or (4) solely for the purposes of (ii) below, you resign following the expiration of this Employment Agreement, then for one (1) year after the Termination Date, in the case of clause (i) below, and for (2) two years after the Termination Date, in the case of clause (ii) below, you will not, without the written consent of the Board, directly or indirectly, (i) knowingly engage or be interested in (as owner, partner, stockhoIder, employee, director, officer, agent, consultant or otherwise), with or without compensation, any business in the United States which is in competition with any line of business actively being conducted on the Termination Date by the Company or any of its subsidiaries; provided that if your employment has been terminated by the Company without Cause or you have terminated your employment with the Company for Good Reason, you may so compete in which event you shall forfeit your right to receive future severance payments pursuant to paragraph 5(a)(1) hereof and (ii) whether or not your termination of employment occurred without Cause or for 5 Good Reason, hire any person who was employed by the Company or any of its subsidiaries or affiliates (other than persons employed in a clerical or other nonprofessional position) within the six-(6)month period preceding the date of such hiring, or solicit, entice, persuade or induce any person or entity doing business with the Company or DKB and their respective subsidiaries and affiliates, to terminate such relationship or to refrain from extending or renewing the same. Nothing herein, however, will prohibit you from acquiring or holding not more than one percent (1%) of any class of publicly traded securities of any such business; provided that such securities entitle you to no more than one percent (1%) of the total outstanding votes entitled to be cast by securityholders of such business in matters on which such securityholders are entitled to vote. (c) Remedy for Breach. You hereby acknowledge that the provisions of this paragraph 6 are reasonable and necessary for the protection of the Company, DKB, and their respective subsidiaries and affiliates. In addition, you further acknowledge that the Company, DKB, and their respective subsidiaries and affiliates will be irrevocably damaged if such covenants are not specifically enforced. Accordingly, you agree that, in addition to any other relief to which the Company may be entitled, the Company will be entitled to seek and obtain injunctive relief (without the requirement of any bond) from a court of competent jurisdiction for the purposes of restraining you from any actual or threatened breach of such covenants. In addition, and without limiting the Company's other remedies, in the event of any breach by you of such covenants, the Company will have no obligation to pay any of the amounts that remain payable by the Company under paragraph 5(a)(1). (d) Enforceability. If a court determines that any of the provisions of this paragraph 6 are unenforceable because of the duration or geographical scope of such provisions, the parties hereto agree that the duration or scope of such provisions, as the case may be, shall be reduced so that such provision becomes enforceable and, in its reduced form, such provision shall then be enforceable and shall be enforced. 7. Change of Control. (a) Contract Extension. If during the Term, a "Change of Control" occurs as defined in paragraph 7(d), the Term of your employment shall automatically be extended until the second anniversary date of such Change of Control. (b) Special Payment. In addition to the compensation and benefits already required under the provisions of your Employment Agreement, if, while you are an active employee of the Company, a Change of Control should occur on or prior to December 31, 2000, you will receive a special payment (the "Special Payment"). The amount of such Special Payment shall equal the sum of your annual bonuses, if any, for the two (2) immediately preceding calendar years under The CIT Group, Inc. Bonus Plan and will be payable over a two-(2)year period as follows: one-third (1/3) of the payment shall be paid to you within thirty (30) days after the 6 date of the Change of Control; one-third (1/3) shall be paid to you on or before the first anniversary date of such Change of Control; and one-third (1/3) shall be paid to you on or before the second anniversary date of such Change of Control, provided, however, the Company, in its sole discretion, may accelerate the payment of all or any part of the Special Payment determined in accordance with this paragraph 7(b). Notwithstanding the foregoing provisions of this paragraph, all or any part of such Special Payment shall not be payable to you if during the two-(2)year period commencing on the date of a Change of Control, and ending on the second anniversary of such date: (1) your employment is involuntarily terminated by the Company for "Cause" as defined in the Employment Agreement; (2) you voluntarily terminate employment with the Company for any reason other than "Good Reason" as defined in the Employment Agreement; or (3) you breach any confidentiality or competition covenant under paragraph 6 of the Employment Agreement. For purposes of this paragraph 7(b), a termination of your employment on account of your death, disability or retirement on or after age fifty-five (55) under the terms of the Company's Retirement Plan shall constitute a termination for "Good Reason." In the absence of a separate beneficiary designation, your beneficiary under the Group Life Insurance Plan will receive any Special Payment remaining to be paid upon your death. (c) Termination of Employment After a Change of Control for Awards Granted under the ECP. Notwithstanding the provisions of Article 14 of the ECP: If an Executive's employment with the Company is terminated by the Company, or, if applicable, a Subsidiary, or a successor to the Company or a Subsidiary, on or after a Change of Control and prior to the first anniversary of such Change of Control: (1) If you terminate employment for Good Reason or your employment with the Company is terminated by the Company, or if applicable, a Subsidiary, or a successor to the Company or a Subsidiary, on or after a Change of Control and prior to the first anniversary of such Change of Control: (i) any and all Options other than Options granted in consideration of the termination of The CIT Group, Inc. Career Incentive Plan (the "CIT Career Incentive Plan") or granted in consideration of The CIT Group, Inc. Initial Public Offering (the "CIT Initial Public Offering"), shall become immediately exercisable, and shall remain exercisable throughout their entire term; and (ii) any Period of Restriction and restrictions imposed on Restricted Stock, other than Restricted Stock granted in consideration of the termination of the CIT Career Incentive Plan or granted in consideration of the CIT Initial Public Offering, shall lapse. 7 (2) If you terminate employment for Good Reason or your employment with the Company is terminated by the Company, or, if applicable, a Subsidiary, or a successor to the Company or a Subsidiary, on or after a Change of Control and prior to November 1, 2002, (i) All Options granted in consideration of the termination of the CIT Career Incentive Plan or granted in consideration of the CIT Initial Public Offering held by the Participant, if any, shall become immediately exercisable and shall remain exercisable throughout their entire term; and (ii) any Period of Restriction and all restrictions imposed on Restricted Stock granted in consideration of the termination of the CIT Career Incentive Plan or granted in consideration of the CIT Initial Public Offering, if any, shall lapse. (3) All terms with respect to the ECP that are not otherwise defined herein, are defined in the ECP. (d) Change of Control Defined. For purposes of this Employment Agreement, a "Change of Control" shall be deemed to have occurred if: (1) any Person or Group other than DKB or an Affiliate becomes the Beneficial Owner, directly or indirectly, of securities representing a majority of the combined voting power of the Company's then outstanding securities generally entitled to vote for the election of directors (capitalized terms not otherwise defined herein are used as defined under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder); or (2) as a result of a cash tender offer, merger or other business combination, sales of assets or contested election, or any combination of the foregoing transactions (a "Transaction"), the persons who were directors of the Company immediately before the Transaction shall cease to constitute a majority of the Board of the Company or of any successor to the Company. Notwithstanding the foregoing, a Change of Control resulting from a Change of Control of DKB shall not require the extension of the Term hereunder. 8. MiscelIaneous. (a) Survival; Notices. The obligations of the Company in paragraph 5 and your obligations in paragraph 6 will survive the termination of this Employment Agreement. Any notice, consent or other communication made or given in connection with this Employment Agreement will be in writing and will be deemed to have been duly given when delivered or five (5) days after mailed by United States registered or certified mail, return receipt requested, to the parties at the address set forth on the first page of this Employment Agreement (attention: General Counsel, if to the Company). 8 (b) Entire Agreement. This Employment Agreement supersedes any and all existing agreements between you and the Company or any of its subsidiaries or affiliates relating to the terms of your employment. (c) Amendments and Waivers. No provisions of this Employment Agreement may be amended, modified, waived or discharged except as agreed to in writing by you and the Company. The failure of a party to insist upon strict adherence to any term of this Employment Agreement on any occasion will not be considered a waiver thereof or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Employment Agreement. (d) Successors. This Employment Agreement shall be binding upon and inure to the benefit of you and the Company and its successors and permitted assigns. Neither this Employment Agreement nor any of the rights of the parties hereunder may be assigned by either party hereto except that the Company may assign its rights and obligations hereunder to a corporation or other entity that acquires substantially all of its assets. Any assignment or transfer of this Employment Agreement in violation of the foregoing provisions will be void. (e) Governing Law. This Employment Agreement will be governed by and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed in that State. (f) Legal Counsel; Offsets and Reductions. In the event you obtain legal counsel to enforce your rights under this Employment Agreement, the Company will pay you reasonable legal fees if you recover any amount on such claim. Except as provided in paragraph 6, if your employment is terminated by the Company, your severance shall not be subject to any offsets or reductions for your subsequently earned income or reduction by reason of any claim by the Company. (g) Severability. If any provision of this Employment Agreement is invalid or unenforceable, the balance of this Employment Agreement will remain in effect, and if such provision is inapplicable to any person or circumstance, it will nevertheless remain applicable to all other persons and circumstances. (h) Withholding. The Company is authorized to withhold from any benefit provided or payment due hereunder the amount of withholding taxes due any federal, state, or local authority in respect of such benefit or payment and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such withholding taxes. (i) Tax Gross-Up. In the event that any payment made to you pursuant to this Employment Agreement with the Company becomes subject to excise taxes under Section 4999 of the Code, the Company will pay to you the amount of such excise taxes plus all federal, state and local taxes applicable to the Company's payment of such excise taxes including any additional excise taxes due 9 under Section 4999 of the Code with respect to payments made pursuant to this Employment Agreement. The determination of amounts required to be paid under this Employment Agreement shall be made by an independent auditor selected and paid by the Company. Such independent auditor shall be a nationally recognized United States public accounting firm, which may be the independent accounting firm used by the Company to audit its financial statements. If you are in agreement with the terms of this letter, please so indicate by signing and returning the enclosed copy of this letter, whereupon this letter shall constitute a binding agreement between you and the Company. Very truly yours, THE CIT GROUP, INC. By: /s/ Albert R. Gamper, Jr. -------------------------------- Name: Albert R. Gamper, Jr. Title: President & CEO Agreed: /s/ Joseph M. Leone - ------------------------------ Joseph M. Leone EX-10.10 3 EMPLOYEE STOCK PURCHASE PLAN EXHIBIT 10.10 THE CIT GROUP, INC. EMPLOYEE STOCK PURCHASE PLAN As Amended and Restated January 28, 1999 The following constitute the provisions of The CIT Group, Inc. Employee Stock Purchase Plan (the "Plan") of The CIT Group, Inc. (the "Company"). 1. Purpose. The purpose of the Plan is to provide employees of the Company and its subsidiaries with an opportunity to purchase shares of Common Stock of the Company through payroll deductions. It is the intention of the Company to have the Plan qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). The provisions of the Plan shall, accordingly, be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. Definitions. (a) "Account" shall mean the account established for each Participant under the Plan. (b) "Base Salary" shall mean an Employee's salary or wages for each pay period during any Offering Period as determined from the payroll records of the Company. (c) "Board" shall mean the Board of Directors of the Company. (d) "Broker" shall mean the brokerage firm designated in Section 9. (e) "Closing Date" shall mean the last business day of each Offering Period. (f) "Code" shall mean the Internal Revenue Code of 1986, as amended. (g) "Committee" shall mean the Employee Benefit Plans Committee of the Company. (h) "Common Stock" shall mean the Class A common stock of the Company par value $.01 per share. (i) "Company" shall mean The CIT Group, Inc., a Delaware corporation. (j) "Employee" shall mean any person who is customarily employed for at least twenty (20) hours per week by the Company or a Subsidiary. (k) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (l) "Fair Market Value" shall mean on any day, with respect to Common Stock of the Company which is (a) listed on a United States securities exchange, the last sales price of such stock on such day on the largest United States securities exchange on which such stock shall have traded on such day, or if such day is not a day on which a United States securities exchange is open for trading, on the immediately preceding day on which such securities exchange was open, (b) not listed on a United States securities exchange but is included in The NASDAQ Stock Market System (including The NASDAQ National Market), the last sales price on such system of such stock on such day, or if such day is not a trading day, on the immediately preceding trading day, or (c) neither listed on a United States securities exchange nor included in The NASDAQ Stock Market System, the fair market value of such stock as determined from time to time by the Board in good faith in its sole discretion. (m) "Offering Date" shall mean the first business day of each Offering Period. (n) "Offering Period" shall mean each three (3) month period when Options for shares of Common Stock are offered by the Company. (o) "Option" shall mean the right of a Participant to purchase shares of Common Stock of the Company under the Plan. (p) "Participant" shall mean an Employee of the Company or Subsidiary who is enrolled in the Plan in accordance with Section 3 hereof. (q) "Plan" shall mean The CIT Group, Inc. Employee Stock Purchase Plan. (r) "Subsidiary" shall mean a corporation, domestic or foreign, of which not less than fifty percent (50%) of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. 3. Eligibility. (a) As soon as administratively possible, any Employee who shall be employed by the Company or one of its Subsidiaries shall be eligible to participate in the Plan as of the date of the first Offering Period following the Employee's commencement of employment with the Company or a Subsidiary. (b) Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an Option under the Plan (i) if, immediately after the grant, such Employee would own shares of Common Stock or hold outstanding options to purchase shares of Common Stock possessing five percent (5%) or more of the total combined voting power or value of all classes of shares of the Company or of any Subsidiary of the Company, or (ii) which causes him or her to purchase shares of Common Stock under all employee stock purchase plans of the Company and its Subsidiaries which have a Fair Market Value which exceeds Twenty-Five Thousand Dollars ($25,000) (determined at the time such Option is granted) for each calendar year in which such Option is outstanding at any time. 4. Offering Dates. The Plan shall be implemented by one offering during each three (3) month period (calendar quarter) of the Plan, commencing on October 1, 1998, and continuing thereafter until terminated in accordance with Section 21 hereof. The Offering Periods for each calendar quarter are as follows: October 1 - December 31 January 1 - March 31 April 1 - June 30 July 1 - September 30 The Committee shall have the power to change the duration of Offering Periods with respect to future offerings without shareholder approval if such change is announced at least fifteen (15) days prior to the scheduled beginning of the first Offering Period to be affected. 5. Participation. An eligible Employee may become a Participant in the Plan by authorizing payroll deductions in such form or manner as the Committee may prescribe prior to the applicable Offering Date. Once authorized, such authorization for payroll deductions shall commence on the first Offering Date after authorization is effected and shall remain effective for all subsequent Offering Periods until the Participant withdraws from the Plan as provided in Section 11 hereof or, subject to Section 6 hereof, authorizes a change in the amount of his or her payroll deductions. 6. Payroll Deductions. (a) At the time a Participant authorizes payroll deductions, he or she shall elect to have payroll deductions made on each payday during subsequent Offering Periods at a rate between one percent (1%) and ten percent (10%) of Base Salary (such percentage representing a whole number percentage). (b) All payroll deductions made by a Participant shall be credited to his or her Account under the Plan. A Participant may not make any additional payments into such Account. (c) A Participant may increase or decrease his or her rate of payroll deductions (within the limitations set forth in Section 6(a) hereof) to be effective for the next Offering Period by authorizing a new rate of payroll 2 deductions at least fifteen (15) days before the beginning of such Offering Period. A Participant may not increase or decrease the rate of payroll deductions during an Offering Period to be effective for that Offering Period. (d) A Participant must continue payroll deductions for the duration of the Offering Period in order to exercise an Option in accordance with Section 8 hereof. In the event that a Participant does not continue payroll deductions for the entire Offering Period, such Participant shall be treated as withdrawing from such Offering Period in accordance with Section 11(a) hereof. 7. Grant of Option. (a) On each Offering Date, each eligible Employee participating in the Plan shall be granted an Option to purchase (at the per share Option price) up to a number of shares of the Company's Common Stock determined by dividing the Employee's to be accumulated payroll deductions (not to exceed an amount equal to ten percent (10%) of his or her Base Salary during the applicable Offering Period) by the option price, determined in accordance with this Section 7. (b) Subject to Sections 7(c) and 7(d), the Option price per share of such shares of Common Stock shall be the lesser of (i) eighty-five percent (85%) of the Fair Market Value of a share of Common Stock of the Company on the Offering Date or (ii) eighty-five percent (85%) of the Fair Market Value of a share of Common Stock of the Company on the Closing Date. (c) Effective for the Offering Period commencing January 1, 1999, the option price per share of such shares of Common Stock shall be the lesser of (i) the higher of (A) eighty-five percent (85%) of the Fair Market Value of a share of Common Stock of the Company on the Offering Date or (B) eighty-five percent (85%) of the Fair Market Value of a share of Common Stock of the Company on January 28, 1999 or (ii) eighty-five percent (85%) of the Fair Market Value of a share of Common Stock of the Company on the Closing Date. (d) Effective for the Offering Period commencing on October 1, 1998, the option price per share of such shares of Common Stock shall be eighty-five percent (85%) of the Fair Market Value of a share of Common Stock of the Company on the Closing Date. 8. Exercise of Option. Unless a Participant withdraws from the Plan as provided in Section 11 hereof, his or her Option for the purchase of shares of Common Stock will be exercised automatically on the Closing Date, and the maximum number of whole and fractional shares (rounded to the nearest ten thousandth) of Common Stock subject to the Option will be purchased for him or her at the applicable Option price with the accumulated payroll deductions in his or her Account. During his or her lifetime, a Participant's Option to purchase shares of Common Stock hereunder is exercisable only by him or her. 9. Designation of Broker and Participant's Account with Broker. The Company has designated Morgan Stanley Dean Witter & Co. and its affiliates to open and maintain an Account for each Participant. The Company reserves the right to change such designation at any time without prior notice to Participants and the Broker has reserved the right to terminate its services as Broker under the Plan at any time. The Broker shall deliver to each Participant as promptly as practicable, by mail or otherwise, all notices of meetings, proxy statements and other materials distributed by the Company to its shareholders. The whole and fractional shares in each Participant's Account shall be voted in accordance with the Participant's signed proxy instructions duly delivered to the Broker by mail or otherwise, in accordance with the rules applicable to stock listed on the New York Stock Exchange. 10. Delivery of Certificates. A Participant may request, in accordance with Section 22 hereof, that the Company arrange for the delivery of a certificate representing the number of whole shares of Common Stock of the Company purchased upon exercise of the Participant's Option as promptly as practicable after each Closing Date. A Participant may not require delivery for a fractional share, but may instruct the Broker to sell the fractional share. In connection with the delivery of certificates to a Participant, the Committee may, in its sole discretion, impose a reasonable charge. 3 11. Withdrawal; Termination of Employment. (a) A Participant may withdraw all but not less than all the payroll deductions credited to his or her Account under the Plan at any time prior to the Closing Date by giving notice to the Committee in such form or manner as the Committee may prescribe. All of the Participant's payroll deductions credited to his or her Account will be paid to him or her as soon as administratively possible after receipt of his or her notice of withdrawal and his or her Option for the current Offering Period will be automatically terminated, and no further payroll deductions for the purchase of shares of Common Stock will be made during such Offering Period. (b) Upon termination of the Participant's employment prior to the Closing Date for any reason, including retirement or death, the payroll deductions credited to his or her Account will be returned to him or her or, in the case of his or her death, to the person or persons entitled thereto under Section 16 hereof, as soon as administratively possible, and his or her Option will be automatically terminated. (c) In the event an Employee fails to remain in the continuous employ of the Company or one of its Subsidiaries for at least twenty (20) hours per week during the Offering Period in which the employee is a Participant, he or she will be deemed to have elected to withdraw from the Plan and the payroll deductions credited to his or her Account will be returned to him or her as soon as administratively possible and his or her Option will be terminated. (d) A Participant's withdrawal from an Offering Period will not have any effect upon his or her eligibility to participate in a succeeding offering or in any similar plan which may hereafter be adopted by the Company. However, in such a case, the Participant must authorize the resumption of payroll deductions and the rate of such payroll deductions. 12. No Interest. No interest shall accrue on the payroll deductions held in the Account of a Participant in the Plan. 13. Stock. (a) The maximum number of shares of Common Stock which shall be made available for sale under the Plan shall be five hundred thousand (500,000), subject to adjustment upon changes in capitalization of the Company as provided in Section 20 hereof. The shares of Common Stock to be sold to Participants under the Plan may, at the election of the Company, be either treasury shares, authorized but unissued shares or publicly traded shares. If at the termination of any Offering Period the total number of shares of Common Stock which would otherwise be subject to Options granted pursuant to Section 7(a) hereof exceeds the number of shares of Common Stock then available under the Plan (after deduction of all shares of Common Stock for which Options have been exercised or are then outstanding), the Company shall promptly notify the Participants, and shall, in its sole discretion (i) make a pro rata allocation of the shares of Common Stock remaining available for Option grant in as uniform a manner as shall be practicable and as it shall determine to be equitable, (ii) terminate the Offering Period without issuance of any shares of Common Stock or (iii) obtain shareholder approval for an increase in the number of shares of Common Stock authorized under the Plan such that all Options could be exercised in full. The Company may delay determining which of (i), (ii) or (iii) above it shall decide to effect, and may accordingly delay issuances of any shares of Common Stock under the Plan for such time as is necessary to attempt to obtain shareholder approval for any increase in shares of Common Stock authorized under the Plan. The Company shall promptly notify Participants of its determination to effect (i), (ii) or (iii) above upon making such decision. A Participant may withdraw all but not less than all the payroll deductions credited to his or her Account under the Plan at any time prior to such notification from the Company. In the event the Company determines to effect (i) or (ii) above, it shall promptly upon such determination return to each Participant all payroll deductions not applied towards the purchase of shares of Common Stock. (b) The Participant will have no interest or voting right in shares of Common Stock covered by his or her Option until such Option has been exercised. (c) Shares of Common Stock to be delivered to a Participant under the Plan shall be registered in the name of the Participant. 4 14. Dividends. Cash dividends for shares of Common Stock in Participants' Accounts under the Plan shall not be distributed to Participants directly, but shall be automatically invested in shares of Common Stock at the full Fair Market Value on the date of such investment as soon as administratively possible after such dividends are paid by the Company. Such shares of Common Stock will be held in Accounts under the Plan. 15. Administration. The Plan shall be administered by the Committee. The administration, interpretation or application of the Plan by the Committee shall be final, conclusive and binding upon all Participants. 16. Designation of Beneficiary. The beneficiary or beneficiaries of the Participant to receive any shares of Common Stock and cash, if any, from the Participant's Account under the Plan in the event of such Participant's death prior to delivery to him or her of such shares of Common Stock and cash shall be determined under the Company's Group Life Insurance Plan. A Participant under the Plan may, from time to time, name any beneficiary or beneficiaries to receive any shares of Common Stock and cash, if any, from the Participant's Account under the Plan. Each such designation shall revoke all prior designations by the same Participant, including the beneficiary designated under the Company's Group Life Insurance Plan, and will be effective only when filed by the Participant in writing (in such form or manner as may be prescribed by the Committee) with the Company during the Participant's lifetime. 17. Transferability. Neither payroll deductions credited to a Participant's Account nor any rights with regard to the exercise of an Option or to receive shares of Common Stock under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 16 hereof) by the Participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds in accordance with Section 11 hereof. 18. No Segregation of Funds. The Company shall not be obligated to segregate payroll deductions received or held by the Company under the Plan. Such payroll deductions shall be used to purchase shares of Common Stock under the Plan in accordance with Section 8 hereof. 19. Reports. Individual Accounts will be maintained for each Participant in the Plan. Statements of Account will be given to Participants within a reasonable period of time following each Closing Date. 20. Adjustments Upon Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each Option under the Plan which have not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but have not yet been placed under Option (collectively, the "Reserves"), as well as the price per share of Common Stock covered by each Option under the Plan which has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split or the payment of a stock dividend (but only on the Common Stock) or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration". Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into or exercisable for shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. The Board may, if it so determines in the exercise of its sole discretion, also make provision for adjusting the Reserves, as well as the price per share of Common Stock covered by each outstanding Option under the Plan, in the event that the Company effects one or more reorganizations, recapitalizations, rights offerings or other increases or reductions of shares of its outstanding Common Stock, and in the event of the Company being consolidated with or merged into any other corporation. 21. Amendment and Termination of the Plan. (a) Amendment and Termination. The Committee may at any time amend, alter, suspend or discontinue the Plan, but no amendment, alteration, suspension or discontinuation shall be made which would impair the rights of any Participant under any Option theretofore granted without his or her consent. 5 (b) Shareholder Approval of Amendments. The Company shall obtain shareholder approval of any Plan amendment to the extent necessary and desirable to comply with Rule 16b-3 promulgated under the Exchange Act or with Section 423 of the Code (or any successor statute or rule or other applicable law, rule or regulation), such shareholder approval to be obtained in such a manner and to such a degree as is required by the applicable law, rule or regulation. (c) Effect of Amendment or Termination. Any such amendment or termination of the Plan shall not affect Options already granted hereunder and such Options shall remain in full force and effect as if this Plan had not been amended or terminated. 22. Notices. All notices or other communications by a Participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. All notices or other communications to a Participant by the Company shall be deemed to have been duly given when sent by the Company by regular mail to the address of the Participant on the human resources records of the Company. 23. Conditions Upon Issuance of Shares of Common Stock. Shares of Common Stock shall not be issued with respect to an Option unless the exercise of such Option and the issuance and delivery of such shares of Common Stock pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange or automated quotation system upon which the shares of Common Stock may then be listed or quoted, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the shares of Common Stock are being purchased only for investment and without any present intention to sell or distribute such shares of Common Stock if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 24. No Contract of Employment. The Plan is not and shall not be deemed to constitute a contract of employment between the Company and any Employee or other individual, nor shall anything herein contained be deemed to give any Employee or other individual any right to be retained in the Company's employ or to in any way limit or restrict the Company's right or power to discharge any Employee or other individual at any time and to treat him without any regard to the effect which such treatment might have upon him as a Participant of the Plan. 25. Governing Law. The Plan shall be construed in accordance with and governed by the laws of the state of New York. 26. Effective Date and Approval of Plan by Shareholders. The Plan shall become effective on October 1, 1998, subject however, to receipt of approval of the Plan by shareholders of the Company in accordance with Section 423(b)(2) of the Code. 6 EX-12 4 COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES EXHIBIT 12 THE CIT GROUP, INC. AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES Years Ended December 31, -------------------------------- 1998 1997 1996 -------- -------- -------- Dollars in millions Net income ................................. $ 338.8 $ 310.1 $ 260.1 Provision for income taxes ................. 185.0 178.0 155.7 -------- -------- -------- Earnings before provision for income taxes .............................. 523.8 488.1 415.8 -------- -------- -------- Fixed Charges: Interest and debt expenses on indebtedness ........................ 1,040.8 937.2 848.3 Minority interest in subsidiary trust holding solely Debentures of the Company ......................... 19.2 16.3 -- Interest factor - one-third of rentals on real and personal properties ........... 7.9 8.5 8.1 -------- -------- -------- Total fixed charges ........................ 1,067.9 962.0 856.4 -------- -------- -------- Total earnings before provisions for income taxes and fixed charges ........ $1,591.7 $1,450.1 $1,272.2 ======== ======== ======== Ratios of Earnings to Fixed Charges ........ 1.49x 1.51x 1.49x EX-21 5 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 THE CIT GROUP, INC. AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT December 31, 1998 Jurisdiction of Name of Subsidiary Incorporation ------------------ ------------- 3553400 Canada Inc. ........................................... Canada The CIT Group/Credit Finance, Inc. ............................ Delaware The CIT Group/CrF Securities Investment, Inc. ............... New Jersey The CIT Group/Sales Financing, Inc. ........................... Delaware The CIT Group/Consumer Finance, Inc. .......................... Delaware Equipment Credit Services, Inc. ............................... Delaware North American Exchange, Inc. ................................. Delaware C.I.T. Corporation (Maine) .................................... Maine C.I.T. Corporation of the South, Inc. ......................... Delaware William Iselin & Co., Inc. .................................... New York The CIT Group/Commercial Services, Inc. ....................... New York The CIT Group/CmS Securities Investment, Inc. ............... New Jersey C.I.T. Foreign Sales Corporation One, Ltd. .................. Barbados CIT FSC Two, Ltd. ........................................... Bermuda CIT FSC Three, Ltd. ......................................... Bermuda CIT FSC Four, Ltd. .......................................... Bermuda CIT FSC Seven, Ltd. ......................................... Bermuda CIT FSC Nine, Ltd. .......................................... Bermuda CIT FSC Ten, Ltd. ........................................... Bermuda The CIT Group/Capital Aircraft, Inc. ........................ Delaware The CIT Group/Factoring One, Inc. ........................... New York CIT FSC Five, Ltd. ........................................ Bermuda The CIT Group/Capital Transportation, Inc. .................. Delaware The CIT Group/Commercial Services (Asia) Ltd. ............... Hong Kong The CIT Group, Inc. (NJ) ...................................... New Jersey The CIT Group/Capital Investments, Inc. ....................... New York Assurers Exchange, Inc. ....................................... Delaware C.I.T. Financial Management, Inc. ............................. New York The CIT Group/FM Securities Investment, Inc. ................ New Jersey The CIT Group/Capital Finance, Inc. ........................... Delaware Banord Limited .............................................. United Kingdom Equipment Acceptance Corporation ............................ New York The CIT Group/Asset Management, Inc. .......................... Delaware Commercial Investment Trust Corporation ....................... Delaware The CIT Group/Business Credit, Inc. ........................... New York The CIT Group/BC Securities Investment, Inc. ................ New Jersey Meinhard--Commercial Corporation .............................. New York 650 Management Corp. .......................................... New Jersey The CIT Group/Equity Investments, Inc. ........................ New Jersey The CIT Group/Venture Capital, Inc. ......................... New Jersey The CIT Group/Equipment Financing, Inc. ....................... New York C.I.T. Realty Corporation ................................... Delaware CIT FSC Eleven, Ltd. ......................................... Bermuda CIT FSC Twelve, Ltd. ......................................... Bermuda CIT FSC Fourteen, Ltd. ....................................... Bermuda CIT FSC Fifteen, Ltd. ........................................ Bermuda THE CIT GROUP, INC. AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT (Continued) December 31, 1998 Jurisdiction of Name of Subsidiary Incorporation ------------------ ------------- CIT FSC Sixteen, Ltd. ........................................ Bermuda CIT Leasing Two (Bermuda) LTD ................................ Bermuda CIT FSC Eighteen, Ltd. ....................................... Bermuda CIT FSC Nineteen, Ltd. ....................................... Bermuda CIT FSC Twenty, Ltd. ......................................... Bermuda The CIT Group/El Paso Refinery, Inc. ......................... Delaware The CIT Group/Securities Investment, Inc. .................... Delaware Bunga Bebaru, Ltd. ........................................... Bermuda CIT Leasing (Bermuda), Ltd. .................................. Bermuda The CIT Group/Corporate Aviation, Inc. ....................... Delaware Arctic Shipping Co., Inc. ................................ Delaware Atlantic Shipping Co., Inc. .................................. Delaware Baltic Shipping Co., Inc. .................................... Delaware Indian Shipping Co., Inc. .................................... Delaware Mediterranean Shipping Co., Inc. ............................. Delaware Bering Shipping Co., Inc. .................................... Delaware Ross Shipping Co., Inc. ...................................... Delaware Sargasso Shipping Co., Inc. .................................. Delaware Caspian Shipping Co., Inc. ................................... Delaware Baffin Shipping Co., Inc. .................................... Delaware Caribbean Shipping Co., Inc. ................................. Delaware Tasman Shipping Co., Inc. .................................... Delaware Sulu Shipping Co., Inc. ...................................... Delaware Hudson Shipping Co., Inc. .................................... Delaware Arabian Shipping Co., Inc. ................................... Delaware C.I.T. Leasing Corporation ................................... Delaware The CIT Group/LsC Securities Investment, Inc. .............. New Jersey CIT FSC Six, Ltd. .......................................... Bermuda CIT FSC Eight, Ltd. ........................................ Bermuda Kelbourne Limited .......................................... Ireland The CIT Group Holdings, Inc. .................................. Delaware The CIT Group Securitization Corporation ...................... Delaware The CIT Group/Consumer Finance, Inc. (NY) ..................... New York The CIT Group Securitization Corporation II ................... Delaware The CIT GP Corporation ........................................ Illinois GFSC Aircraft Acquisition Financing Corporation ............... Delaware The CIT Group Securitization Corporation IV ................... Delaware The CIT GP Corporation II ..................................... Delaware The CIT GP Corporation V ...................................... Delaware The CIT GP Corporation VI ..................................... Delaware Crestpointe Financial Corp. ................................... Delaware The CIT Group GP Corporation III .............................. Delaware The CIT Group Securitization Corporation III .................. Delaware CIT Capital Trust I ........................................... Delaware The CIT Group/Consumer Finance, Inc. (TN) ..................... Tennessee EX-23 6 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT To the Stockholders and Board of Directors of The CIT Group, Inc.: We consent to the incorporation by reference in Registration Statements No. 33-85224, No. 333-70249, No. 333-64539, No. 333-43323, No. 333-64529 and No. 333-63793 on Form S-3 of The CIT Group, Inc. of our report dated January 28, 1999, relating to the consolidated balance sheets of The CIT Group, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998, which report appears in the December 31, 1998 Annual Report on Form 10-K of The CIT Group, Inc. KPMG LLP Short Hills, New Jersey March 16, 1999 EX-27 7 FDS --
5 1,000,000 12-MOS DEC-31-1998 DEC-31-1998 74 0 19,856 264 0 0 0 0 24,303 0 12,507 250 0 2 2,702 24,303 0 2,271 0 418 189 99 1,041 524 185 339 0 0 0 339 2.09 2.08
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